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Cheaper gasoline on the way





The top chart compares crude oil (orange) and wholesale gasoline prices (white), and the inference I draw is that crude prices are leading gasoline prices on the way down. Today's $91 crude price suggests that wholesale gasoline prices should fall to at $2.70/gal or less. The bottom chart compares wholesale gasoline (white) and regular gasoline prices at the pump (orange); the tight correlation between the two suggests that if wholesale gasoline prices fall to $2.70, then prices at the pump should fall to $3.40 or less, compared to today's $3.61 average nationwide price for regular. That would result in a 15% net decline in gasoline prices from April's highs, which in turn would reverse most of the bulge in oil prices that started last February.

If higher crude and gasoline prices contributed to the economy's slowdown in the first quarter, which seems likely, then the reversal in prices over the past two months should help support the economy this summer.

P.S. And all of these price declines so far have happened without any assistance from government policies. It's been a natural market reaction to the combination of a rise in price and a rise in crude inventories. Today's announcement by the IEA that it will be releasing crude inventories into the market will likely have only a minimal impact compared to the larger fundamentals that are driving the market.

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