Is There a Relationship Between Oil Price and Gasoline Price in the US?

With all the turmoil in the middle east, there has been a lot of talk about oil price and the resulting rise in Gasoline prices.  I downloaded daily spot prices and got yearly averages from 1986 through 2011 YTD.   The price categories are:

• Cushing, OK WTI Spot Price FOB ($/Barrel)
• Europe Brent Spot Price FOB ($/Barrel)
• New York Harbor Conventional Gasoline Regular Spot Price FOB ($/Gal)
• U.S. Gulf Coast Conventional Gasoline Regular Spot Price FOB ($/Gal)

As you can see in the graph below, Cushing Crude Price remained relatively flat from 1986 to 1999 at which time prices began a steady rise.

The next graph is for Gulf Regular Gasoline Price which follows a similar pattern on the same dates. 

These similar patterns suggest that correlations may help to see if anything has been changing in the relationship between Crude and Gasoline prices.  In the graphs below, the Cushing Crude price and U.S. Gulf Gasoline price are correlated for the period 1986 to 1999 with a resulting very strong correlation of 94% (R square).

In the table below, you will see that the correlations between the Cushing (US) and Brent (Euro) Crude price correlation weakens after 2003 while Gulf and NY Gas prices remain very strong in all three timeframes.  Looking further into the correlation between Cushing Crude Price and either Gulf or NY Gas prices, you find these correlations weaken to around 70 after 2003 (highlighted in red in the table).  This makes me want to look deeper into why the change in relationships after 2003.



	1986 - 1999	2000 - 2002	2003 - 2011
Cushing Crude to Brent Crude	99.0	99.4	95.8
Gulf to NY Regular Gasoline	99.4	99.8	99.8
Cushing Crude to Gulf Gasoline	94.0	96.3	70.1
Cushing Crude to NY Gasoline	99.4	97.7	69.3

Using a best fit exponential growth line to the price data, you can determine the stable and consistent Compound Annual Growth Rate (CAGR).  In the graph below, the best fit growth line for Cushing Crude Price has been found, and this same technique is applied to to the 3 time periods for both Cushing Crude Price and Gulf Gas Price Growth and summarized as CAGR in the table following.

	1986 - 1999	2000 - 2002	2003 - 2011
Cushing Crude Price Growth	0.2%	-7.2%	6.1%
Gulf Regular Gasoline Price Growth	0.2%	-7.2%	10.9%

So what happened in 2003 to cause the Gasoline price in the US to grow at a rate almost twice that of Cushing Crude Price.  California, in 2003 outlawed MTBE which was an additive in US gasoline in improve octane rating.  This step was taken when MTBE was found in groundwater and to be carcinoginic.  This lead to the use of Ethanol in gasoline to increase octane rating and finally the Federal Government's intervention (support) of ethanol production.  This is claimed to help reduce our dependance on foreign oil with a stabilization in gas prices.  However, the result has instead been the doubling of gas price growth relative to oil prices and the corresponding increase in corn prices to produce ethanol which in turn is driving up food prices in the US.