So much for $4 per gallon gasoline prices

Today, the unleaded gasoline futures contract which trades on the New York Mercantile Exchange (NYMEX) closed at around $3.04 per gallon. Less than two weeks ago, this contract was trading north of $3.60 per gallon. The futures price essentially represents a wholesale price that excludes taxes, transportation fees, service-station markups and other costs. Nationwide, the markup from the NYMEX futures contract to actual prices at the pump has averaged around 62 cents per gallon since January 2000 (which is when AAA began tracking this information). Therefore, if there is reversion to the mean anytime soon, it is not unreasonable to expect prices at the pump to fall below $3.70 per gallon in the not-too-distant future. The graph below (obtained from shows this dramatic change since 15 July:

Given this substantial (nearly 16%) drop in prices of gasoline futures contracts, current pump prices (averaging nationally more than $4 per gallon, and around $3.90-$3.95 in Texas) are not sustainable. Barring a high severity natural or man-made catastrophe, pump prices have nowhere to go but down. It will be interesting to see how long it takes for these lower prices to make their way through the supply chain.

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