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Why Does Gasoline Cost so Much? A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market

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  • Kilian, Lutz

Abstract

There is an important distinction between the price of gasoline in the U.S. and the price of crude oil in global markets that is often ignored in discussions of the impact of higher energy prices. This paper makes explicit the relationship between demand and supply shocks in these two markets. Building on a recently proposed structural VAR model of the global crude oil market, it explores the implications of a joint VAR model of the global market for crude oil and the U.S. market for motor gasoline. It is shown that it is essential to understand the origins of a given gasoline price shock, before predicting the likely path of the price of gasoline or of gasoline consumption, since each demand and supply shock is associated with responses of different magnitude, pattern and persistence. The paper assesses the overall importance of these shocks in explaining the variation in U.S. gasoline prices and consumption growth, as well as their relative contribution to the surge in U.S. gasoline prices since 2002. The findings have important implications for the future evolution of the real price of gasoline. Although there is considerable uncertainty about the determinants of the price of gasoline, this paper makes the case that the real price of gasoline is likely to remain high for several years.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6919.

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Date of creation: Jul 2008
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Handle: RePEc:cpr:ceprdp:6919

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Keywords: Demand shock; Dynamic effects; Gasoline consumption; Gasoline price; Price of crude oil; Refiners; Supply shock;

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References

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  1. Michael C. Davis & James D. Hamilton, 2003. "Why Are Prices Sticky? The Dynamics of Wholesale Gasoline Prices," NBER Working Papers 9741, National Bureau of Economic Research, Inc.
  2. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  3. Robert Barsky & Lutz Kilian, 2004. "Oil and the Macroeconomy Since the 1970s," NBER Working Papers 10855, National Bureau of Economic Research, Inc.
  4. GONÇALVES, Silvia & KILIAN, Lutz, 2003. "Bootstrapping Autoregressions with Conditional Heteroskedasticity of Unknown Form," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2003-01, Universite de Montreal, Departement de sciences economiques.
  5. Erich J. Muehlegger, 2004. "Gasoline Price Spikes and Regional Gasoline Content Regulations - A Structural Approach," Working Papers, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research 0421, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  6. Kilian, Lutz & Rebucci, Alessandro & Spatafora, Nikola, 2009. "Oil shocks and external balances," Journal of International Economics, Elsevier, vol. 77(2), pages 181-194, April.
  7. Borenstein, Severin & Cameron, A Colin & Gilbert, Richard, 1997. "Do Gasoline Prices Respond Asymmetrically to Crude Oil Price Changes?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(1), pages 305-39, February.
  8. Lutz Kilian, 2008. "Exogenous Oil Supply Shocks: How Big Are They and How Much Do They Matter for the U.S. Economy?," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 216-240, May.
  9. Lutz Kilian, 2008. "A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(1), pages 78-121, 03.
  10. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  11. Kilian, Lutz & Park, Cheolbeom, 2007. "The Impact of Oil Price Shocks on the U.S. Stock Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6166, C.E.P.R. Discussion Papers.
  12. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
  13. Robert B. Barsky & Lutz Kilian, 2001. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Working Papers 8389, National Bureau of Economic Research, Inc.
  14. Edelstein, Paul & Kilian, Lutz, 2007. "Retail Energy Prices and Consumer Expenditures," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6255, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Kilian, Lutz & Vega, Clara, 2008. "Do Energy Prices Respond to U.S. Macroeconomic News? A Test of the Hypothesis of Predetermined Energy Prices," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7015, C.E.P.R. Discussion Papers.
  2. Hicks, Bruce & Kilian, Lutz, 2009. "Did Unexpectedly Strong Economic Growth Cause the Oil Price Shock of 2003-2008?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7265, C.E.P.R. Discussion Papers.
  3. Kilian, Lutz & Rebucci, Alessandro & Spatafora, Nikola, 2009. "Oil shocks and external balances," Journal of International Economics, Elsevier, vol. 77(2), pages 181-194, April.
  4. John D. Burger & Alessandro Rebucci & Francis E. Warnock & Veronica Cacdac Warnock, 2010. "External Capital Structures and Oil Price Volatility," Research Department Publications 4667, Inter-American Development Bank, Research Department.
  5. Katarzyna Leszkiewicz-Kędzior, 2011. "Modelling Fuel Prices. An I(1) Analysis," Central European Journal of Economic Modelling and Econometrics, CEJEME, CEJEME, vol. 3(2), pages 75-95, June.

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