Updated: Using Gas Prices to Forecast Unemployment

Good morning, White House Staffer!

Say, do you remember when we said you should enjoy it while you can as the average price of gasoline in the U.S. dropped below $3.50 per gallon back in June?

Summer's over dude, and has been for well over a month!

Although your boss' spokesman is chillin' from his job (such strange behavior with the national election less than six weeks away, but what should we expect when the boss himself has been phoning it in all this time!), maybe you should have spent more time working on real, non-election-related stuff for the last four months, because gas prices in the U.S. have spiked sharply upward. Again.

So, to help you better understand why you really don't want that to happen, we've updated our tool that allows you to roughly forecast what today's high gas prices will mean for tomorrow's soon-to-come unemployment rate in the U.S. Basically, we've incorporated all the available data through September 2012 and accounted for inflation through that month as well.

Average Gasoline Price Trends for Washington D.C. and USA Washington D.C. Gas Prices Provided by GasBuddy.com

The Future Unemployment Rate Enter: Today's Average USA Gasoline Price U.S. Unemployment Rate In Two Years* * If High Gas Prices Are Sustained.... See you tomorrow!

Just for fun, you should try this exercise using yesterday's average price of gasoline in California, $4.67.

"Good Morning, White House Staffer" is a special feature we run periodically whenever the average U.S. national retail price for gasoline rises above $3.50 per gallon!

The Coming Surge for New Jobless Claims

How much of an effect do high gasoline prices have upon the rate of layoffs in the U.S. economy?

Today, following the initial confirmation of our hypothesis that they do have a significant effect as measured by the number of new jobless claims filed every week, we're going to attempt to quantify how big an impact that high gasoline prices has upon the employee retention decisions of U.S. employers.

We define "high gasoline prices" as being when the national average price of a gallon of regular unleaded gasoline in the United States rises above $3.50 per gallon, in terms of 2011-12 U.S. dollars. This price level appears to be significant in affecting both the spending of U.S. consumers, who respond by cutting back their spending on other goods and services, and the cost of doing business for U.S. employers, who face higher fuel and transportation costs, both directly and indirectly through their supply chains.

Previously, we've observed that whenever the national average price of gasoline crosses this level, the number of seasonally-adjusted initial unemployment insurance claims that are filed each week is affected some two to three weeks later. If it rises above the $3.50 per gallon mark, we observe an upward shift in the number of new jobless claims being filed and if it falls below it, we observe a downward shift in the number of new jobless claims being filed each week.

An upward shift corresponds to the situation where business revenues are falling while costs are rising, triggering the decision to lay off employees, while a downward shift corresponds to the opposite situation, resulting in employees being retained.

The two-to-three week long time lag between when the price of gasoline crosses this critical level to when it shows up in the BLS' new jobless claims data may be attributed to the typical payroll cycle of U.S. businesses, where they react to the change in their business outlook with their next payroll cycle - allowing the current payroll cycle to play out. Since the vast majority of Americans are paid weekly, biweekly or semi-monthly, the time-delayed reaction of employers to an event affecting their employee retention decisions to when in shows up in the government's official data is about 2 to 3 weeks.

We have previously attributed the last four shifts in the major trends for new jobless claims in the U.S. to the national average gasoline price crossing the apparently critical threshold of $3.50 per gallon. And because it just rose above that level on the week ending 30 July 2012 after having fallen below it just several weeks before that, we anticipate we'll see a significant upward shift with either this week's jobless claim data or with next week's data.

That's the "coming surge" we described in the title of this post. But how big will that surge be?

Looking over the past four shifts in the major trends for new jobless claims, we would anticipate that having average gasoline prices in the U.S. rise above $3.50 per gallon will add anywhere from an additional 15,000 to 25,000 to the number of people filing for first-time unemployment insurance benefits each week while gasoline prices remain high.

That brings us to our next problem: volatility in the data.

Previously, we had the benefit of gasoline prices remaining steadily either above or below the $3.50 per gallon mark for extended periods of time, which makes it relatively easy to measure the size of the shift in new jobless claims.

But with gasoline prices hovering so close to the apparently critical threshold of $3.50 per gallon right now, we can expect to see quite a bit of volatility in the weekly data for new jobless claims, as the shifts we describe are combined with natural statistical variation about the underlying trend for new jobless claims, which has been rising since mid-February. And especially if the average price of gas in the U.S. keeps crossing the threshold!

As a result, we could very well see some pretty dramatic swings from week to week until gasoline prices stabilize either above $3.50 per gallon or below it.

Testing a Hypothesis for New Jobless Claims

Do high gasoline prices affect the number of layoffs in the United States?

We're going to put our empirical observation-backed hypothesis that "Yes. Yes They Do" to the test during the next several weeks to see if we can get a solid answer to that question!

Here, we're defining "high gasoline prices" as being when the average price of a gallon of regular (unleaded) gasoline in the U.S. exceeds $3.50 per gallon in terms of 2011-12 U.S. dollars, as reported by the U.S. Energy Information Agency. We're also measuring the number of layoffs in the U.S. by the number of seasonally-adjusted initial unemployment insurance claims that are filed each week, as reported by the U.S. Department of Labor.

The test we're about to run hinges on an event that occurred in the week between 18 June 2012 and 25 June 2012, when the average price of gasoline in the United States fell back below the $3.50 per gallon mark.

Here, if our hypothesis holds, we'll see a shift in the trend for new jobless claims being filed some two to three weeks later, as employers react to this positive development which reduces their cost of doing business and also increases the disposable income of U.S. consumers after their current pay cycle ends and their next pay cycle begins.

Since most people in the U.S. are paid on a weekly, biweekly, or semi-monthly basis, that means a two to three week delay between when an event affecting employee retention decisions takes place to when it actually shows up in the weekly data for new jobless claims in the U.S.

After that, it can take several weeks longer to confirm the change in trend. Speaking of which, our chart below shows the previous two trends, along with the current trend:

We could see a shift begin as early as this week or next, however we expect it will be several weeks beyond that before we could confirm such a shift in the trend, given the effect the Fourth of July holiday will likely have on data reporting and the BLS' continuing issues with upward revisions to their initially-reported data in subsequent weeks.

Where Are U.S. Gas Prices Going?

Have you ever wanted to know where the average price of a gallon of gasoline in the United States was headed next?

If so, our latest tool was designed with you in mind! Building on James Hamilton's regression analysis of oil prices and U.S. gasoline prices from 2000 through the present, the main thing you need to know to predict where the price of gasoline in the U.S. is the price of a barrel of Brent crude oil, which if you're accessing our site directly, appears in the upper right corner of this post (via Oil-Price.Net)!

All you need to do is enter that current price in our tool, and we'll estimate how much the average price of a gallon of gasoline will be in the U.S. within the next several weeks.

Crude Oil Price Data
Input Data	Values
Price per Barrel of Brent Crude Oil

Future Price of Gasoline in U.S.
Calculated Results	Values
Average U.S. Price per Gallon

Hamilton explains the main factors behind the math:

The price of gasoline and price of Brent turn out to be cointegrated, meaning that any permanent change in the price of Brent eventually shows up as a permanent change in the price of gasoline. The coefficients of the above relation are very much what you'd expect. A barrel holds 42 gallons, and the estimated coefficient (0.025) is 1/40. The intercept (0.84) captures an average state and federal tax of 50 cents per gallon plus a bit over 30 cents in markups and other costs.

With Brent on Friday at $91.50 and an average retail gasoline price about $3.47, we'd thus expect gasoline prices to come down another 35 cents a gallon or so from where they were on Friday. Historically those adjustments usually come pretty quickly. For example, last December U.S. gasoline prices temporarily fell about 25 cents/gallon below the long-run relation, but by March they were right back on track.

The default data for our tool is taken from Hamilton's Friday, 22 June 2012 data point described above. If you know the difference between the excise taxes per gallon of gasoline that apply in your state (visualized here) and the national average listed above, you can adjust our tool's results accordingly for your area.

One other factor to consider is the volatility in the price of Brent crude oil. Here, frequent fluctuations in the market price for a barrel of Brent crude oil means that it will be difficult to pin down a specific price for a gallon of gas in the U.S. at a specific point in the future.

But in general, our tool should put you very close to being in the right ballpark for where the price of gasoline is going in the U.S., and if Hamilton's chart is any indication, that's a pretty impressive achievement in itself.

U.S. Gasoline Prices Fall Below the Magic Threshold

With the national average price of gasoline in the U.S. officially set to fall below $3.50 per gallon during this week, we have discontinued running our "Good Morning, White House Staffer" feature at the top of our site, as we promised last week - we've attached it for reference to the end of this post.

With that improvement in the average gasoline price, we anticipate that the reported pace of layoffs in the United States will change somewhat for the better within the next two to three weeks, as employers adjust their employee retention plans during their next pay cycle. Here, the employer reaction will be driving by the combination of their lower cost of doing business and an effective increase in the discretionary disposable income of Americans, who will increasingly have more money to spend on things other than gasoline.

We have previously observed that the $3.50 per gallon mark in the national average price of gasoline, as measured in terms of 2012 U.S. dollars, seems to be the magic threshold at which new jobless benefit claim filings reported by the U.S. Department of Labor are affected by gasoline prices.

In practical terms, we should see the trend in the number of new jobless claims shift to a less negative trajectory, as gasoline prices will have fallen to a level where they will stop having a direct impact upon the rate at which Americans file for first-time unemployment insurance benefits.

We say "less negative" instead of "positive" because other factors will dominate the overall trend. Namely, the failing economies in both Europe and Asia, where the falling relative demand for oil expected in the future is the principal reason why global oil and gasoline prices are now falling. We anticipate that the economic situation in these nations will increasingly and negatively affect the U.S. economy into 2013.

In the short term however, we anticipate that the U.S. economy will see a bit of improvement from the current quarter, which we've previously described as effectively being in a microrecession.

Enjoy it while you can!

Good Morning, White House Staffer!...

The Future Unemployment Rate Enter: Today's Average USA Gasoline Price U.S. Unemployment Rate In Two Years* * If High Gas Prices Are Sustained.... See you tomorrow!

Average Gasoline Price Trends for Washington D.C. and USA Washington D.C. Gas Prices Provided by GasBuddy.com

"Good Morning, White House Staffer" is a special feature we run whenever the average U.S. national retail price for gasoline rises above $3.50 per gallon!

The Economic Effects of Today's Falling Gasoline Prices

Good morning, White House Staffer!

We appreciate your daily visits, as you continue your ongoing efforts to closely monitor the U.S. gasoline price situation. We have, after all, tailored our top-of-the-page "Good Morning, White House Staffer" feature specifically to assist you in your daily task.

But we're afraid that we'll soon be taking down our feature, as the average retail price of a gallon of unleaded gasoline in the United States has fallen below $3.55 per gallon. Given the potential for volatility in that average price, we'll keep it going until it firmly drops below $3.50 per gallon, as this will help ensure that we don't discontinue our feature too early, should there be any unexpected supply disruptions in the next several weeks that might boost it back over the $3.55 per gallon mark.

That's good news for you, in the short term sense, as we expect that U.S. employers will react positively to falling fuel and transportation prices, which if our previous observations hold, will mean that the pace of weekly layoffs in the United States will change for the better within 2-3 weeks of the national average gasoline price dropping below $3.50 per gallon, which we would measure by the number of seasonally-adjusted new unemployment insurance benefit claims filed each week.

As we remarked on 31 May 2012:

If we're lucky in the short term, we'll see if the rate of layoffs that prompt new unemployment insurance claim filings shifts to a new, more positive trajectory if gasoline prices fall back below the $3.50 per gallon mark in the weeks ahead.

But then, we'll be unlucky in the longer term because that will mean that the world demand for oil will have dropped enough to make that possible, as much of the world appears headed for recession. That of course will have consequences for the U.S. economy.

In the meantime though, we continue to expect the U.S. economy will rebound a bit in the third and fourth quarters of 2012, after passing through the equivalent of a microrecession during the current second quarter. The story for 2013 will be very different, we're afraid....

That said, our previous advice to you to keep your résumé up to date still holds. We would also suggest that this summer will perhaps present the best opportunity you will have to sell your metropolitan Washington D.C. home before that real estate market changes.

And now you can't say that you weren't warned when it mattered most - when you still had time to do something about your situation!

Previously on Political Calculations

• New Jobless Claims: Thunderdome Edition!


• Visualizing the Actual Price of Gasoline Across the U.S.


• Gasoline Prices and the Unemployment Rate


• How High Gas Prices Affect the Number of Layoffs


• Questions from Our Inbox: Why Are Gasoline Prices Rising So Much?


• Scheduling the Next U.S. Recession


• How Much Might Producing More (or Less) Oil Change Its Price?


• Surprising Impotence


• Who's Behind the Drop in Gas Prices?


• Changing the Outlook for Oil Prices


• Holy Gas Prices Batman! It's the New Batmobile!...


• Using Gas Prices to Forecast the Unemployment Trend


• Correlating the Price of Gas and the Unemployment Rate


• Why Are Americans Driving Less?


• How Much Does Your Commute Cost You?


• Should You Move Closer to Work to Save Commuting Costs?


• How to Save Money on Gas, Without Driving Less


• How Much Are Higher Gas Prices Really Hurting You?


• Should You Trade in Your Gas Guzzler?


• Is It Worth the Drive?


• Do Hybrids Really Save Money?


• How Much Do You Pay in Gas Taxes?

Questions From Our Inbox: Why Are Gasoline Prices Rising So Much?

It seems that unlike say a "trained journalist" like the Incredibly Incurious Jonathan Chait, our casual readers are more than capable of asking us questions about our work!

Proof of that today comes straight from our e-mail inbox, which we can attest has still not registered any electronic contact initiated by "trained journalist" Chait, where someone with actual curiosity observed and asked:

Gas prices are about as high as they were in mid 2008 when oil was about 140 per barrel but oil today is about 110. Why the disconnect?

That's a good question - one for which we had no idea what might be the answer before we decided to take it on! Here's our augmented response, where we've expanded upon our original reply to our inquiring reader!...

It's not as disconnected as you might think, given which crude oil and gasoline prices are primarily involved.

Here, the increasing price of Brent crude oil that we've previously discussed...:

Source: livecharts.co.uk - 26 February 2012

... is being pushed upward by geopolitical concerns. That upward price pressure has combined with already falling demand in the U.S....:

... to force the closure of money-losing refineries in the U.S. that refine Brent crude oil, mainly on the East coast.

Matthew Philips of Bloomberg BusinessWeek provides more details from a 23 February 2012 article:

The average price of gas is up more than 10 percent since the start of the year, a point repeatedly made during Wednesday's Republican Presidential debate. Predictably, the four GOP candidates blamed President Barack Obama for the steep increase.

Actually, the President doesn't have that kind of pricing power. The more likely reason behind the price increase, though certainly less compelling as a political argument, is the recent spate of refinery closures in the U.S. Over the past year, refineries have faced a classic margin squeeze. Prices for Brent crude have gone up, but demand for gasoline in the U.S. is at a 15-year low. That means refineries haven't been able to pass on the higher prices to their customers.

As a result, companies have chosen to shut down a handful of large refineries rather than continue to lose money on them. Since December, the U.S. has lost about 4 percent of its refining capacity, says Fadel Gheit, a senior oil and gas analyst for Oppenheimer. That month, two large refineries outside Philadelphia shut down: Sunoco's plant in Marcus Hook, Pa., and a ConocoPhillips plant in nearby Trainer, Pa. Together they accounted for about 20 percent of all gasoline produced in the Northeast.

This week, Hovensa finished shutting down its refinery in St. Croix. The plant processed 350,000 barrels of crude a day, and yet lost about $1.3 billion over the past three years, or roughly $1 million a day. The St. Croix plant got hit with a double whammy of pricing pressure. Not only did it face higher prices for Brent crude, but it also lacked access to cheap natural gas, a crucial raw material for refineries. Without the advantage of low natural gas prices, which are down 50 percent since June 2011, it's likely that more refineries would have had to shut down.

The U.S. refining industry is being split in two. On one hand are the older refineries, mostly on the East Coast, which are set up to handle only the higher quality Brent "sweet" crude–a benchmark of oil that comes from a blend of 15 oil fields in the North Sea. Brent is easier to refine, since it has a low sulfur content, though it's gotten considerably more expensive recently. (Certainly another reason for higher gas prices.)

[Be sure to read the whole article, because it also explains why gasoline prices are so much lower elsewhere in the U.S.]

The combination of rising gasoline prices with reduced quantities being supplied indicate that the relative decrease in supply stemming from the recent refinery closures is currently driving the price of gasoline in the U.S. by more than what would be driven by rising crude oil prices alone:

Price and Available Quantity Data
Input Data	Values
How has the price of the item changed over a given period of time?	The price has increased. The price has decreased.
How has the available quantity of the item changed over that same time period?	The quantity has increased. The quantity has decreased.

What's Behind the Change in Price?

And that, in a nutshell, is why gasoline prices have risen as high as they did back in 2008, even though crude oil prices haven't risen as high as they did then.

We will note however that actual journalist Matthew Philips is incorrect when he suggests that "the President doesn't have that kind of pricing power". The supply disruptions from the closure of money-losing oil refineries on the East coast and their result effect upon gasoline prices could have been minimized simply by subsidizing their operations - much as the President has been willing to subsidize "green energy" companies that were also certain to fail, like Solyndra.

By our estimate, the $500 million of taxpayer money that the President put on the line and lost on that one company would have been sufficient to keep just one of these recently closed refineries going for another 500 days - thus avoiding the supply disruption and massive run-up in U.S. gasoline prices. (And that doesn't include all the other "green energy" business failures where taxpayer money has been permanently lost that could have gone to create or save real refinery jobs!)

At least then, taxpayers might have something more to show for the money the President was so determined to waste, no matter what!

How Sanctions on Iran Might Affect World Oil Prices

John Iacovelli recently ran some "back of the envelope" calculations on the potential impact of Western country sanctions on Iran upon world oil prices. He estimated:

The U.S. Energy Information Administration in its latest tables stated that the Persian Gulf states produced 23,714 thousand barrels per day of crude as of October 2011, which we'll round to 23.7 million.

At the current time, Saudi Arabia is already producing more than usual to make up for the drop in Libya oil production. Let us arbitrarily state, then, that the other Gulf states will make up no more than 20% of the shortfall in Iranian production; thus, the calculation would be as follows:

• 23.7 million, total Gulf production


• minus .8 million (loss of 1 million Iran, plus .2 additional additional from Saudi Arabia and/or others)


• equals 22.9 million as the new production level.


• .8 divided by 23.7 equals a percentage drop of 3 and 1/3 percent. (-0.033)

Taking our PED formula and the Wikipedia coefficient for world oil, then:

• -.4 times -.033 = +1.33 percent change in the price of Persian crude, based upon the drop in supply.

The January 2012 price of Dubai crude (the benchmark for the region) is $110. Adding 1 1/3% puts the new price at $113.63.

I'm neither a mathematician nor an expert in oil pricing, and so would love to hear from anyone who has experience in the subject regarding this exercise. I know enough to know that my calculations could be hysterically off the mark.

But are they hysterically off the mark? To find out, we'll adapt a tool we originally developed in November 2011 to estimate what the impact would be upon world oil prices if the United States increased its production of oil by 25%.

Here though, we'll use the CIA's current estimate for world oil production in 2010 of 89,346,535 barrels per day, the most recent year for which the data is available (even going by the Energy Information Administration's world data, which as of 12 January 2012, only covers 10 months of 2010.)

The CIA's data indicate that Iran, the fourth largest producer of oil in 2010, produced 4,252,000 barrels per day that year. If sanctions imposed by Western nations only affect 25% of Iran's production, then the effect would be to reduce the daily supply of oil to the world by 1,063,000 barrels per day.

Because most of the oil that would be affected by sanctions upon Iran would be shipped to Europe, we'll use the average January 2012 spot price of $110.69 per barrel for Brent crude oil in Europe as our price reference.

The results may be found by clicking the "Calculate" button below!

Oil Production and Economic Data
Input Data	Values
Daily Oil Production Data
Change in Amount of Oil Production [Positive if increase, negative if decrease]
Oil Price (per Barrel)
Demand Elasticity
Supply Elasticity

Estimated Price Change
Calculated Results	Values
Projected Change in the Price of a Barrel of Oil

As always, you're more than welcome to update our tool with more recent data or to consider other assumptions or scenarios!

Using our tool, we would anticipate that the price of Brent crude oil in Europe would rise by $4.39 per barrel, from $110.69 in January 2012 to $115.08 as a result of Iranian oil being embargoed by Western nations, if not offset by increases in the oil production of other nations. Such as the United States, which is experiencing somewhat of a boom in new oil production.

If Iran's oil production were completely shut off from the world, and no other oil producers adjusted their supplies to compensate, the effect upon European oil prices would be to increase the cost of each barrel of Brent crude oil by by $17.39.

So all in all, we find that John Iacovelli's math appears to be largely on target, as the results are consistent with what we find using slightly different assumptions about the elasticity of oil supply and demand.

What's Driving U.S. Fuel Efficiency?

We recently tapped the U.S. Department of Transportation's Traffic Volume Trends report to use the data it provides on the total miles accumulated by Americans on the nation's roads as a measure of the health of the U.S. economy, but it occurred to us that we can also use the data to get a sense of how the overall fuel efficiency of the nation's road vehicles is changing over time!

Since the DOT's data only covers the period since January 1986, our first chart shows the number of miles accumulated by all U.S. ground-based vehicles in the 12 months prior to the reported month:

Next, we went into the U.S. Energy Information Administration's data on the amount of motor gasoline, distillate (aka "Diesel") and residual fuel oil distillate to find out how much of these petroleum products were supplied to American vehicles for each month since January 1986:

So now that we have the number of miles driven by Americans each month (which we can approximate by dividing the rolling 12-month figure provided by the U.S. DOT by 12), and also the number of gallons of motor gasoline and distillate products supplied to Americans, which we'll assume all went into the nation's vehicle gas tanks, we can just divide the miles by the gallons to find the nation's average fuel economy for each month since January 1986. Our results are below....

In January 1986, the average mileage of vehicles traveling on U.S. roads was 10.5 miles per gallon. That figure rose then to roughly 13.0 miles per gallon in January 1993.

From there, it took another 15 years to rise just one more mile per gallon, reaching roughly 14.0 miles per gallon in January 2008.

Since then, the apparent fuel economy of the nation's vehicles has increased a bit more rapidly, rising by almost 0.75 miles per gallon between 2008 and 2009, but falling back from 2009 to 2010, but rising to nearly 15.0 miles per gallon from 2010 through November 2011.

Something Doesn't Add Up

We though we'd compare our results with those of the U.S. Environmental Protection Agency.

Here, we found a 2010 report that covers the period of time from 1975 through 2010, which provides specific data for the average fuel economy of all U.S. cars, trucks, vans, etc. for 1975, 1988 and 2010.

Looking at the years of 1988 and 2010, which our data overlaps, we found that the average fuel economy of all U.S. vehicles was 21.9 miles per gallon in 1988, which increased by 2.7% to 22.5 miles per gallon in 2010.

Keeping in mind that our data likely includes petroleum products that go into places other than the fuel tanks of U.S. ground-based vehicles, we see an average increase of nearly 32% in the nation's apparent fuel economy, rising from 11.0 miles per gallon in 1988 to 14.5 miles per gallon in 2010.

If we're right in suspecting that the combination of finished motor gasoline and distillate fuel products is going into much more than just the fuel tanks of America's cars, trucks, vans, and so on, what that apparent difference suggests is that almost all of the apparent gains in the nation's effective fuel efficiency have taken place outside of the nation's ground-based vehicles!

So much for those federal CAFE standards, right?! The more interesting question perhaps then is who's really not consuming anywhere near as much finished motor gasoline and distillate fuel products today as compared to 1988? As best as we can tell from the EPA's data on vehicle fuel economy, it's somebody other than the nation's drivers!

And that's something for which we don't yet know the answer!

Data Sources

U.S. Department of Transportation. November 2011 Traffic Volume Trends. November 2011.

U.S. Energy Information Administration. U.S. Product Supplied, Petroleum and Other Liquids. Accessed 14 February 2012.

U.S. Environmental Protection Agency. Light-Duty Automotive Technology, Carbon Dioxide Emissions, and Fuel
Economy Trends: 1975 Through 2010. November 2010.