Publications: Notes at the Margin

Gasoline Futures: Setting the Price of Retail Gasoline (June 26, 2017)

 

Fluctuations in retail gasoline prices can raise political hackles. The subject is so charged that a group of economists at the Federal Trade Commission evidently spend much of their time monitoring market fluctuations. Within the FTC, some believe refining companies have market power and can raise or lower prices as they see fit unless observed closely by the Commission’s economists. Empirical evidence suggests, however, that FTC oversight of the gasoline market is no longer required in most cases because the fluctuations in gasoline futures prices explain the fluctuations in retail gasoline prices. To illustrate, we demonstrate here that movements in New York Harbor gasoline futures prices explain the fluctuations in retail gasoline prices in Chicago, Cleveland, Boston, and Minnesota.

 

To explain briefly here, the expansion of trading that has occurred simultaneously with the growth of the futures markets has flattened the supply curves. The flattened supply curve has made gasoline marketing more competitive, removed much of the profits, and prompted the exit of many of the larger companies. This development, particularly the dominant role of the NYMEX gasoline contract, needs to be recognized and acknowledged. Full details appear in our report.

 

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