For immediate release: October 24, 2007
Current Market Conditions Could Lead to Cheaper Gasoline Prices, Says Dallas Fed's Economic Letter
DALLAS—If current market conditions prevail, gasoline prices are set to rise over the next few months and then fall over the next three years, according to the October issue of the Federal Reserve Bank of Dallas' Economic Letter.
In "What's Driving Gasoline Prices?" director of energy economics and microeconomic policy Stephen P.A. Brown and economic analyst Raghav Virmani find that gasoline prices could rise by 20 cents in the next few months and then decline by about 35 cents a gallon over the next three years, with seasonal variations during each year of about 27 cents a gallon.
"Household budgets won't get much relief, but continued high gasoline prices probably aren't going to be an unbearable burden for the economy as a whole," Brown and Virmani write.
The authors use an econometric model incorporating crude oil prices and seasonal and nonseasonal movements in consumption, refinery production, imports and inventories to create a complete picture of gasoline pricing in the U.S. market. The model explains more than 99 percent of gasoline price levels and 56 percent of the weekly changes in gasoline prices.
Brown and Virmani find that recent market conditions that have driven gasoline and oil prices in opposite directions are short lived.
"Our econometric models confirm the traditional result that crude oil prices dominate movements in gasoline prices, but they also show that seasonal and nonseasonal movements in consumption, refinery production, imports and inventories influence gasoline prices in the short term," they write.
The three-year outlook incorporates West Texas Intermediate crude futures prices, which call for oil to slide to $75 a barrel by the end of 2010. As with all estimates, the outlook for crude oil prices can change significantly with economic conditions or geopolitical events, the authors say.
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