(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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