Answer to the question

If you saw this post right after it went up, my apologies for not having the charts come up. I forgot the source was a transient website address, now I’ve corrected the oversight. I also put in a short explanation of what the charts represent.

I told you Jane Van Ryan reads my site. Yesterday I received an e-mail in my box regarding a query I had in Wednesday’s post about gas prices and other oil-related news. In getting the answer, I found out that I misread the chart but lucked into asking the right question anyway. The date in question for the huge marketing/manufacturing bump was September 5, 2005 – not 2006. As most recall, September 2005 was the period immediately after Hurricane Katrina wreaked havoc on the Gulf Coast. Naturally I would have realized the reason had I seen the date correctly – ah! right after Katrina!

But here’s her answer:

I’ve got the answer to the question posed in your blog post, and it’s is precisely as I expected. Here’s how one of our economists explained it:

First, it is important to remember that the 9/5/05 figure is a one-week snapshot in time…right after Katrina.

Second, the figure is for manufacturing and marketing (and transportation, margin (both wholesale, retail, and distribution), and all other costs.

This figure is very volatile—tending to broaden as prices go up (widening out the most when prices are spiking) and narrow as prices go down (shrinking the most when prices are plummeting).  This is partially because it includes the expected costs of the next shipment. When refineries are offline it tends to rise as well (as with Katrina/Rita) and different product formulations also affect the price (higher costs for summer blends vs non-summer blends).

It is better to look at the numbers over longer periods of time instead of a weekly snapshot—over a month or a year, for instance…and better to look at same-month comparisons vs different months (with different product formulations).

For September 2005, the cost was $1.119, for September 2008 it was 82.7 cents.

Annual averages (inflation adjusted):  from 1980’s peak of $1.1509, the manufacturing/marketing/transportation/margin component fell to 39.46 cents in 1999, rising back to 74.06 cents in 2007.  For the first 10 months of 2008 it is estimated at 55.04 cents.

This chart shows the manufacturing and marketing cost component of gasoline from 1980-2006.

This chart shows the manufacturing and marketing cost component of gasoline from 1968-2004.

So far for 2008, the monthly averages have been well below 60 cents (with the exception on September and October in the aftermath of Gustav and Ike).

This chart shows the manufacturing and marketing component cost of gasoline during 2008.

I hope this helps.

By the way, another interesting data point not in the Pump Price Update is the “Refiner Margin”  (the difference in price from crude and gasoline in the spot/futures market).  It is out of this number that the actual cost of manufacturing gasoline is taken…it has been NEGATIVE since October 3.

Refinery margin graph for 2008, showing the negative margin of late.

So far in 2008 it has averaged 11.05 cents…down from 2007 (27.58 cents), 2006 (22.13 cents), 2005 (26.77 cents), 2004 (21.62 cents), 2003 (16.48 cents), 2002 (13.77 cents).

Please let me know if you have any questions.

Best,

Jane

Can you tell an economist answered this? Holy smokes, that’s a lot of data – and all because I misread a number!

But Jane does bring up another good point, one that is often missed when talking about gas prices. The price at the pump isn’t set by what was paid for the gasoline that’s in the station’s storage tanks but rather by the next tankful the station owner has to buy. This tends to explain the phenomenon where prices seem to spike upward quickly but take their sweet time to decline. And the formulation aspect is also important around here because there’s a certain time of year (we just passed through it) where gasoline in Delaware runs cheaper than it does in Maryland – I’m told that is because of formulation differences between the two states. Now that both states are back on a level playing field the prices have reverted back to the norm of Delaware being a few pennies more than Maryland.

I don’t know if I can give you a college semester’s credit for reading this post, but I certainly imparted a lot of data to my readers and managed to get all the charts to come out. All told, I’m just pleased that the price of a gallon is back down to a level more in line with sanity – and I’m sure Jane and her cohorts would agree that now’s the time to work on keeping it that way!

Author: Michael

It's me from my laptop computer.