Monthly Labor Review December 1998 33

 Alternative Energy Measures

The Bureau of Labor Statistics produces a family of indexes, called Producer Price Indexes, that measure the

average change in prices received by domestic

producers for their output. These indexes, updated monthly, are published at numerous levels of product aggregation and in a variety of

classification schemes. Periodically, BLS reviews its indexes by comparing them with alternative measures of price trends. This article

presents the results of one such test, which focuses on the important and price-volatile group

of energy commodities, as arrayed within a

stage-of-processing system of price indexes.

Background

The stage-of-processing (SOP) system is one of

the primary classification schemes used by BLS

to develop Producer Price Indexes (PPIs). The

SOP indexes are commodity-based measures

that regroup commodities at the subproduct

class,1 according to the class of buyer and the

amount of physical processing or assembling

the products have undergone. There are three

major, or aggregate, SOP categories of goods:

finished, intermediate, and crude. Finished

goods are defined as commodities that are ready

for sale to the final user, which could be either

an individual or a business firm. Examples include bread, gasoline, apparel, and passenger

cars. Intermediate goods are materials, supplies, and components that have been partially

processed but require further processing. Intermediate goods also consist of nondurable, physically complete goods purchased by business firms

as inputs to their operations. Intermediate goods

include flour, cotton yarn, steel mill products, and

lumber. Crude materials are defined as unprocessed

commodities entering the market for the first time,

such as crude petroleum, natural gas to pipelines,

gravel, sand, steel scrap, and coal.2

Movement in aggregate PPIs, including movement in the stage-of-processing indexes, is driven

in large part by the price fluctuations for energy

commodities. This is due to the large relative importance of energy product indexes in the aggregate PPIs, as indicated in the following tabulation:

Stage-of-processing Relative

 category importance

Finished energy goods

as a part of total

finished goods.................... 13.575

Intermediate energy goods

as a part of total

intermediate materials ........ 13.132

Crude energy materials

as a part of total

crude materials ................... 36.173

Historically, Crude, Intermediate, and Finished

energy PPIs experience large month-to-month

price fluctuations. (See chart 1.) For example, the

PPI for Crude energy materials increased 11.1

percent in November 1996 and 19.3 percent the

following month. One of the factors driving this

increase was a rise in natural gas prices: the index for Natural gas increased 33.8 percent in

November 1996 and 39.9 percent in December

1996 due to low inventory levels. With storage

Comparing PPI energy indexes

to alternative data sources

The trend in measures constructed using

alternative sources of price data for energy

products tracks fairly well

with changes in the Producer Price Index

Katherine A. Klemmer

and

Joseph L. Kelley

Katherine A. Klemmer

and Joseph L. Kelley are

economists in the Office

of Prices and Living

Conditions, Bureau of

Labor Statistics.
34 Monthly Labor Review December 1998

Month-to-month percent changes in the Producer Price Indexes for Crude, Intermediate, and Finished

energy goods, January 1990March 1998

levels already low due to the previous year’s severe winter,

the early onset of winter weather in 1996 caused a further

drawdown of natural gas inventories, creating concern over

supply shortages. The Crude energy materials index subsequently showed large decreases of 17.9 percent in February

1997 and 21.3 percent in March 1997, as prices for natural

gas declined from the previous year’s high.

Another example of energy price volatility occurred in

1990, as the result of Iraq’s invasion of Kuwait. This event

caused sharp increases in crude and refined petroleum prices,

in anticipation of oil shortages caused by the hostilities. In

August 1990, the Crude energy materials index increased 25.1

percent and the Finished energy goods index rose 8.96 percent. The PPI for Crude petroleum increased 62.4 percent and

the PPI for Gasoline was up 17.4 percent over the same month.

Given the volatility of the PPIs for energy commodities, BLS

periodically reviews the indexes. Such reviews include checks

on methodology, analysis of trends, and, recently, a rigorous

comparison to movements in prices for energy commodities

published by BLS and other statistical agencies.

In the sections that follow, the movements of several PPIs

for energy products are compared with trends in other published measures for the period January 1995–December 1997.

(See exhibit 1 for a list of the PPI series selected for study and

the alternative data sources used.) Means and variance tests

are used for statistical analysis. (See appendix.)

Statistical test methodology

Conducting statistical tests to compare two data sources has

certain advantages and limitations. These tests do not indicate

the accuracy of the data or how closely the data reflect actual

market price movements. However, they can provide insight

into the similarities or differences between the data being compared. Specifically, the tests can show the extent to which the

data sources have similar movements, and the extent to which

the variances of the data sources are comparable.

Two tests were used to compare the PPI data series being

examined to similar data from alternative sources. The first

was a means test, conducted to determine if these series have

significantly different average month-to-month percentage

changes. Second, a variance test was conducted to compare

the monthly movements of the two data series. The methodology for these two tests is presented in the appendix.

Alternative Energy Measures

Chart 1.

1990 1991 1992 1993 1994 1995 1996 1997 1998

-25

-20

-15

-10

5

0

5

10

15

20

25

-25

-20

-15

-10

-5

0

5

10

15

20

25

Crude

Intermediate

Finished

Percent

change

Percent

change

–

–

–

–

–

–

–

–

–

–

1990 1991 1992 1993 1994 1995 1996 1997
 Monthly Labor Review December 1998 35

Exhibit 1. Selected Energy product indexes and corresponding alternative source data

 Index

 number

PPI0531 Natural gas (Crude materials) Energy Information Agency Natural gas data

PPI0561 Crude petroleum (Crude materials) Energy Information Agency Crude petroleum data

PPI05730201 Fuel oil #2 (Finished goods) Energy Information Agency Fuel oil #2 data

PPI0571 Gasoline (Finished goods) Energy Information Agency Gasoline data

PPI0541 Residential electric power (Finished goods) CPI for Residential Electric power

PPI0551 Residential natural gas (Finished goods) CPI for Residential Natural gas

Performance measures

Most of the information used in calculating Producer Price

Indexes is obtained through systematic sampling of the mining, manufacturing, and service sectors of the economy.3

 The

energy industries covered by the PPI include crude and refined

petroleum, natural gas at the wellhead, electric and natural gas

utilities, and coal. Measures, or indexes, of price change classified by industry form the basis of the PPI program. These

indexes reflect the price trends of a constant set of goods and

services that represent the total output of an industry.4 For example, the crude petroleum index includes both the Eastern

and Western petroleum producing regions of the United States.

The electric power and natural gas utilities indexes cover the

residential, commercial, industrial, and “other” sectors.

In the PPI program, the preferred price to be collected is for

an actual shipment that occurred as close as possible to the

pricing date. The pricing date is the Tuesday of the week containing the 13th day of the month, and can range between the

9th and the 15th of the month. There are exceptions to the

Tuesday pricing date for some products, however. A number

of farm products are priced on a day of the week other than

Tuesday. Prices for some refined petroleum products are commonly an average of prices during the first 10 working days of

the month or the prices received by oil refineries on the tenth

working day. Price indexes for liquefied petroleum gas, some

industrial chemicals, and compact discs and audiotapes are

based on data for the calendar month as a whole, and therefore

lag 1 month behind other indexes. The November index for

liquefied petroleum gas, for example, would reflect price

changes that actually occurred in October.

Although most prices reported to BLS are the selling prices

of selected producers that are referred to as free-on-board

(f.o.b.) point of production, some prices are those quoted on

organized commodity exchanges or at central markets. This

practice is most often applied to farm products.5 Order prices

and “futures” prices are not included, because the PPI is intended to reflect the selling price for output being shipped in

the reference month, not in some other period. Changes in transportation costs are reflected in industry price indexes only when

the producing company delivers the product itself, rather than

hiring a third-party shipper.6

For the purposes of the PPI program, a price is defined as

the net revenue accruing to a specified producing establishment from a specified kind of buyer for a specified product

shipped under specified transaction terms on a specified day

of the month. Although the same product usually is priced

month after month, it is necessary to provide a means for bridging over changes in detailed specifications so that only real

price changes will be measured. Such an adjustment is especially important when an existing product is replaced by a new

one. Even when companies report their selling prices based on

altered transaction terms (such as price per 1,000 sold, instead

of price per 100), routine steps are taken to ensure that only

true price changes influence the index.

Because the Bureau of Labor Statistics publishes price indexes rather than the prices themselves, the BLS measures cannot be directly compared to published prices from other

sources. To perform the analysis presented here, month-tomonth percentage changes were calculated from the Producer

Price Indexes. These changes were then compared with monthto-month percentage changes in the alternative data sources.

The alternative source data used include data published by

the Energy Information Administration (EIA), and data from

the Consumer Price Index (CPI), which is produced by the

Bureau of Labor Statistics. The function of the EIA is to provide information to decisionmakers on energy policy issues.

The primary users of the EIA data include the congress, the

U.S. Government, the energy industry, academia, the media,

and the public.7 The major users of the CPI include the Federal Reserve Board, the congress, government, business executives, labor leaders, and the public.

Index Alternative source data
36 Monthly Labor Review December 1998

Month-to-month percent changes in the Producer Price Index for Crude Petroleum (PPI0561)

and EIA Crude oil prices, February 1995December 1997

Alternative Energy Measures

Month-to-month percent changes in the Producer Price Index for Natural gas (PPI0531) and EIA Natural

gas wellhead prices, February 1995December 1997

Chart 2.

1995 1996 1997

-40

-30

-20

-10

0

10

20

30

40

-40

-30

-20

-10

0

10

20

30

40

PPI

EIA

Percent

change

Percent

change

–

–

–

–

–

–

–

–

1995 1996 1997

Chart 3.

1995 1996 1997

-20

-15

-10

-5

0

5

10

15

20

-20

-15

-10

-5

0

5

10

15

20

PPI

EIA

Percent

change

Percent

change

–

–

–

–

–

–

–

–

1995 1996 1997
 Monthly Labor Review December 1998 37

The EIA and CPI data sources are described in detail below.

An accompanying chart compares the month-to-month percentage changes in the PPI and in the alternative data source.

Comparisons with EIA data

The Energy Information Administration collects large amounts

of energy product data. This information is valuable because

of its variety, and includes data on prices, production, and sales,

as well as detailed breakdowns.

The EIA publishes monthly average prices for natural gas,

crude oil, fuel oil #2, and gasoline. While these data are useful

for purposes of this analysis, it should be noted that the published prices represent full-month averages, as opposed to PPI

data, which pertain to a specified pricing date within the month.

Also, final data from the EIA are available after a 2- to 3-month

lag, while Producer Price Indexes are published for the express purpose of month-to-month analysis of price change.

EIA Natural gas data. Final monthly average data on natural

gas prices at the wellhead are obtained from Form EIA-627

and Form EIA-176, along with numerous other data related to

natural gas production. Data on all aspects of monthly and

annual natural gas production, including wellhead prices, are

collected using Form EIA-627. The appropriate State agencies

participate voluntarily in the survey. States complete the form

by collecting information from natural gas producers. Form

176 is a mandatory form, and wellhead price data from this

form are used here in cases for which EIA-627 wellhead price

data are not available. Form 176 data are collected directly

from field, well, or processing plant operators, synthetic natural gas plant operators, underground natural gas storage operators, investor and municipally owned natural gas distributors, and interstate and intrastate natural gas pipeline companies. Estimates for monthly natural gas prices are based on

the change in production-weighted gas prices from Kansas,

Mississippi, New Mexico, Oklahoma, and Texas. The gas production from these five States represents approximately 50

percent of total U.S. production, and its prices are readily available. Final revisions to the EIA monthly natural gas wellhead

price data are made when the final annual data reported on the

forms described above become available. This means that the

current year’s prices are estimated.8 Chart 2 compares the

month-to-month percentage changes in the PPI for Natural gas

to changes in the EIA data.

EIA Crude oil data. The EIA publishes first-purchase prices

for domestic crude oil on a monthly basis. These data, collected on Form EIA-182—Domestic Crude Oil First Purchase

Report, are average wellhead price data from petroleum producers, and represent the average price at the wellhead at which

domestic crude oil is purchased.9 Chart 3 compares the monthto-month percentage changes in the PPI for Crude petroleum

with the corresponding changes in the EIA data.

EIA Fuel oil #2 data. Each month, the EIA publishes data on

prices of refined petroleum, as obtained from Form EIA-782A—

Refiners’/Gas Plant Operators’ Monthly Petroleum Product

Sales Report, and Form EIA-782B, Resellers’/Retailers’

Monthly Petroleum Product Sales Report. This survey collects data on a monthly basis from respondents who either directly or indirectly control a refinery or gas plant facility.10

Chart 4 compares the month-to-month percentage changes in

the PPI for Fuel oil #2 to changes in the EIA data.

EIA Gasoline data. The EIA survey forms described for Fuel

oil #2 are the same ones used to collect Gasoline data. Chart 5

compares the month-to-month percentage changes in the PPI

for Gasoline to corresponding changes in the EIA data.

Comparisons with the CPI

For purposes of this analysis, PPI data also were compared with

CPI data, primarily because of the quality of both data series.

But, while both the PPI and CPI are measures of price change

over time for a fixed set of goods and services, they differ in

two critical areas: (1) the composition of the set of goods and

services, and (2) the types of prices collected for the goods

and services included.

The target set of goods and services included in the PPI is

the entire marketed output of U.S. producers; thus, imports

would be excluded. The set includes both goods and services

purchased by other producers as inputs to their operations or

as capital investment, and goods and services purchased by

consumers, either directly from the service provider or indirectly from a retailer. In contrast, the target set of items included in the CPI is the set of goods and services purchased by

urban U.S. households; this set includes imports. This difference in the target sets of goods means that, while the CPI program collects prices only for electricity and natural gas sales

made to residential consumers, the PPI program also collects

prices for sales to commercial and industrial consumers.

The other area of difference between the PPI and CPI is in

the type of price collected. The price collected for an item

included in the PPI is the revenue received by the producer.

Sales and excise taxes are not included because they do not

represent such revenue. The price collected for an item included in the CPI is the out-of-pocket expenditure by a consumer for the item. Sales and excise taxes are included in the

collected price because they are necessary expenditures by the

consumer for the item.

More significant differences in the CPI and PPI occur as the

lower level indexes are aggregated into higher level indexes.

This is because the CPI and the PPI have different intended objectives and uses. A primary use of the PPI is to deflate revenue

streams in order to measure real growth in output. The objec-
38 Monthly Labor Review December 1998

Alternative Energy Measures

Month-to-month percent changes in the Producer Price Index for Fuel oil #2 (PPI05730201) and EIA

Fuel oil #2 prices, February 1995December 1997

Month-to-month percent changes in the Producers Price Index for Gasoline (PPI0571) and EIA Gasoline

prices, February 1995December 1997

Chart 4.

1995 1996 1997

-20

-15

-10

5

0

5

10

15

20

-20

-15

-10

5

0

5

10

15

20

PPI

EIA

Percent

change

Percent

change

–

–

–

–

–

–

–

–

1995 1996 1997

Chart 5.

1995 1996 1997

-10

5

0

5

10

15

-10

-5

0

5

10

15

PPI

EIA

Percent

change

Percent

change

–

–

–

–

1995 1996 1997
 Monthly Labor Review December 1998 39

tive of the CPI program is to approximate a cost-of-living index conditioned on market prices—in other words, to measure the change in consumers’ well being that results from

changes in consumer prices. (One use of the CPI is to adjust

income streams such as Social Security payments.) Because

of the different uses of the PPI and CPI, each program utilizes a

different weighting scheme. PPI weights currently are based

on the value of shipments of products as reported by producers for the 1992 economic census. For the period through

December 1997, CPI weights were based on expenditures reported by households for the years 1982–84. Because of the

difference in the weights for the Electricity and Natural gas

indexes in the two programs, price changes have differing degrees of impact on the higher level aggregate indexes in each

program.

Aggregation of the indexes in the two programs also results

in index series that are unique to each program. The CPI program calculates indexes for Residential electricity and for

Natural gas for 32 metropolitan areas plus 12 region-city size

classes (not all of which are published). The national-level indexes for electricity and for natural gas are aggregations of

these 44 individual indexes. The PPIs for the same products

do not approach this level of detail, being published only for

nine census regions.

So, at the lowest level, the Electricity indexes in the two

programs are relatively similar, but do demonstrate differences.

However, as the indexes are combined into higher level aggregates for different objectives or uses, the measures become

more dissimilar.

CPI Residential electric power data. The not seasonally adjusted CPI for electricity, U.S. City average for all urban consumers (series ID F01), was used as the alternative data source

for comparison to the PPI for Residential electric power (PPI

0541). The CPI was chosen because of the comparability of the

data that are collected for each index series, subject to the differences mentioned previously. Both the CPI and the PPI programs price residential utility bills based upon selected usage

levels for a given month. In addition, the populations from

which the items are chosen and the sampling methodologies

used in both programs are virtually identical. Once a utility is

selected from the population, analysts in each program use a

process called “disaggregation” to select a unique item to be

priced from month to month. In each case, prices are collected

directly from the utilities. Chart 6 compares the month-to-month

percentage changes in the PPI for Residential electric power

with changes in the CPI for Electricity.

CPI Residential natural gas data. The seasonally unadjusted

CPI for Piped natural gas, U.S. City average for all urban consumers (series ID F02), was used as the alternative data source

for comparison to the PPI measure for Residential natural gas

(PPI 0551). The CPI for piped natural gas was chosen for the

reasons stated in the section on Electric utility data above.

Chart 7 compares the month-to-month percentage changes in

the PPI for Residential natural gas to changes in the CPI for

Piped natural gas.

Results of statistical tests

Tables 1 and 2 summarize the statistical results of the means

and variance tests applied to the differences in changes between the price measures. There are 35 observations for

each PPI data series and alternative data source. Unlagged

PPI natural gas data were used for the period January 1995

through June 1996.

In table 1, the t-value calculated for each item is shown in the

first data column. This value was compared to the t-statistic

shown in the second data column. For all of the means tests,

there was a failure to reject the null hypothesis that the means of

the percentage changes for each pair of data series are the same.

Table 2 shows the calculated F-value and the corresponding F-statistic used to test the variances of the percentage

changes of the data series. For all of the variance tests, there

was a failure to reject the null hypothesis equating the variance for each pair of data series.

MONTH-TO-MONTH PERCENTAGE changes in the PPI energy series perform well when compared with corresponding changes

in alternative data sources. There is no indication that the

month-to-month percentage changes for the PPIs examined are

significantly different from corresponding changes in alternative series. All of the data series examined similarly reflect

any unusual price movements in the energy industries selected

Table 1. Results of means tests of percent changes in prices

 for selected energy commodities

Natural gas ............................. 0.1377 1.69 Fail to reject

Crude petroleum .................... –.0057 1.69 Fail to reject

Fuel oil #2 ............................... .0164 1.69 Fail to reject

Gasoline ................................. .1013 1.69 Fail to reject

Residential electricity ............. .0382 1.69 Fail to reject

Residential natural gas ........... .0105 1.69 Fail to reject

Table 2. Results of variance tests of percent changes in

 prices for selected energy commodities

Decision on null

hypothesis

Natural gas .................... 1.1656 1.57 Fail to reject

Crude petroleum ........... 1.2862 1.57 Fail to reject

Fuel oil #2 ...................... 1.2204 1.57 Fail to reject

Gasoline ........................ .9619 1.57 Fail to reject

Residential electricity .... 1.5161 1.57 Fail to reject

Residential natural gas .. 1.0953 1.57 Fail to reject

Commodity tested t-value of

means test

t-statistic Decision on null

hypothesis

Commodity tested F-value of

variance test F-statistic
40 Monthly Labor Review December 1998

Alternative Energy Measures

Chart 7. Month-to-month percent changes in the Producer Price Index for Residential natural gas (PPI0551) and

 the Consumer Price Index (CPI) for Piped natural gas. February 1995December 1997

Month-to-month percent changes in the Producer Price Index for Residential electric power

(PPI0541) and the Consumer Price Index (CPI) for Electricity, February 1995December 1997

Chart 6.

Chart 7.

1995 1996 1997

-6

-4

-2

0

2

4

6

8

-6

-4

-2

0

2

4

6

8

PPI

CPI

Percent

change

Percent

change

–

–

–

–

1995 1996 1997

–

–

1995 1996 1997

-6

-4

-2

0

2

4

6

6

4

2

0

2

4

6

PPI

CPI

Percent

change

Percent

change

–

–

–

–

1995 1996 1997

–

–
 Monthly Labor Review December 1998 41

Variance test

The following F-test statistic was used to test the homogeneity

of the variances of the 1-month percentage changes for the PPI

data series and for the corresponding measures based on alternative data sources:

 2

2

S

L

s

s F =

Here sL

2 represents the larger sample variance and sS2 represents the smaller sample variance. It is assumed that both data

series have normally distributed sample populations and that

the samples were randomly and independently selected from

their respective populations.

The null hypothesis, H0: SL = S , was tested against the

alternative hypothesis, H1: SL 1 S . Rejection of a null hypothesis occurs when the calculated F-test value exceeds a

critical F-value based on the number of degrees of freedom

and an established level of significance. The degrees of freedom are the number of observations minus 1. The level of

significance used for this test was a = .10. The critical Fvalue2

 was F nn 1 21 2 −( /) α (,) − − 1 1 .

sp [(1/na) + (1/nb)]

APPENDIX: Test methodology

Means test

A test was conducted to compare the mean 1-month percent

change of the measures based on alternative data sources to

the mean 1-month percent change of the PPI data series. This

test is used to indicate if the series have significantly different

month-to-month percentage changes over the period examined.

The null hypothesis, H0 : Xa = Xb, was tested against the

alternative hypothesis, H1 : Xa1 Xb, where Xa and Xb represent

the mean 1-month percentage change of the two samples being

compared. Rejection of the null hypothesis occurs when the

calculated t-test values fall outside the bounds of the twotailed t-statistic. The t-test is based on a level of significance

a = .10.

The critical t-values are ( t

a / ) (na

 + nb – 2), or

 t

1–(a/2) (na

 + nb – 2).

The test statistic is tobs =

where 

( )( )

( )( ) 1 1

1 1 2 2

2

- + -

- + - =

a b

a a b b

p n n

n s n s

s

H0 is rejected when1 t

obs< t(a / 2) (na

 + nb – 2), or

t

obs > t1–(a / 2)

 (na + nb – 2).

for study. The tests of the means and the variance tests used to

compare the PPI series to the alternative source data failed in

1

 The subproduct class level is the six-digit level of the Producer Price

Index Classification system unique to the PPI program. A complete listing of

the commodity structure is avaiable on the Internet at: ftp://146.142.4.23/

pub/time.series/wp/wp.item 2

 For further information on these indexes see BLS Handbook of Methods,

Bulletin 2490 (Bureau of Labor Statistics, 1997), ch. 14. 3

 BLS Handbook of Methods, ch. 14. 4 Ibid.

5 Ibid.

6 Ibid.

7

 See Energy Information Administration, 1998–2002 Strategic Plan,

section i, pp. 1–3, on the Internet at: http://www.eia.doe.gov/faq.html 8

 Energy Information Administration, Directory of Energy Data Collection Forms (Washington DC, U.S. Government Printing Office, 1996), pp. 5

and 8. 9 Ibid., p. 5. 10 Ibid., pp. 8–9.

Footnotes

1

 Thomas H. Wonnacott and Ronald J. Wonnacott, Introductory Statistics for Business and Economics (New York, John Wiley & Sons, 1984),

pp. 231–33. 2 B.J. Winer, Statistical Principles in Experimental Design (New York,

McGraw Hill Book Co., 1971), pp. 26–35.

all cases to reject the null hypothesis that the trends of the

series were essentially similar. 

Footnotes to the appendix

 is

2

(Xa – Xb) ,

.

2

2 2

.

2 2

s

s