Anticipating Radio Questions on Gas & Oil

I expect that gas and oil prices are on the mind of many radio callers these days. It is an important question because gas is one good people cannot substitute away from easily in the short run. At the very least then the perceived budget impacts are, in the short run, quite high. All data used here come from

So in terms of where we start with this topic let’s take a look at two graphs, one for WTI oil price and the Midwest PADD gas prices.

There is plenty of volatility for oil prices as most people living through these times would know. So let’s take a look at gasoline prices.

The shape of the graph is almost exactly the same as the WTI graph. So from looking at the two graphs we surmise they have similar movements. By the way, the rapid increase at the end of both graphs is clearly what the public is concerned about at this time.

So students and radio callers ask me what kind of relationship is there between oil price increases and gasoline price increases. I am going to set aside the current geopolitical crisis to come up with an answer. Sanctions, warfare, and all the related issues with moving oil and setting commodity prices can change the relationship and I would rather not predict that right now.

I simply look at the gas price level divided by the price per barrel for WTI. This is a historical measure and will not address the dynamics we might want to examine, but this is just an approximation for now.

We actually have a narrow range for the this relationship. The average is $0.0477, so every $10 increase in the price for a barrel of oil was expected to increase prices around 50 cents. I already fielded questions about the likely impacts on oil production, particularly if there are sanctions placed on Russian oil exports. However, and I seem to be alone in this, refinery capacity remains an issue.

Refinery capacity is actually pretty much the same since around 1985. Yes it looks to be an increase but over almost 40 years the increase in capacity is only around 2.5 million barrels of refining capacity. If we take January of 1985 (the start of the data series) as our base value, then we get:

We see that our capacity now is less than 15% higher than the initial value for the series. There does not seem to be expansion of capacity or significant productivity improvements in refining capacity over this time frame.

Add to this that US refineries regularly operate at 90% (the mean over this time period was 88.85%) of capacity and what you get an outcome that suggests pumping more oil will not be a solution to fuel price problems. That is unless the pumping of extra barrels serves to reduce prices, but this is again where the geopolitical circumstances might prevents such an outcome.

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