Predicting at the Pump

Trying to anticipate the price of gas can be a lot like trying to pick lottery numbers sometimes.

A lot of us would love to know when gas prices are going to go up or down because we could use that information to save money at the pump. If we know gas prices are about to go down we can hold off on buying it or put just enough gas in the car to tide us over until the price drops. Similarly, if the price is about to go up we could load up our tanks as often as possible before the increase happens.

Recently, the folks at Econbrowser found a way to predict a gallon of gasoline’s expected price in the near future that’s actually proven to work. They figured out that the main reason oil prices don’t directly correlate to the price of gas at times is that people were watching the wrong oil price.

Most gas predictors online are using the West Texas Intermediate (WTI) cost of a barrel of oil. WTI is used most often because it’s used to predict the Chicago Mercantile Exchange’s oil futures, but it’s actually not all that accurate when it comes to predicting the price of the unleaded gasoline most consumers buy at the gas station. Instead, Econbrowser has focused on the price of Brent Crude oil, a different oil company.

There’s even a calculator where you can put in the price of Brent Crude and get back the average cost of gas.

By using a formula based on the price of Brent Crude, the economists who write Econbrowser’s blog were able to predict whether the price of gas will increase or decrease in the coming months. You can watch the price of Brent Crude Oil at Oil-Price.net. 

Here’s what James Hamilton, the man who wrote the formula, had to say: “The price of gasoline and price of Brent turn out to be co-integrated, meaning that any permanent change in the price of Brent eventually shows up as a permanent change in the price of gasoline.

“The coefficients of the above relation are very much what you'd expect. A barrel holds 42 gallons, and the estimated coefficient (0.025) is 1/40. The intercept (0.84) captures an average state and federal tax of 50 cents per gallon plus a bit over 30 cents in markups and other costs.”

The price of Brent Crude is up about $7 in the past couple weeks, which means we can probably expect gas prices to level off soon or get higher.