Oil and gasoline prices move together

I keep seeing people on social media saying things like, “Well oil prices are down but gasoline prices are still high.” Look, the last thing I want to do is defend the fossil fuel industry. It should be put out of business as soon as possible because it’s a threat to civilization and maybe human life itself. But on this point, the social media pundits are wrong.

For example, in August 2013, crude oil (as measured by West Texas Intermediate, the US benchmark) was $107 a barrel and the average gasoline price was $3.66. Two years later, oil was $43 and gas was $2.75. Aha!, you might say—oil fell by 60% and gas by only 25%. But it works the same in the other direction too. In June 2006, oil was $71 and gas was $2.96. Two years later, oil was $134, up 89%, and gas was $4.12, up 39%.

The graph below makes the point visually. Oil and gas prices move almost exactly together, with gas moving less than oil. A simple regression on these stats shows that for every 10% change in the price of oil over the course of a year, the price of gas moves by about 4.5%. The relationship hold in both directions. That 45% ratio almost exactly matches the percentage changes in the previous paragraph. And the relationship holds if you take the analysis back to 1975 instead of beginning in 2000.

Again, this is not to defend the oil industry, which should be put out of business ASAP. But people who think gas prices won’t come down if oil prices come down are going to look silly if oil prices ever come down again—assuming the world isn’t blown to bits before they get a chance to.

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