Price Predictions

How do you predict the gas market prices will change over the next couple years?
I predict that gas Prices may decrease over the next couple years. The predicted values of consumer
Demand and the Price of gasoline both fell in 2015 and 2016. There is a correlation between Price and
Demand, but not causation. This is because gasoline is a product with very low price elasticity
meaning the price is not in response to the demand.
In order to predict this, I found the Real and Nominal gas Price data from the EIA, online. I used the Real
aka inflation-adjusted values for Annual Motor Gasoline Regular Grade Retail Price measured in dollars
per gallon from 2000-2013. I used the graph from the smartboard file of the Average annual
household expenditures on gasoline and motor oil to list Demand values from 2000-2013.
Next, I graphed Demand over Time and I graphed Price over Time using excel.

Next, I made a graph to represent what Traditional Economists believe.

They believe that consumer choice aka Demand is what causes price fluctuation. It is the independent
variable. Therefore, I put Demand on the bottom since it is the input and I put Price on the y axis since it
is the output and dependent on the Demand. Looking at the graph, I can see that Price as a function of
Demand fluctuates, but has a general positive trend. As the Demand increased, the Price increased.
However, Traditional Economists believe that as Demand increases, Price decreases. This is due to the
idea that as more people want a product, it becomes cheaper to produce. With gasoline, we dont see

dropping prices when more people want it. So, this data does not show the Traditional concept of
Demand and Price.
The data almost looks like a linear function! I drew a red line to show this. Since I want to extend the
data to predict the gas market prices, I decided to try and find out the slope of this theoretical y=mx+b
function. To do this, I used excel to find the derivatives of the Demand and Price.
To get the derivative of each variable, I went back to my original graphs with Price over Time and
Demand over Time. This made Time the x value. With the idea of local linearity, Im trying to find the
slope of one point. I used (y3-y1)/(x3-x1) in order to find the slope at (x2,y2).
Using this information, I was able to start predicting what the Demand and Price could be in 2015 and
2016. To find the Demand for 2015, I added the derivative of Demand from 2013 to the actual Demand
value for 2014. I did this because I know adding the change to the previous value gives me the current
value. Then I took the current predicted value and put it in as x3 in order to figure out the next
derivative. I repeated this process 2 more times so that I got the Demand values for 2015 and 2016.
They are the yellowy-brown cells squared in green on excel. In 2015, the estimated quantity Demanded
as the average household expenditures on gas are $2375 in 2015 and $2262.50 in 2016. Compared to
previous years, this shows a decrease in Demand
Next, I repeated the process but with Price instead of Demand: calculating the derivative of Price and
using that to calculate the actual Price. The Price values are in the blue cells squared in red on excel. In
2015, the estimated gas price is $3.23 and in 2016, the estimated gas price is $3.09. Compared to
previous years, this is a decrease in Price.
In conclusion, I saw that Demand Decreased and the Price Decreased in my estimated vales. This does
not agree with what Traditional economists believe because if the Demand had increased, the
expectation would be that the Price would have decreased.

This is the graph of how Supply Siders think economic trends work.

They believe that price fluctuation is what influences consumer behavior. So, unlike Traditional
Economists, Price is the input and Demand is the output. Traditional economists and Supply Side
economists both believe that low prices mean bigger demand and bigger prices correlate with smaller
demand. This graph says that as price increases, the demand increases and as Price decreases, the
demand decreases. Just like the other graph, the data does not agree with what the economists would
expect.
They look similar because they have the same data with a correlation that is positive (as one increases
the other increases as well) However, I think the Supply-Side graph is more appropriate for the gas
market because Demand doesnt really matterPrice does. And in Supply Side economics, Price is the
input value. The companies are going to base their prices on other factors not the demand and
regardless of the price, people are still going to purchase gasoline.
There are many factors that can impact consumer Demand. One thing I was thinking about was that,
since I measured my Demand as average household expenditures on oil (which is a dollar amount
instead of a measurement of gallons of gas) my Demand value could be increasing or decreasing
because households are spending more or less money each year as a result of bigger or smaller prices.
The graph of Demand over time on the Smartboard had a predicted data showing a decrease in
household expenditures (Demand) just like I predicted with excel. I was still a bit confused and unsure,
so I located the graph online and the explanation the EIA gave for why families were spending less was
a combination of falling retail gasoline prices and more fuel-efficient cars and trucks that reduce the
number of gallons used to travel a given distance. So those are 2 examples of factors that can impact
Demand.
So, Ive concluded that graphing like Supply-Siders with Price as the input is more appropriate for the
gas market. But in order to find out why the results did not follow the trend economists usually expect, I
did some further research.
I found out that gasoline is not like other products because Price does not determine the Demand.
People will still use gas whether the price increases or decreases.
Usually, as price increases, demand decreases. An example provided by the U.S. Energy Information
Administration is air travel for vacation. A 10% increase in the price of air travel leads to an even
greater (more than 10%) decrease in the amount of air travel. This is because it has a more elasticity.
Elasticity describes how Demand responds to Price. Usually products are like Air travel and have a higher
elasticity meaning that the Demand responds more to the Price. However, gasoline is very inelastic
meaning changes in price have little impact on the number of gallons used (U.S. Energy Information
Administration 2014). So, the demand does not really respond to price at all.
As years pass and we become more reliant on cars, gasoline price elasticity decreases even more
because people have a demand no matter what the price. The Price hardly impacts the Demand: it
takes a 25% to 50% decrease in the price of gasoline to raise automobile travel 1%. The U.S. Energy
Information Administration predicted that Price in 2015 would be 23% lower than the 2014 average,
and consumptionwill be virtually unchanged. In conclusion, people will still demand gasoline no
matter the cost.

References
U.S. Energy Information Administration. Annual Average Motor Gasoline Regular Retail Price [table].
EIA.gov. Retrieved from: http://www.eia.gov/forecasts/steo/realprices/real_prices.xlsx
U.S. Energy Information Administration. (2014, December 15). Gasoline prices tend to have little effect
on demand for car travel. Retrieved from: http://www.eia.gov/todayinenergy/detail.cfm?id=19191
U.S. Energy Information Administration. (2014, December 16). U.S. household gasoline expenditures in
2015 on track to be the lowest in 11 years. Retrieved from:
http://www.eia.gov/todayinenergy/detail.cfm?id=19211