The price of gasoline and statistical fallacies

The price of gasoline in Spain has skyrocketed during the first months of the year 2022 (fueling inflation) and everyone has looked for culprits. But, to know the causes, we must analyze the consequences paying attention to the statistical fallacies.

Thus, some blame the Government, because taxes represent an important part of the bill. Others blame the oligopoly of the producing companies or the exchanges, putting the focus on markets and regulation, or the lack of it. In this way, simple analysis offers a breeding ground for biased or erroneous statistics.

But in economic science interpretations must be made with great care. The analysis is complex and multifactorial. In fact, it is common not to pay attention to certain effects that can cause those “statistical fallacies” that we will write about today.

Let us not forget that, on many occasions, the media offer information that could make this type of error, even if it is unconsciously. In the end, what reaches the citizen is information that does not allow him to obtain an objective judgment of reality.

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And having a wrong image of reality means making judgments that may also be wrong. Therefore, to make a decision we must be clear about what is being shown to us, as we will see with gasoline prices

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The price of gasoline and the effect it charges. hypotheses or prejudices

In this type of fallacy, the cobra effect, we are faced with a situation in which we start from a prejudice and not from a hypothesis. For example, in the case at hand, we can focus our attention on what interests us, forgetting the rest.

Thus, depending on our ideological affinity, we can think that oligopoly or taxes are the essential and often the only variable. In this way, analyzing the data from one or another perspective, we can obtain erroneous conclusions based on these prejudices. Let’s look at the figure.

The Price of Gasoline and Statistical Fallacies 2 1

Let’s focus on taxes. We can verify that it seems that they increased less than the prices before taxes in mid-March 2022. In addition, it is seen that it is the base price that increases very sharply and vice versa with the subsequent decrease. A situation that is repeated with the latest data available from April 25.

A priori, without a detailed study, it seems that the production companies and their offer prices are the ones that most affect the final price when it increases. It should be added that in Spain they are an oligopoly with few bidders and this allows them to set offer prices. Of course, let’s not stay here…

If we look at the graph again, the drop that occurs later also seems to affect the base price more than the tax. Now the reading could be different, it seems to be the tax that lowers the least and, therefore, slows down price reduction to a greater extent. In this case we could blame taxes.

However, a somewhat deeper analysis gives us one of the possible causes of this. Part of the tax, specifically that of hydrocarbons, is calculated on the amount of gasoline, consequently, it is not affected by price variations.

We can see that the perspective of analysis can provide us with information that we will interpret based on what we want to find and that is not the objective of an investigation. In addition, the conclusions are not going to help us much. But there is more…

The evolution of prices, the boom and rocket effect

We have already explained in Economipedia what the pen and rocket effect is. In short, the first occurs when the price of a product with which another is manufactured drops a lot and the latter does so very slowly. The second (rocket) would be the other way around, the price of one goes up a little and the price of the other goes up very sharply.

Once again, in the case of gasoline we can find two points of view. This time we want to focus on the price variations, so that we can find out which part is the one that has the greatest rises and falls throughout the period studied.

It must be borne in mind that an erroneous interpretation of these two situations can lead to a corrective measure that is not appropriate on the part of the company or the governments. In addition, it affects the analysis of the data and, therefore, creates the statistical fallacies that we are seeing today.

We have calculated the variation rates for the price of gasoline before and after taxes and for the price of a barrel of Brent (see figure). The prices, as in the previous figure, are up to the latest available data for April. On the other hand, we have included some trend lines (linear in the graph) calculated with the simple regression method, but only for guidance purposes.

The Price of Gasoline and Statistical Fallacies 1 3

If we focus on price increases, we see the rocket effect. This occurred when Brent saw its price increase considerably on February 28, 2022 and that of super95 gasoline increased significantly, especially without taxes, on March 7.

Taxes seem to be, again, a brake on the rise. An economic reasoning could be that, when the price rises, it is normal that we consume less fuel, at least temporarily, and the hydrocarbon tax levies the quantity. Therefore, this tax is reduced to pay for hydrocarbons, acting as a moderator, something similar happening with VAT, which taxes the price.

Of course, in both cases the price rises, but the one that already includes taxes does so to a lesser extent. We do not go into the question of whether or not taxes are recommended, we leave it to the reader. We are analyzing reality, without falling into the cobra effect and being objective.

The pen effect occurs with the drop in the price of a barrel of Brent on March 14, 2022. Thus, the price of gasoline fell very little on March 23, with and without taxes. We see that, from here, Brent rises again (March 21) and it seems that gasoline also rises afterwards.

Therefore, it seems that both go in the same direction, one goes up (Brent) and the other (gasoline) also. But while the first has a very pronounced variation, the second does not, it reduces very slowly and hence the name of the feather effect. Once again, we have to look at things in greater detail…

As of March 21, the price of a barrel of Brent drops again, but only 4.12%, while this time gasoline and the tax do so considerably, with the fall of the second, once again, lower . It may seem that this time the feather effect does not work and we would not be completely wrong.

It should be clarified that when a statistical effect occurs, it is because it occurs in the majority of cases, not always. This one in particular seems to work most of the time. In addition, when observing the trend throughout the period (the linear trend), we see that Brent has a decreasing slope and that of gasoline and taxes is increasing in the analyzed period.

Knowing that these two effects occur, it is possible to foresee the evolution of the price and take the appropriate measures. For example, we can have the price of Brent at hand and anticipate it. Thus, if it rises, we know that gasoline will rise and, therefore, we will stock up as soon as possible.

The base effect and open-mindedness

We have also written about the base effect in detail. A simple explanation is that, depending on the basis we take to compare two data, the interpretation can be very different and this is not trivial.

Here we are going to put a simple example based on what we have analyzed previously. We will focus on the price of Brent and calculate the rate of change, but on a given base price. For example, the smallest and largest of the entire period and two other outlier points. Let’s see what would happen then.

The Price of Gasoline and Statistical Fallacies 3

The first and second columns have been calculated on the high and low of March 7 and March 14, 2022, respectively. Those of March 21 and April 11 corresponded with a peak (high variation) and a valley (low variation). The latter are outliers.

If we look at the table, especially in the last row, we see the base effect clearly. Taking the maximum as a base, the price of the last year was reduced (negative). However, in the second case it increased. At the peak there is a more pronounced reduction and at the valley a smaller increase than before.

If we were looking at price changes, the conclusions would be clearly wrong. First, because if we start from a very high price, even though it seems to have gone down, it may be that by expanding the sample we discover that it was much lower before and, in fact, that is what has happened if we look at the first chart shown.

Therefore, what the base effect tells us is that we must be very careful when we analyze data from different periods. In this case, the choice of the appropriate base is crucial and extreme, maximum or minimum values ​​must be avoided as far as possible.

For example, the rise in gasoline prices raised the Consumer Price Index (CPI) and this is the indicator with which inflation is calculated. When comparing data from different periods, this base effect must be taken into account to prevent these data from reflecting increases or decreases that may only be punctual.

Concluding, the important thing is what is not seen

This phrase, what is not seen, is from the French economist and philosopher F. Bastiat, one of the fathers of economic liberalism. Thus, in his “broken window fallacy” he made it clear that it is precisely what we do not see with the naked eye that usually causes the biggest problems when it comes to economic science.

Keep in mind that taxes can be reduced by the Government, although in times of crisis it is not so simple. However, an oligopoly of companies requires a more complex solution and this usually involves all political parties. In addition, the measures that are taken can do more harm than good if these statistical fallacies are not taken into account.

The price of gasoline has multiple factors that affect it. All must be taken into account, each in its measure. We have done some very simple analyzes to show possible effects that distort reality.

For this reason, we believe that it is important to carry out economic studies from various perspectives. In addition, they must be carried out objectively, seeking the truth of the facts (hypotheses) and not what best suits us (prejudices), without forgetting that the appropriate basis must always be chosen to compare data over time.

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