Gasoline vs. Oil

gas pumpIn talking to friends, there is a common perception that we are not reaping at the pump the full benefit of the plunge in oil prices. Of course, the matter is made more complicated by two factors:

  • a very large portion of the pump price of gasoline is made up of taxes; contrarily to most taxes, these are not proportional to the underlying price, but are a fixed amount.
  • most oil trading is made in US Dollars, while we in Europe pay gasoline in Euro.

I have therefore attempted to look at this issue removing the effect of (italian) taxes and of the X-rate. The result is in this chart:

Gas vs Oil

Essentially I have taken the price of Oil (blue=USD, red=EUR) and plotted it against the pump price (green=EUR), taking 01 Jul 2014 as 100%; the dotted black line is the ratio between the green and red lines: when it goes beyond 100% it means gas distributors are making more money than in July, 2014.

As you can see, if we take the dollar price as the “real” price (since trading is in dollars) you can clearly see a 15 basis point x-rate wedge starting to creep in since January, 2015 between the red and blue lines and while the cartel sometimes is effective in smoothing out dips (like in mid-march ’15) there are also instances of overreaction (e.g. january). In general the more prices are stable, the more competition will bring gas prices closer to oil prices.

According to this chart, there is still a 12-to-16 basis point margin to be eroded, we’ll see how it works out, but in general I don’t think we’re being MASSIVELY ripped off.

*NOTE – the continuous thin lines are mathematical extrapolations because during the summer I fill up in France, where prices are 15% to 20% lower than in Italy

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