Heavy Lifting - thoughts and web finds by an economist
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Friday, March 25, 2005
This is an interesting chart. In econometrics we talk about structural change in data, and this picture seems to have a structural break. Before December 2003, or so, the price of gasoline varied, mostly seasonally, around $1.50 to $1.60 per gallon. After December 2003, the price of gasoline marched steadily to a new plateau where prices now seem to vary around $1.90 per gallon.
It is possible that in the next couple of years the price of gasoline might steadily decline to return to the $1.50-$1.60 area, but I doubt that is going to occur. If this were 1988 or 1993 it might be possible, but the demand for oil in the 2000s is much greater than it was in the late 1980s, and it is not going decline, especially in Asia. Therefore, it is unlikely that gasoline prices here in the states are going to return to the good old days. In other words, there has been a structural change in the price of gasoline.
In a Heavy Lifting post from May of 2004, I argued that the days of $1.50 gasoline were gone for good. In that post I offered the following supply and demand side concerns:
Doesn't seem like much has changed, except for the refinery explosion in Texas City this week. I agree that inflation adjusted gasoline prices are still fairly reasonable, and backstop technologies are likely to improve mpg in new cars. My point is that the jump in prices in December 2003 is fairly clear.
Another thought. September 2003 (or a little earlier) is when the dollar starts it's long slide against the Euro. Perhaps this has also had an influence on the transition from one price regime to the next. If the dollar has been permanently devalued against the rest of the world (something many economists would agree needed to happen), then the new price regime might well be stable.
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