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It should be no surprise to consumers that crude oil prices have a strong impact on day to day gasoline prices, but that relationship has not always been as strong as in recent years.
According to data from the Energy Information Administration, crude oil prices account for an unsurprising 67% of the cost for each gallon of regular gasoline. Taxes, distribution, marketing and refining costs account for the remaining 33%.
The story becomes interesting when we compare those figures on a historical basis. Barry Ritholtz discovered that early last decade, crude prices accounted for only 35% of the cost in a gallon of gas. At the peak in July 2008, crude represented 76% of the cost.
There is an inherent seasonality to crude and gasoline prices that is well documented. Crude prices begin to rise in early spring and generally do not experience an easing until October and November. In fact, crude prices rose an average of 3.9% during March over the past 27 years.
Changes in crude directly filter through to end consumers, and during four of the past six years, retail gas prices jumped 40% or more through the first half of the year.
These days, food inflation is regularly mentioned in the same breath as energy given the skyrocketing costs of most food commodities. As opposed to energy, though, costs of the farm account for 16 cents of every food dollar spent. The other 84 cents goes towards marketing, broadly defined to include processing, retailing, transportation and advertising – essentially all the steps required once food is cultivated.
As the middle class grows in the emerging markets, prices are becoming more susceptible to factors outside the US. The Food and Agriculture Organization of the United Nations reported that food prices reached an all-time high in February behind higher prices for cereal, dairy, oils and meat.
There is a dangerous trend developing in food and energy costs, one that threatens to derail the global recovery. Thus far, consumers are able and willing to accept higher commodity prices. With consumers still feeling the effects of the worst recession in nearly a century, though, there is only so much that people will be willing to tolerate and the second half of the year may be too far away, at least when it comes to crude prices.