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Oil price movements impacting US gasoline prices at record speed: economists


Oil price pass-through getting faster

API economist sees access to information as cause

Total pass-through may depend on supply, demand factors

  • Author
  • Brian Scheid
  • Editor
  • Richard Rubin
  • Commodity
  • Oil

Houston — While the September 14 attacks on Saudi crude oil facilities caused oil prices to quickly rise, pushing Brent crude futures up initially about 20%, average retail gasoline prices took about four days to climb 10 cents/gal, an increase of 4%, before leveling off at about $2.66/gal, where they remain today, according to US auto club AAA.

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The impact of the crude oil price spike on US gasoline prices may have been record quick, new data suggests.

While crude oil and gasoline price moves are hardly synchronous, gasoline prices appear to be more responsive to crude prices than ever, with the effects of crude price movements arriving at the pump historically fast.

This sensitivity of retail gasoline prices to changes in crude oil prices, known as "oil price pass-through," is getting faster, according to Alexander Chudik, an economic policy advisor and senior economist at the Federal Reserve Bank of Dallas.

The pass-through quantifies how much a given oil price change is reflected in a corresponding change in gasoline prices. For example, if crude oil prices rise 5% and then gasoline prices subsequently rise 5% that would be a 100% pass-through.

Looking at changes in spot Brent oil and regular-grade US retail gasoline prices from August 2000 to May 2017, Chudik and Georgios Georgiadis, an economist with the European Central Bank, found that the speed of the pass-through has gotten faster over time.

For example, in August 2000, less than 4% of a change in oil prices would passed through to US retail gasoline prices within the same day, which the economists define as within zero working days. By comparison, by May 2017, more than 19% of a change in oil prices would be passed through within zero working days. In August 2000, about 8% of the crude price changes were passed through to gasoline prices within five working days, compared to May 2017 when 24% was passed through within five days, according to the data.

Chudik told S&P Global Platts that they did not look at the causes of the increase in the speed of the pass-through, but R. Dean Foreman, chief economist at the American Petroleum Institute, said the increase in pass-through speed was likely due to leap in information access since 2000.

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"Think about the evolution of the information economy and what's available, not only to firms, but to everyday consumers in terms of their behavior," Foreman said.

"Information is out there everyone to see immediately," said Andy Lipow, president of Lipow Oil Associates.

Even smaller, independent retail gasoline station owners have access to market data and pricing they did not have 20 years ago, allowing retail gasoline prices to be more reactive to changes in the global crude market, Foreman said.

"If you think about just the free flow of information, the liquidity and oil markets as a whole and what you can get access to now with just any smartphone," Foreman said. "As this flows through the market is working more efficiently and that makes sense."

But while the speed of the crude oil pass through may be faster than ever, the total impact likely depends on whether a supply or demand shock is moving the market, Foreman said.

For example, the data shows that in early 2015, when prices were collapsing due to the global oil supply glut, nearly 70% of crude oil price movements were being passed through to US gasoline prices with 20 working days. As prices later rose, the pass-through may have been more immediate, but the overall impact was lessened. By May 2017, less than 60% of oil price movements were passed through to gasoline prices within 20 working days.

-- Brian Scheid,

-- Edited by Richard Rubin,