Are gas prices becoming more volatile?

Now that I've let our guest blogger, David Zetland, get his feet wet (pun intended--he's a newly minted water economist--get it?) I decided to take up his challenge to look at world gas prices.  Then after I looked at the wikipedia gas price list, I decided I didn't really have anything useful to say (do I ever?) about world gas prices and instead I would return to my jingoistic roots and look at U.S. gas prices. 

We all know gas prices are going up.  But are they also becoming more volatile over time?  The graph to the right should look familiar--it's real (i.e. inflation adjusted) gas prices from 1990-present and there is a distinct upward trend.  But what my finely trained eye also sees is increased price variability in recent years.  So let's take a closer look...

  In an attempt to take the trend out of the picture and instead focus only on price fluctuations, the next graph shows the weekly percentage change in prices.  Again, a noticeable pattern emerges.  The weekly swings in gas prices appear to be larger from about 2000 on than they were in the previous decade--not just in absolute terms, but also as a percentage of the previous weeks price. 

Want more evidence?  Graph #3 looks at the difference between the high and low gas prices over the previous 52 weeks.  Again, the highs relative to the lows are getting bigger.

How about one more?  Graph #4 is the one year moving standard deviation of prices.  Again, an upward trend.

What does all of this mean?  I have no idea.  Gas prices appear to be getting more volatile.  What are the common explanations for higher gas prices and can they explain increasing volatility? 

1. Increasing demand.  That doesn't seem likely to cause increased volatility.
2. Decreasing supply.  Again, I can see this causing higher prices but not more variability.
3. Political instability in oil producing countries.  This one I might buy into but are these countries any more unstable than they were in the 1990's?  If so, I guess we can blame always Bush.
4. Speculation.  I have to admit that this is the one I know least about, but seems to hold the most promise for explaining volatility.  If oil is being treated as an investment commodity rather than a consumable commodity we might expect to see larger day-to-day price fluctuations.  How that translates to the gas market, I don't know.

So there you have it.  A completely uniformed look at gas price volatility.  But to be fair, my intent isn't to answer the question but rather raise it:  Why are gas prices more volatile now than 10 years ago?

Comments

[David Zetland]

Tim,

I think that volatility also has something to do with lean inventories -- as I argue here wrt ag commodities. OTOH, there's no good answer to that issue either :(

[...]

I believe part of it is 'marketing' by the oil companies. They can bump the price up a dime, then down a nickel, and the new price looks good compared to the higher price a couple days earlier (or up a quarter and down a nickel).

[Patrick]

What about variability in the capacity of oil refineries? For instance, it looks like the biggest blip in price changes occurs around when Katrina hit (graph 4 might show it the best, I think).

[John Tantillo]

Today the branding the oil companies are doing do not focus on the short term strategy. They forgot what the target market really wants and that is gasoline that will save them money.

[Bob Murphy]

I may be able to come back later with specifics to back up my bald assertions, but:

* The need for boutique fuels (where different regions of the US have different requirements for gasoline) may have intensified during the period you're discussing, with more regulations etc. So that would segment markets and lead to higher volatility, even in the average price over the whole area.

* Generally speaking, doesn't speculation reduce price volatility? If you buy low and sell high, you smooth out the price fluctuations. I would argue if anything it's the opposite, that there have been more crackdowns on "hoarding" etc. since Katrina and so natural variations in price have less of a cushion from people anticipating the hiccups.

[Matthew McCormick]

My senior honor's thesis in economics way back when addressed this topic, as it relates to boutique gasoline requirements... at the time (2004), a non-trivial portion of the phenomenon could be traced to requirements at the state and local level that required the use of particular blends during certain times of year. These requirements reduced the fungibility of gasoline supplies by turning a single, national commodity into a much larger number of commodities that often could not be sold in other areas.

So there's that, of course... but I don't think it explains a lot of what we're seeing. I'd bet that a lot of the phenomenon could probably be explained by looking at refinery, storage, and pipeline capacity and utilization rates-- particularly storage-- as the first two will be the choke points and the third the only real buffer. So... yes, I think David is right. I've posted a picture to illustrate this here:

http://www.thereconstruction.org/media/1/volatility_vs_stocks.PNG

[joshua corning]

In the housing market before it dropped i saw lots of price fluctuation...also in 2000 tech stocks where all over the place.

I see a bubble.

[Rich Kazmierczak]

It is instructive to overlay either the nominal or real U.S. gasoline prices on a plot of the inverse of the U.S. dollar index. Although the relationship is not a perfect 1:1, its pretty darn close. A look at the volatility of the dollar in relationship to the gasoline price would likely clear up much of the mystery, just from eye-balling the data.

[Hale]

The start of the increase in volitility in price of gasoline in the US seems to coincide with the institution by OPEC of a price band for its basket of crude oil, intended I think, to reduce price volitility.

[john]

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