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

47 Pages Posted: 18 Mar 2016

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: February 17, 2016

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 several new forecasting approaches for the U.S. 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: Q430, C530

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 (February 17, 2016). CESifo Working Paper Series No. 5759. Available at SSRN: https://ssrn.com/abstract=2749057

Christiane Baumeister

University of Notre Dame ( email )

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Notre Dame, IN 46556
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HOME PAGE: http://https://sites.google.com/site/cjsbaumeister/

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Lutz Kilian (Contact Author)

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

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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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