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

45 Pages Posted: 2 Feb 2015

See all articles by Christiane Baumeister

Christiane Baumeister

University of Notre Dame; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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 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: Brent, Expert forecasts, Forecast combination, Oil market, Real-time data, Retail gasoline price, Survey expectations, WTI

JEL Classification: C53, Q43

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 2015). CEPR Discussion Paper No. DP10362. Available at SSRN: https://ssrn.com/abstract=2559283

Christiane Baumeister (Contact Author)

University of Notre Dame ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Lutz Kilian

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

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Ann Arbor, MI 48109-1220
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734-764-2769 (Fax)

Centre for Economic Policy Research (CEPR)

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United Kingdom

Thomas K. Lee

Energy Information Administration - US DOE ( email )

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Washington, DC 20585
United States

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