Sunday, February 20, 2005

Five Year Trend: Gas Price 'Spreads' Outpace Inflation

With the gasoline price spikes of 2004, oil companies in the United States have not been shy to point out how little consumers were actually paying, when taking inflation into account. Over the long haul, that point has merit and is well taken.

But look at the data over a shorter term, on the basis of the past six years, and you see a picture containing contrasting colors. The research reported here uses what's known as the 'spread', that being the difference between the acquisition expense for crude oil and the price of gasoline at retail. This approach rules out variations in the cost of crude exaggerating price figures.

Data were derived from weekly crude oil and retail gasoline prices, with 1999 used as the base year. As the chart and table below each reveal, the spread increased well beyond inflation in four of the five subsequent years. The spread gain was greatest in 2004, exceeding inflation by a whopping 13%, followed by 11.72% in 2001, then by 9.90% in 2003 and finally by 8.79% in 2000. In the only year that thespread came in below inflation, 2002, the lag was a modest 1.77%.

Over the half decade from 2000 through 2004, the spread has outpaced inflation by an average of 8.33%, year over year. I think it's fair to say that most businesses would trade their present balance sheets to have such a comparative pricing advantage.

The raw data used to determine the spreads were provided by the U.S. Government's Energy Information Administration. A handy calculator, accessible via the Bureau of Labor Statistics web site, was relied upon to determine annual rates of inflation.


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