Continuing Research on U.S. Gasoline and Crude Oil Prices, Part One

Preface

The next several posts will contain a brief version of the exploratory analysis that I had performed for my final research project (thesis) while I was enrolled in a Masters program in Applied Economics.  The overall goal was to quantify the causal relationship between U.S. gasoline prices and spot crude oil prices -- both West Texas Intermediate (WTI) and Brent.

All of my data comes from the U.S. Dept. of Energy's Energy Information Agency (EIA).  A lot of the initial transformation of the data, such as picking the time frame and choosing which variables to include, was done in LibreOffice Calc.  Originally, the statistical analysis had been done in Stata12, but since migrating myself to R I have done most of my work over again.

The data and R script will be made available in my GitHub account, a link is available on the right-hand side of the page.

Introduction

Crude oil is a heavily traded commodity that garners a lot of attention.  The question that I ultimately would like to answer is: What is the relationship between crude oil and U.S. gasoline prices, and is it quantifiable in some manner?

First, I chose an eight year time period of data from the EIA's publicly available data, beginning in July 2006 and ending in June 2014.  The first part of my analysis focuses primarily on WTI and Brent crude oil spot prices and the simple average of the U.S. Conventional Gasoline prices from the New York and Gulf hubs.  (i.e.: (Conv. Gas NY + Conv. Gas Gulf) / 2)

Exploratory Analysis

Foregoing summary statistics, I will begin by visualizing the data:

From this simple line plot, it looks like the average Conventional Gasoline price tracks closer to the Brent crude oil price than the WTI price.  So this graph is followed up with the correlation between the variables, using the cor() function in R:

                 wti     brent avgConvGas
wti        1.0000000 0.9385743  0.9172266
brent      0.9385743 1.0000000  0.9718169
avgConvGas 0.9172266 0.9718169  1.0000000

From the table above you can see that the two crude oil prices are highly correlated (orange highlighting) with each other, which is not a surprise given the global nature of the crude oil market.  We also see that the two market crude oil prices are highly correlated with the gasoline prices -- again, not a surprise since gasoline is derived from crude oil via the refining process -- but U.S. Conventional Gasoline prices are more correlated with the Brent crude oil price (blue highlighting) than the WTI crude oil price (green highlighting).

...

I'm going to stop here.  I will continue my analysis in Part Two of this post.  Stay tuned!