March 26, 2017

Gas Prices Exceed $4 per Gallon

During the week ending May 9th, the price for a gallon of gas nationally averaged $4.018, according to the US Energy Administration. This is the second week with the national average above $4 per gallon, as well as the twenty-first week out of the past twenty-three weeks with an increase in the national average for a gallon of gas. With a clear trend of rising gas prices, 2011 may bring the highest gas prices on record, but not necessarily.

The highest national average for a gallon of gas occurred in early July 2008, when the price averaged $4.16 per gallon. While the current average is only about fourteen cents away from setting a record, the price of crude oil has fallen in the past week and will likely prevent this record from being set, at least during May.

A barrel of oil closed at $103.89 on Tuesday, which is about $10 lower than a week ago. Since crude oil makes up 68% of the costs in a gallon of gas, this decline in the price of oil will likely correlate with a decline in the price of gas. More specifically, a $10 fluctuation in a barrel of oil typically translates to a fluctuation of 24 cents per gallon in gas prices, according to the US Energy Administration. With this formula and the assumption that the price of oil will remain around its current level, the recent $10 decline in the price of oil ought to result with gas prices eventually averaging $3.78 per gallon.

While it could be two months before the price of gas fully adjusts to the change in the price of oil, about half of the adjustments to the price of gas are reflected within the first two weeks of the price change in oil. This means the price of gas ought to decline about twelve cents in the next two weeks, or averaging about $3.90 per gallon by the week ending May 23rd. As a result, the next two weeks will not only bring two straight declines in the national average for the price of gas, which hasn’t occurred since July 2010, but also the greatest weekly declines in gas prices since May 2010, when gas prices last declined six cents or more in one week.

Further, some consumers have noticed the current price of gas is nearly equal to the record price during July 2008, yet the current price of oil is far from the price during July 2008, when the cost for a barrel of oil was over $140. In other words, the price of oil is lower in 2011 than in 2008, yet gas prices are comparatively higher in 2011.

Using the formula above, if oil prices reach $125 per barrel in 2011, gas prices would easily break the record. This discrepancy between the prices of gas and oil in 2011 and 2008 shows the declining value of the dollar, the unrest in North Africa and the Middle East, and also a growing demand of oil from developing countries, especially China.

Meanwhile, the upward trend of oil and gas prices throughout the first quarter of 2011 resulted with a similar trend in the profits of oil companies. Exxon, the largest public company in the world, recorded a profit of $10.65 billion in the first quarter [.pdf]. BP, Chevron, and Shell each earned about $6 billion in the same period.

Comments

  1. As this article noted, the average price for a gallon of gas has declined two consecutive weeks since the week ending May 9th and the average price for a gallon of gas in the week ending May 23rd was $3.90, as projected.

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