Inside the Crystal Ball: New Approaches to Predicting the Gasoline Price at the Pump

CFS Working Paper No. 500

46 Pages Posted: 17 Jan 2015

See all articles by Christiane Baumeister

Christiane Baumeister

University of Notre Dame

Lutz Kilian

University of Michigan at Ann Arbor - Department of Economics; Centre for Economic Policy Research (CEPR)

Thomas K Lee

Energy Information Administration - US DOE

Multiple version iconThere are 3 versions of this paper

Date Written: January 13, 2015

Abstract

Although there is much interest in the future retail price of gasoline among consumers, industry analysts, and policymakers, it is widely believed that changes in the price of gasoline are essentially unforecastable given publicly available information. We explore a range of new forecasting approaches for the retail price of gasoline and compare their accuracy with the no-change forecast. Our key finding is that substantial reductions in the mean-squared prediction error (MSPE) of gasoline price forecasts are feasible in real time at horizons up to two years, as are substantial increases in directional accuracy. The most accurate individual model is a VAR(1) model for real retail gasoline and Brent crude oil prices. Even greater reductions in MSPEs are possible by constructing a pooled forecast that assigns equal weight to five of the most successful forecasting models. Pooled forecasts have lower MSPE than the EIA gasoline price forecasts and the gasoline price expectations in the Michigan Survey of Consumers. We also show that as much as 39% of the decline in gas prices between June and December 2014 was predictable.

Keywords: Retail gasoline price, oil market, real-time data, WTI, Brent, survey expectations, expert forecasts, forecast combination

JEL Classification: Q43, C53

Suggested Citation

Baumeister, Christiane and Kilian, Lutz and Lee, Thomas K., Inside the Crystal Ball: New Approaches to Predicting the Gasoline Price at the Pump (January 13, 2015). CFS Working Paper No. 500. Available at SSRN: https://ssrn.com/abstract=2550731 or http://dx.doi.org/10.2139/ssrn.2550731

Christiane Baumeister

University of Notre Dame ( email )

722 Flanner Hall
Notre Dame, IN 46556
United States
+1 574 631 8450 (Phone)

HOME PAGE: http://https://sites.google.com/site/cjsbaumeister/

Lutz Kilian (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-764-2320 (Phone)
734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Thomas K. Lee

Energy Information Administration - US DOE ( email )

1000 Independence Avenue, SW
Washington, DC 20585
United States

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