Following Tuesday’s announcement of the coordinated release of strategic oil reserves, policymakers and investors are focusing on the indirect—or some would say the actual— target of such an action: consumer retail gasoline prices.
Based on the relationship between retail gasoline costs and wholesale gasoline prices, that cost for consumers is likely to decline in the near term.
Wholesale gasoline prices peaked on Oct. 26 and have fallen 8.1% since then. While the policy action on Tuesday will almost certainly provide no relief for consumers ahead of the long holiday weekend, a look at the relationship between wholesale and retail gasoline prices implies that the cost of gasoline is likely to decline by roughly 11% in the coming weeks.
The relationship between wholesale and retail gasoline prices since 1990, in statistical parlance, has an R2 of .77, an adjusted R2 of .60, and both are essentially unchanged if one looks at that relationship over the past decade.
While wholesale gasoline prices do not always provide a precise and timely forward look at consumer prices—price declines and increases can lag movement in wholesale costs—they do tend to hold up as a useful indicator.
Wholesale gasoline prices, like oil costs, started to ease in late October as the Biden administration and its ad-hoc coalition began rhetorically targeting pricing in energy markets and talking openly about petroleum reserve releases. In our estimation, the jawboning may prove more successful than the actual policy action.
