How Oil and Gas Prices Fare in Dollar vs. Euro Terms

I have been looking at oil and gas prices, and wondering how they fare in dollar vs. euro terms. Clearly, since the oil market is a world market, the euro will buy more oil.

Figure 1 shows the spot price of Cushing Oklahoma crude for about the last 10 years by quarter(Q4 1998-May 28th, 2008). The last bar is for May 28th, 2008. The green bars are the prices in US dollars. The black bars are the US dollar price convered to euro at the rate for the same day. I note three plateau regions. The first one (the longest) is roughly from the end of 1999 until the end of 2004. The typical gas price in this time period was $1.50/gallon (shown in blue). The next region is from the beginning of 2005 through part of 2007. Here the typical gas price is $2.50/gallon. The third region is now. The typical gas price for this time period is $3.75/gallon (and rising $.03-.04 per day from my local observations). The most interesting thing to note on this graph is the acceleration of the US dollar cost of oil relative to the euro cost. This of course represents the weakening of the dollar against the euro. The other interesting thing to note is that the cost of gasoline appears to be following the euro price of oil and not the US dollar cost of oil. From the first preiod to the second, the cost of gas increased about 1.7 times. The cost of oil in euros (or dollars) incresed about 2 time. This is not exact, so I would say it was a close match. From the second period to the third (the current), the cost of gas increased again about 1.5 times. The cost of oil in euros increased 1.5 times. The cost of oil in dollars increased substantially more (closer to 2 times), and is increasing at a faster rate. This indicates that gas prices likely are lagging. They should be more like $5 a gallon (and are heading up pretty quickly) at the May 28th spot oil price. The refineries and gas stations can only raise rates so quickly.

Figure 2 is a similar graph for gasoline prices (regular unleaded, nationwide average, all formulations). The main interesting point here is the the recent increase in oil prices is not apparent in the euro prices for gasoline, but is very clear from the US dollar prices. In euros, the price of a gallon of gasoline has not changed substantially (on average) since June 2005. In dollar prices, it has been increasing rapidly since at least December 2007.

If we presume that the dollar and euro should have about equal value (and this is debatable), then we can subtract the euro price for gasoline from the dollar price, and let the difference represent the effect of the exchange rate disparity. This is illustrated in Figure 3. The dotted line at 0 represents parity. It is clear that the increase in the value of the euro has been a factor since mid-2001. In fact, the curve appears to be flattening out, and right around 9-11-2001 is when the curve started going up. We are currently paying $1.40 too much for gasoline (if 1 dollar is actually worth 1 euro). Note the acceleration of increase since Q3 2007. How much would you bet that this is related to the August subprime meltdown?

Finally, Figure 4 is a correlation between the cost of gasoline (dollars/gallon) vs. the cost of a barrel of oil (dollars per barrel). This does not account for any lag between actual cost, etc. Basically, a gallon of gasoline (in this period Dec. 1998-May 2008) was approximately $0.68 + 2.76% (cost of a barrel of oil). This implies that at $200/barrel for oil, gasoline should be $6.20/gallon. Adding in the apparent lag factor, if oil equalized at this price, it could be even higher ($7-8/gallon).

Comments

[zenalgorithm:]

Don't waste time trying to make sense of oil's movement. Goldman and Morgan Stanley control the price.

2008 Jun 11 09:41 AM

[Dr. No:]

The problem with technical analysis is that you can show whatever you want depending on how you cut it and mostly it is obvious.

2008 Jun 11 11:52 AM

[User 208877:]

Ever notice how the Euro $ people are not getting cheaper oil as the US dollar soars to new lows? Perhaps not all countries are purchasing oil at the so - called published world rates?

2008 Jun 12 01:26 AM

[Joe d:]

This proves that the recent price surge is not becasue of supply and demand. Demand only rose 1 percent this year got the price ofreally being dictated by the devaluation of the dollar. The devaluation of the dollar is direclty related to the Fed's decision to keep interest rates too low and Bush's policy of flooding the world with war dollars and unbridled spending. Inflation has not been going up mainly becasue China is holding retail prices low but the fed is ignoring commodiites in the infalation forecast. Who gives a shit if they can by a cheap dvd player when they cannot afford cornflakes? Those days are here.... Save the dollar!

2008 Jun 18 04:44 PM

[GhostFlier:]

All current dialog about the drastic increase of the price of oil has been confined to supply and demand. Conventional wisdom places that massive increase on those factors while the euro payers have noticed only moderate price increases in gasoline. Nothing is mentioned about the escalation of the price of oil that is due to the deflation of the US Dollar. Your interesting analysis and its identification that $1.40 is the current price tag due solely on Dollar deficiencies. "You can pay me now or you can pay me later" - It appears that burden of funding a war paid by printing money is upon us and our Grandchildren.

2008 Jul 20 09:48 AM

[gas-gr..or as.:]

As many suspect, futures trading and the devaluation of the Dollar were the most likely culprits in the huge oil price run-up. Also, let us not forget demand; yes, India, China, and lots of new Hummers crusing the American roads today.

A silver lining becomes evedent when one realizes that our subprime mess has also served to dry up the short-term capital needed by the robber-barans in the oil futures trading arena.

Look at Vitol and notice the inherent conflict of interest in their trading practices. Enron showed California how it could make a buck... Oil futures traders are showing the world.

2008 Oct 11 07:28 PM

[NWA10000:]

Priced in gold the increase in oil prices is even less.
The media doesn't bother to mention this.

2008 Dec 13 04:04 PM