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July 2003, Vol. 126, No.7

Consumer gasoline prices: an empirical investigation

Jonathan Weinhagen

According to the BLS Consumer Expenditure Survey, the average consumer spent approximately $1,300 on gasoline and motor oil in 2000, an increase of 22.4 percent over the 1999 figure. Over the same period, the average price of gasoline increased 36.3 percent,¹ indicating that price changes within the gasoline market can substantially affect consumers’ expenses. Conventional reasoning suggests that the high level of volatility for gasoline prices is the result of supply forces, as the price of crude petroleum changes rapidly due to production decisions of the Organization of Petroleum Exporting Countries (OPEC) nations. However, shifts in demand also can cause variations in gasoline prices. The purpose of this article is to examine the nature of price changes for consumer gasoline, using econometric techniques as well as historical evidence.

The second section of the article analyzes the impact of crude-oil supply shocks on prices at various stages of gasoline production by visually examining those price changes for crude oil, producer gasoline, and consumer gasoline which occurred subsequent to interruptions in the supply of crude petroleum. The major supply shocks considered are the Yom Kippur War, the Iranian Revolution, the Iran-Iraq War, the Persian Gulf War, and a 1999 OPEC production cut.

The article’s third section constructs a structural simultaneous-equations model of the market for consumer gasoline to determine the effects of changes in supply and demand on the price of gasoline. The model developed is a five-variable structural vector autoregression constructed from the Producer Price Indexes (PPI’s) for crude petroleum and gasoline, the Consumer Price Index (CPI) for gasoline, the quantity of gasoline consumed domestically, and the industrial production index. The final section of the article presents its conclusion.

This excerpt is from an article published in the July 2003 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.

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Footnotes
1 The 36.3-percent figure represents the percent increase in the annual average of the Consumer Price Index for gasoline from 1999 to 2000.

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