The Hidden Pattern in Gas Prices (And How to Beat It) | Diving In
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you know the feeling you pull up to the gas station you know that oil prices have ticked up a bit and bang the price signs already changed then oil prices come back down a few weeks later and somehow the relief that lower price it just floats in like a feather
This isn't just some random gripe. It's in the news right now. Oil prices have been bouncing around and Donald Trump just jumped on social media to accuse the oil companies of not cutting gas prices fast enough. He's called it price gouging. Now that's a serious charge. But before we decide who the villain is, let's start by understanding the phenomenon itself. You've got to live with it every day. Because, mate, if you've had the feeling that gas prices go up fast and come down slow, you're not imagining it. Economists have been studying this for decades. We've even got a name for it. Rockets on the way up and feathers on the way down. The pattern's real. It shows up in lots of places over lots of years.
But it can arise for several different reasons. Some of them are pretty ordinary. Others are more worrying. So here's my plan for today. Does this really show up in the data? Is this an empirical regularity? Then let's get into it and ask, why might it happen? And finally, what does that all tell you? And what doesn't it tell you when you're standing at the pump? So let's start with the actual claim. Nobody's saying that gas prices never fall. Of course they fall. The claim is about how quickly. When oil, which is a major ingredient of gas, goes up, how fast does that show up for you at the gas pump? And then when oil prices go down, how fast does that show up at the pump?
What is the 'rockets and feathers' pattern in gas prices and how common is it?
That's the whole question for today. And it's a good question because people really do notice. Oil drops sharply, the sign barely budges, and suddenly it feels like someone somewhere is pocketing the difference. Now look, I don't want to jump from that feeling straight to a prosecution, but I don't want to wave it away either because economists have measured this for a long time and one finding keeps showing up across a whole big literature. Retail gas prices are often super responsive when crude oil prices are rising, but they're not anywhere near as responsive when they're falling. That's what we call the rockets and feathers pattern. So this isn't just a question of good blokes and bad blokes.
It's a question of timing. Does bad news travel through the system faster than good news? That is something we can actually test. Okay, mate. So I had Stata go fetch the weekly oil and gas price numbers for me. I grabbed weekly US retail gasoline prices from the EIA. That's the price they survey at the pump. First thing every Monday. And I lined up each of those Monday pump prices against the previous week's average crude oil price. Why the previous week? Well, because the pump can only react to oil price changes that have already happened. So we match this Monday's gas price to the crude that came before it. The idea is simple. What we want to do is take the weeks when crude oil rose and separate them from the weeks when crude oil fell.
Then ask how much of each of these movements showed up in gas prices at the pump over each of the following weeks.
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