Can Crude Oil Futures Predict Sport Retail Unleaded Gasoline Prices?

Abstract

The motivation for this paper began with casual empiricism regarding the
brief distributed lag of retail gasoline prices behind crude oil futures. We developed
a model consistent with our hypothesis and tested it with econometrics using statistical
data that include the sharp decrease in crude oil price futures in late summer
2008. We found that our model is a consistent and efficient estimator of the actual
gasoline prices over most of our sample period. However, random shocks to gasoline
prices, like Hurricane Ike in 2008, cause the model to have problems accurately
predicting gas prices. We conclude that our estimated model and simulations provide
reasonable support for our hypothesis that crude oil price futures can predict spot
retail unleaded gasoline prices.