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

by: Mark Wyatt

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).