Oil Math

Example 1

Typical model is $1/bbl = increase of 2–3 cents/gallon at the pump. Here, we assume 2.5 cents/gallon.

Since February 28, WTI increased
from $67 to $81.42

Implication:+$0.36/gallon

National Daily Average Gas Price increased
from $2.98 to $4.07

Increase+$1.09/gallon

Implications:

  1. 1)Tax on consumer
  2. 2)Price action is mostly rational, with some signs of stress at the pump
Example 2

The United States is less sensitive to negative effects of oil prices than it was in the past.

  • GDP is less price sensitive on oil (energy efficiency, changing of economic composition)
  • Bloomberg Economics estimates oil intensity is down 40% since 2000
  • Everything is relative. If other prices, and wages, are up, "real" inflation adjusted oil is less important on a relative basis
  • Together, Bloomberg Economics estimates that oil at $190/bbl is equivalent to $100/bbl 15 years ago

Source: Bloomberg (WTI); AAA national average retail gasoline (gasprices.aaa.com); Bloomberg Economics.