Especially since the price of gasoline skyrocketed in September 2005, I've heard over and over, ad nauseum, that the major determinant of the price of gasoline is the price of crude oil.  The explanation has even been used during the current down-turn in prices.

I decided to graph the two prices (from 2000 to current) together to see whether the one mirrors the other.  It seems, with exceptions, they do.  It's the "with exceptions" part that's puzzling to me.

In my graph there are a couple of short term anomalies.  The first occurred between April & May 2001.  The average price per gallon of regular unleaded (US Cities Average - Bureau of Labor Statistics) in this period rose from $1.75 to $1.94 while the price of crude oil fell from about $0,49 to $0.48.  The next anomaly was an opposite trend - from February to March 2002 the price of gas fell while the cost of crude rose.

The gasoline price rise normally blamed on Hurricane Katrina actually began in the period June to July 2005, and peaked by the end of September 2005.  During this time the average price of gasoline went from $2.38 to $3.11 per gallon, and the cost of crude went from $0.90 to $1.08 per gallon.  Notice the price of gasoline rose over 23%, but the cost of crude oil rose 16%.

The most interesting anomaly is the last two months.  From July to September 2006 the cost of crude oil has fallen a little less than 17%.  During the same period, the average price per gallon of gasoline has fallen almost 32%.

The last thing my graph made clear is that the trend line for the average price of gasoline is diverging from the trend line for the average cost of crude oil.  In other words, by my estimate, the US Cities Average price of a gallon of gasoline is increasing about 34% faster than the average price of crude oil since January 2000.  If the differential between the trend lines had remained constant, the average price of a gallon of gasoline would be approaching $2.00.

All of this reinforces that the commodity (gasoline) price is affected by much more that the cost of crude oil.  I guess I knew that.  But the current down-turn in prices is only half explained by the reduction in crude oil cost - so what does explain it?