Looking at Gas Prices: Facts and Interpretations

The St. Louis Federal Reserve’s economic research unit (FRED) has published two brief articles this past week analyzing trends in gas prices, both recent and long term.

Both provide evidence for those who would seek to turn the debate political about the increases.

The first article is the Long Term Trend in gas prices.  The analysis has two conclusions:

  1. Average annual CPI inflation from 1990 to 2021 was 2.4%, while average annual gasoline price inflation was 3.9%.
  2. Increased demand for gasoline is not likely the primary reason for gasoline price increases over the past decade, however. It increased from 62.9 million gallons in 1990 to 80.4 million gallons in 2006 but began to decrease in 2006. In 2019, U.S. motor gasoline consumption was 80.9 million gallons—only 0.5 million gallons more than motor gasoline consumption in 2006.

The macroeconomic result is that expenditures on motor gasoline made up a smaller percentage of GDP in 2019 (1.7%) than they did in 1990 (2.1%).

Feathers and Rockets: The Consumer’s Disadvantage

The second analysis tracks the relation between the price of oil and gasoline at the pump.

The article’s conclusion:   When oil prices shoot upward, gas prices rise with them. And when oil prices fall, gasoline prices also fall; but they can fall at a slower rate. Economists refer to this market dynamic as “asymmetric pass-through.” A more colorful description of the phenomenon is “rockets and feathers.”

The chart in the article is dynamic allowing the user to focus on recent changes.  This phenomenon doesn’t occur every time oil prices fall, but can be seen in recent months: at the beginning of December 2021 and at the end of March 2022.

Why Members Are Angry

How one interprets the charts and data in these articles will probably influence which political interpretation  for higher prices a person is inclined to believe now.

Both articles highlight the reality of retailer market power and consumer search costs as reasons why many members (consumers) feel so frustrated by the seeming monopolistic pricing patterns when paying for gas at the pump.

Their anger is more than high prices.  It is the absence of  “consumer sovereignty” (choice) the supposed  hallmark of a market economy.


One Reply to “Looking at Gas Prices: Facts and Interpretations”

  1. Chip, you got me thinking about what credit unions can learn about disrupting commodity-model economics – specifically the “asymmetric pass-thru” (I.e. “heads I win, tails you lose”) profit-taking.

    Thinking about gas prices, a Newsweek article from June 9 lists an $0.084 per gallon price at a pump in Venezuela. Sure, Venezuela is an oil producer… but so is the US! Is the Venezuelan refining, distribution, and retailing system really 80-100x more efficient than ours?

    Now, replace gas with cash as a commodity, in the way we think about any commodity futures. I assume that the biggest banks in the US are skilled at asymmetric pass-thru tactics, especially in the current environment with the stock market and the Fed signaling rising rates and tightening credit.

    Unlike gas, which can only be differentiated by octane grade, a cash/financial product can be engineered in all kinds of creative, asymmetric ways.

    Assuming this is going on at BoA and Citi, what can credit unions learn from their messaging to consumers, and how might we use this lesson to craft a less “asymmetric” response?

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