Are Gas Prices Correlated With Crude Oil Prices?
May 1, 2006
As high gas prices continue to dominate the political scene, the question of what exactly is driving higher prices continues to animate supporters of a windfall profits tax. Some politicians have even questioned the link between the price of crude oil and the price at the pump. From yesterday’s Late Edition on CNN, Senator Trent Lott (R-MS) said:
“My suggestion to the oil companies right now is, hey, there is not a direct correlation between the price of a barrel of oil and the gas at the pump. You don’t automatically raise your prices.”
But looking at monthly energy data from the past fifteen years gives us the following picture of the relationship between the price of crude oil (as measured by Brent-Europe Crude) and the price of regular retail gasoline (including all taxes). All price data comes from the Energy Information Administration.
Overall, there is a correlation coefficient of approximately 0.96, suggesting a near-perfect correlation between the two variables. (Click inside the image to zoom in and see a clearer picture.)