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Explaining Fluctuations in Gasoline Prices: A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market

The distinction between the price of gasoline in the U.S. and the price of crude oil in global markets is often ignored in discussions of the impact of higher energy prices. This article makes explicit the relationship between demand and supply shocks in these two markets. Building on a recently proposed structural VAR model of the global crude oil market, it explores the implications of a joint VAR model of the global market for crude oil and the U.S. market for motor gasoline. It is shown that it is essential to understand the origins of a given gasoline price shock, when assessing the responses of the price of gasoline and of gasoline consumption, since each demand and supply shock is associated with responses of different magnitude, pattern and persistence. The article assesses the overall importance of these shocks in explaining the variation in U.S. gasoline prices and consumption growth, as well as their relative contribution to the evolution of U.S. gasoline prices since 2002.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Petroleum – Policy and Regulation; Energy Security and Geopolitics – Energy Security; Energy and the Economy – Energy as a Productive Input; Energy and the Economy –Economic Growth and Energy Demand; Energy and the Economy – Resource Endowments and Economic Performance; Energy and the Economy – Energy Shocks and Business Cycles

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General
Q48 - Energy: Government Policy
O13 - Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
Q34 - Natural Resources and Domestic and International Conflicts
F44 - International Business Cycles

Keywords: Gasoline price, price of crude oil, demand shocks, supply shocks, dynamic effects

DOI: 10.5547/ISSN0195-6574-EJ-Vol31-No2-4

Published in Volume 31, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.