Crude oil prices and global gasoline prices

The retail gasoline price is formed by four basic elements: the crude oil price, refining costs, distribution costs, and taxes. The share of each element in the retail price varies across countries. The production and distribution costs and, especially, the taxes are relatively stable over time. In contrast, the crude oil price exhibits strong short-term and long-term fluctuations that should be followed by changes in the retail gasoline price. But how and when does the adjustment of the gasoline prices happen? Is the change instantaneous or it occurs after a certain time period?

In order to answer these questions we conducted a time-series regression analysis. In the analysis we used weekly data on Brent crude oil prices and the GPP Gasoline Benchmark for 69 consecutive weeks from June 2014 to October 2015. The GPP Gasoline Benchmark represents a world weighted average gasoline retail price using the relative volume of the petroleum products consumption. In the regression model we explain the percentage weekly change in the retail gasoline price by the weekly oil price change in the current week and seven past weeks. The purpose of the analysis is to examine how the gasoline prices adjust to the crude oil price changes over time.

The results show that the crude oil price changes do not lead to instantaneous changes of the retail gasoline prices. It takes on average 5 weeks before the full effect of a crude price change can be felt on the motor fuels retail markets. The chart below shows how an increase in the crude oil price affects the GPP Gasoline Benchmark over time.

We can draw the following conclusions. A 10% increase in the Brent oil price will lead to:

- An immediate increase in gasoline prices by 0.6%;
- 0.7% gasoline price increase after 1 week;
- 1.1% gasoline price increase after 2 weeks;
- 1% gasoline price increase after 3 weeks;
- 0.4% gasoline price increase after 4 weeks;

The cumulative effect of the crude oil price changes on the changes in gasoline prices is 4%. This means that if the crude oil prices increase by 10% the retail gasoline prices will rise by 4% within the following 5 weeks. There are two main reasons for the smaller change of the gasoline price. First, the oil price is only one of the elements in the gasoline price structure. Second, the analysis uses an average of the retail gasoline prices in 100 countries. In some of these countries fuel prices are regulated and stay unchanged for long periods of time.

See the up-to-date Global Gasoline Benchmark.

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