Wednesday, March 26, 2014

Are Gas Prices Tied to the WTI or the Brent Crude Prices?



(Note: As I transferred the information I was unable to get the graphs included I will add at a later date)
Introduction
Two questions are asked; why do gas prices fluctuate, and are gas prices pegged to crude oil? Our answer to the question is simply gas prices fluctuate as crude oil prices fluctuate. To prove whether this statement is true or not we will conduct research using a set of method in proving this theory based on historical data; comparisons in specific time, and tracking a pattern if one is shown.
Thesis:
Gas prices are pegged to crude oil.
What is Crude Oil?
In the simplest terms crude oil can be defined as the substance in which drives the economy and technology. It is a natural substance that is from the ground made from fossils. Craig Freudenrich says it is a starting point for many other substances(Freudenrich, 2001). This is because when broken down to its purified state, or refined, crude oil can be used for gasoline, wax, lubricating oil, kerosene, and many other oil based substance. Crude oil is found in many places of the world but the United States main suppliers are Canada, Saudi Arabia, Mexico, Venezuela, and Iraq.
Two major benchmarks, although there are others, are West Texas Intermediate (WTI) and Brent Blend. Benchmarks can be defined as the reference point of where crude oil is sold from. WTI and Brent Blend are competitive, although Brent Blend specializes in areas of the North Sea and is mainly used in Europe.
Brent Crude Oil
$100.39/barrel
WTI Crude Oil
$89.31/barrel
                                                                        (CNBC, 2013)

How is Crude Oil Turned into Gas?
After the collection from drilling the crude oil is heated in a refinery to a certain temperature. As the crude oil heats different molecules are separated from different temperatures of heat. 
Substances                                         Boiling Temperature                         Used for…
Petroleum Gas
Less than 104 degrees Fahrenheit
Heating, cooking, making plastic
Gasoline
104 to 401 degrees Fahrenheit
Motor fuel
Kerosene
350 t 617 degrees Fahrenheit
Fuel for jet engine and tractors
Gas Oil
482 to 662 degrees Fahrenheit
Diesel fuel, heating oil
Lubricating Oil
572 to 700 degrees Fahrenheit
motor oil, grease, other lubricants
Heavy Gas/Fuel Oil
700 to 1112 degrees Fahrenheit
 industrial fuel
Residuals
greater than 1112 degrees Fahrenheit
coke, asphalt, tar, waxes
                                                                                                                         (Freudenrich, 2001)

How does Gas get to the Gas Pump?
            When crude oil is heated and the gas is produced it is barreled and shipped out from one of its benchmarks, and depending on the price the oil, we are hypothesizing, that it will have an effect on what consumers pay; which again is our thesis:  Gas prices fluctuate as crude oil prices fluctuate.  According to Exxon Mobile, about 67 percent of the average price consumers paid at the pump in March was due to the price of crude oil, according to the latest data from the U.S. Energy Information Administration (Cohen, 2012).

Average Price of Crude Oil from WTI
The following graph shows no trend for the crude oil prices of April 2012.
(FRED, 2013)

The r2shows slight  correlation on why the fluctuation of crude oil in relating to the date. But doing research and study, we do not find any reason that is associated with these dates. So it shows to prove that gas was dropping from this point in time. The informational data are gathered from the economical website FRED Economic Data.  We also want to point out there this is a random date to include no war, no recession, or events that would lead to crude oil change. Now if we compare the WTI barrel price to price per gallon we see that there is a relationship there.
(FRED, 2013)
SUMMARY OUTPUT










Regression Statistics




Multiple R
0.889348772




R Square
0.790941237




Adjusted R Square
0.787996748




Standard Error
0.26672959




Observations
73










ANOVA






df
SS
MS
F
Significance F
Regression
1
19.11069962
19.11069962
268.6174316
7.82849E-26
Residual
71
5.051271859
0.071144674


Total
72
24.16197148










Coefficients
Standard Error
t Stat
P-value
Lower 95%
Intercept
1.082811509
0.1363044
7.944068616
2.1233E-11
0.811028254
WTI Oil per barrel
0.025947802
0.001583192
16.38955251
7.82849E-26
0.022791008



The r2shows strong correlation between WTI crude and the price of gasoline per gallon for the period of 7-1-07 – 1-1-13. The P value is significant at anα of .01. So if we had a crude oil value of x  = 100 then we would usey = 0.0259x + 1.0828=  $3.67 so a prediction derived from the data would mean that the Gas price per gallon when WTI crude oil is $100 dollars Gas price at the pump should be around $3.67.With  95% prediction interval the range would be between $3.14 and $4.20. On 2-01-2012 the WTI closed at $100.27 and the Gasoline per gallon average was $3.609 which falls within the range of prediction.

Average Price of Crude Oil from Brent Blend
Then we take look at the crude oil prices from Brent Blend, and again random date and no catastrophic event going on.

                                                                                    (FRED, 2013)

TheR2 shows here that there is no relationship with Brent Blend oil price change and the random dates that were selected. Now lets compare to Crude oil price change to gas prices to see if there is a relationship with two to support our hypothesis.
                                                                                                                                    (FRED, 2013)

SUMMARY OUTPUT










Regression Statistics




Multiple R
0.9587969




R Square
0.9192914




Adjusted R Square
0.9181547




Standard Error
0.1657284




Observations
73










ANOVA






df
SS
MS
F
Significance F
Regression
1
22.21189
22.21189
808.708
1.54236E-40
Residual
71
1.950079
0.027466


Total
72
24.16197










Coefficients
Standard Error
t Stat
P-value
Lower 95%
Intercept
1.188936
0.075278
15.79387
6.21E-25
1.03883532
Brent Oil
0.0231886
0.000815
28.43779
1.54E-40
0.021562709

The r2shows strong correlation between Brent Blend crude and the price of gasoline per gallon for the period of 7-1-07 – 1-1-13. The P value is significant at anα of .01. So if we had a crude oil value of x  = 102 then we would use y = 0.0232x + 1.1889=  $3.56 so a prediction derived from the data would mean that the Gas price per gallon when the Brent Blend crude oil is $102 dollars Gas price at the pump should be around $3.56. At 95% our prediction interval isbetween $3.18 - $3.84. On 7-1-12 the Brent Blend Barrel price was $102.62 Gasoline in the US traded at an average of $3.64 which falls in the area of prediction.

Result& Summary:
Crude oil does affect what is shown when a person pull up to a gas station. It is safe to say based on study and research that as the price of crude oil raises the price of gasoline too will raise.
Methods used were mainly from the U.S. Energy Information Administration from Jan 2007 until Jan 2013 because this was the timeframe used for the example gas prices per gallon, monthly consumption numbers and Crude oil prices for WTI and Brent oil.












Works Cited

CNBC. (2013, April 23). CNBC. Retrieved April 23, 2013, from WTI Crude Oil: http://data.cnbc.com/quotes/%40CL.1/tab/2
Cohen, K. (2012, April 24). Stats you need to know about gasoline, crude oil and the companies producing it. Retrieved April 23, 2013, from ExxonMobil: http://www.exxonmobilperspectives.com/2012/04/24/stats-you-need-to-know-about-gasoline-crude-oil-and-the-companies-producing-it/?utm_source=google&utm_medium=cpc&utm_term=gasoline+prices&utm_content=Gasoline_Price&utm_campaign=Perspectives_Gasoline_Prices
FRED. (2013, April 23). FRED Economic DATA. Retrieved April 23, 2013, from Economic Research: http://research.stlouisfed.org/fred2/graph/#
Freudenrich, C. (2001, January 04). How Stuff Works. Retrieved April 22, 2013, from How Oil Refining Works: http://science.howstuffworks.com/environmental/energy/oil-refining1.htm

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