Record Oil Prices?

Lately that has been one of the big things I hear on the radio and see in print journalism (link, link, link, link). Some of those articles even note that the stock market is rising despite these new “records”. So what is going on? Isn’t the conventional wisdom that oil is a big driver for the economy. Higher prices lead to less growth and maybe even a recession, while lower prices just the opposite?

Well, how about the “record” isn’t a really a record. Sure it is a record in nominal dollars, but this is like looking at your paycheck and saying you are rich because you are earning so much more than you did 25 years ago. You see, 25 years ago the price of oil was just under $40/barrel. So what is $40 from 1980 worth today? Ninety four dollars and 42 cents. Or think of it this way, would you like it if I told you your salary/wage was going to increase from this point forward at 1%/year no matter what. In 25 years you’d be making 26% more than you are now! What a deal. You’d be an idiot to not take such a deal. Or is it? What if inflation was 2% (on average)? You’d actually end up with a 21% pay cut.

Of course the best way to make this point is with a picture. In other words, we have about $30 dollars to go till we get to the real record.

So, is the increase in oil prices irrelevant? No. Rising oil prices can, even when rising from a fairly low price, can still be bad. After all the sudden run up in oil prices shown in the graph around 1990 probably didn’t help with the restrictive monetary policy and the decline in consumer and business confidence (here is an article from the San Francisco Federal Reserve that looks at the issue). So the current run up in oil prices is not a good thing, but it certainly isn’t a record by any means that actually matter.

FILED UNDER: Economics and Business
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Not only that, but we depend less on oil to make our economy run today than we did in the 1970s. We’re less industrial, so energy prices are not as hard on the economy as they once were.

    That being said, I think if oil keeps rising it could end/dampen this strong growth we’re seeing in the economy.

  2. Herb says:

    First, the price of oil will continue to rise to the point that the American gasoline consumer fed with everything, (politicians, Oil gamblers, oil companies and everything in general) For me, I am sick and tired hearing all the excuses for increasing oil prices. I see the oil companies posting record profits and I see the price of everything increasing due to high oil prices. The consumer gets it put to him in so many additional ways besides the price of gasoline. Today, a gallon of milk costs about $ 3.00 per gallon, a loaf of bread costs almost $ 2.00 per loaf and we hear from our government that we have a very low rate of inflation, BULL. Again, I am sick of the lies, excuses and epically those that say “In Europe gasoline costs four to five dollars a gallon. Let me tell you, WE ARE NOT EUROPE and I could care less about all those pacifists and chicken hearted Europeans.

    It is time for the American consumer to say “Enough is Enough” and TELL our government and The oil companies to “SHOVE IT”

    But, you know what, Most Americans don’t have the nerve and fortitude to do it. They will sit around on their lazy rear ends and say ” there is nothing I can do about it” and duplicate the Europeans with their chicken attitudes.

    Every American needs to start Recall proceedings with and politic an that don’t get off their rear ends and DO SOMETHING NOW about this giant rip off of the American people.

    Can anyone tell I am PO’d ?

  3. Steve Verdon says:

    Herb,

    Any kind of political response will have an even worse effect, IMO. I suggest you go out and buy a hybrid or something.

  4. spencer says:

    In the 1970s energy rose from 6% to 9% of total nominal personal consumption. So far this cycle it has risen from about 4% to 5.7%.

  5. Lou Minatti says:

    I feel sympathy for poor people driving clunkers that get lousy mileage because that is all they can afford. I feel sympathy for truckers trying to keep their incomes steady. I feel no sympathy for the idiots commuting solo to their desk jobs in dualie pickups (it has a V-10 Hemi! I’m cool!) and Expeditions. Tough luck, pal.

    I feel sympathy for US auto workers losing their jobs because more Americans are demanding fuel-efficient autos that will still be running after 4 years. I feel no sympathy for stockholders and corporate leaders at GM, Ford and Chrysler who refuse to allow American engineers and workers to design and build something as bulletproof as a Toyota Corolla.

  6. Individ says:

    Good article, but boy am I tired of hearing from people who refuse to learn basic economics. First, if oil company A could lower prices by a penny relative to oil company B, company A would make LOTS of money, so let’s lose this silly tin hat conspiracy idea about the oil companies.

    Second, in the resource business, it is during periods of high prices when oil companies can increase their budgets for upstream processes such as exploration, tertiary recovery, etc.

  7. Herb says:

    You know Steve Verdon, I most likely would purchase a hybrid if I had the cash to pay for it. I would not finance one either. You see Steve, I am retired, living on a fixed income and trying to get a little pleasure after working my entire life. I contributed all my life to a government that squandered away so much money for the politicians various “Pork Barrel” projects that I could have lived decently if it had not cost so much in taxes during my working career.
    I guess you must be better of financially than I and therefore can afford a hybrid.
    Now, My wife and I have to now scrimp and save just to afford a little gasoline to enjoy the scenery where we live. Not only that, a hybrid is just the ends to another excuse for the oil companies to put it to the consumer.

    And Individ, Thats great, make another excuse for the oil companies, But, I have heard them all before starting back in the 70’s. And you apparantly have no knowledge about the giant giveaway to the oil companies in the energy bill just passed.

    Like I said before, Excuses, I have heard them all. It is time for the consumer to say “Enough is Enough” but, people like you will continue to go your own way, make excuses, and care less for those less fortunate that you.

  8. Will says:

    stop whining herb. u made some bad choices in your life and are now looking for someone to blame. If consumers are really bothered by the price of gas they can drve less or get a second job and buy a prius.

  9. William says:

    This is a record, after a fashion. When the price peaked back in 1980’s, they were trading real barrels of oil. Now they’re trading 3 month delivery contracts for barrels of oil, a much more stable commodity which delays the effect of high barrel prices on gasoline, and usually keeps the price lower down, until now.

    Herb, the base issue is that there’s only so much oil, and the world can’t afford to consume as much as does right now. Europe instituted taxes that hyped up the price because it was out of oil, & it didn’t want to be reliant on others. We’re basically (10-15 years), out of oil, but refuse to admit it, giving huge subsidies to the last remainders (energy bill), and refusing to implement policies that reduce consumption. Net result: Europeans consume less than half per-capita than we do, and we’re going to be hit alot harder by this hike-up than “pansy pacifist Europe”.

  10. Steve Verdon says:

    You know Steve Verdon, I most likely would purchase a hybrid if I had the cash to pay for it. I would not finance one either. You see Steve, I am retired, living on a fixed income and trying to get a little pleasure after working my entire life. I contributed all my life to a government that squandered away so much money for the politicians various “Pork Barrel” projects that I could have lived decently if it had not cost so much in taxes during my working career.
    I guess you must be better of financially than I and therefore can afford a hybrid.

    Herb,

    I don’t disagree with very much of what you have written here (well save that I am financially well off, I’m not). I am not saying everybody must rush out and buy a hybrid right now. What I am saying is that the increasing price of oil, and by extension gasoline, will provide the very incentive to look for a solution. Keeping the price low would reduce that incentive, speed up the day of depletion and be in general a bad thing.

    Now, My wife and I have to now scrimp and save just to afford a little gasoline to enjoy the scenery where we live. Not only that, a hybrid is just the ends to another excuse for the oil companies to put it to the consumer.

    We all take a hit when prices rise faster than income Herb, you aren’t in a special catagory because of this. Also, no the hybrid is actually the market’s response to high oil prices. Suppose the price of oil goes up by $5 a gallon. Now switching migh make much more sense. In short, the presence of the hybrid puts an upper limit on the price of gasoline. In economics this is called the substitution effect and it means that as the price of one good goes up, consumers switch to similar but different goods, thus reducing the impact of the initial price increase.

    And Individ, Thats great, make another excuse for the oil companies, But, I have heard them all before starting back in the 70’s. And you apparantly have no knowledge about the giant giveaway to the oil companies in the energy bill just passed.

    Well, I for one am on record as being totally opposed to the energy bill. And I don’t think that individ’s comments are excuses, but noting the secondary and tertiary effects of higher prices. When the price of something gets “too high” then it basically will bring about changes in behavior that will lower that price or at least greatly limit its upward movement.

    Like I said before, Excuses, I have heard them all. It is time for the consumer to say “Enough is Enough” but, people like you will continue to go your own way, make excuses, and care less for those less fortunate that you.

    Okay I just said it and got a strange look from the person across the aisel from me here at work. Was that the desired response? So what are consumers going to do to say “Enough is Enough”? Institute price controls so Herb can go for a Sunday drive? Are we to drill in ANWR and some how convince ourselves this will do a damn bit of good? Are we to…gasp…use less via the income and substitution effects? Hmmm, I think that is pretty much the only real choice here. Sorry Herb, maybe you and your wife should take up cycling, it’ll improve your health and you can still enjoy the scenery.

  11. WMUNSON says:

    It would seem that the good old days are over. Also Trading Oil futures is not about keeping the public happy with low oil prices but about making money & lots of it. The commodity trader makes a few grand that morning then goes home that evening & hears the spouse complain about high gas prices. Duh

  12. Tony S says:

    Well well well,,,,,,,not one of you has looked up from your latte and morning propaganda rag long enough to realise that CHINA is the biggest criminal enterprise here………they are consuming oil and resources (concrete, steel ..etc) at an astronomical rate and the u.s. gov is not going to do a damn thing about it, cause we are a nation controlled by big business….and the biggest evil corporation is the FED and IRS both are PRIVATE corporations and have this country by the short hairs and untill we WAKE UP and get rid of these institutions, the elitist rich will continue to reap the benefits….enough is enough wake up now before its too late.

  13. Max La Sombra says:

    Both in acting and criminal investigations – the central character’s , or suspect’s actions are always defined and or determined by motivation. In business they say “follow the money” – because it’s always the motivation. Let’s combine this with another cliché – “Connect the dots.” Let’s think about what we know about this oil price problem – and try to connect the dots.

    I suggest that it starts with George Herbert Walker Bush long before his not too bright son George Walker Bush became President. GH Bush graduated from Yale where he was a member of the Skull and Bones Society (As would GW Bush after him). The purpose of this society is for its members to form strategic business alliances with the other wealthy and privileged families’ sons while they are still in college and prior to and as a “leg up” for their own careers.

    GH becomes involved in the oil business and politics. GH eventually becomes head of the CIA under Nixon I believe, where he uses this position to identify and meet all the major financial and power players in the world. If “knowledge is power” then the Director of the CIA is the most powerful man in the world – not the President – unless you become both. Because GH is already in the oil business – this is the area of power and wealth that interests him the most. He begins to establish very close ties (read special favors) with the royal families of Saudi Arabia and with Kuwait. The CIA will establish close ties with bad boys Sadam Hussein and Osama Bin Laddin which they materially support while it suits their needs. (These are facts – check them out). The CIA will ultimately abandon both of these players (along with Manuel Noreiga – a different story) once their manipulated roles in world power have been set completed) – “for mysterious and unclear reasons” – leaving a very bad taste in Hussein and Bin Laddiin’s mouths – which will create long term consequences – planned and unplanned.

    Funny thing, when GH Bush becomes President, Iraq invades Kuwait. Saddam Hussein is at the very least one of the ultimate survivors – why would this shrewd survivor invade a neighboring country who is allied with and protected by the strongest military presence on the planet, unless he was assured by Kuwait’s ally – (the US) the they would let him? That could only happen if Hussein had received assurance that he could invade Kuwait without consequence from very high up in the US Government. So, President GH Bush saves Kuwait, the US receives a few billion dollars from Kuwait (and lots of contracts and business for US oil companies and contractors to put out fires and rebuild Kuwait’s oil fields) for his efforts, but he is not granted the carte blanche access to the Kuwait oil fields that he had hoped – primarily because he moved so slowly to stop Hussein that Kuwait’s oil fields were set afire and almost destroyed.

    That’s ok though he has a big Plan B – or “GW”. Against all odds GW Bush is elected President – sort of. With less than stellar mental resources, or any significant qualifying experience – GW makes the perfect puppet for GH Bush. GH Bush has become a great manipulator – again picking on the uninformed he enlist the support of the conservative and Religious Right to help get GW elected. I recently read in a mainstream newspaper that GH Bush still receives daily global reports from the CIA intelligence gathering efforts – “just to keep him informed” as a former US President. Since when did a standing Presidents get consensus from former Presidents to make a decision? That would be since 2000 when GW Bush first became President. Since GW Bush lost the election by nearly 500,000 votes, but is elected anyway amid major accusations of election manipulation and fraud. Where did this alleged voting fraud take place – why that would be in a state that happens to be governed by GW’s brother Jeb Bush? Wow, what a bunch of coincidences.

    So here we are with several major executives of big oil involved in the running the US since 1988 – which is now headed by a widely acknowledged less than bright President. His father and former CIA Director and US President – GH Bush is still getting daily intelligence from the CIA for purposes unknown.

    Now let’s see, who has the motivation for the US to have its highest gas prices in history? Whose representatives have had not only the motivation, but the means to create the highest US gasoline prices in history? Surely that would be big oil, the dynasties and companies that own big oil and the sources of big oil. Unfortunately for the American people – big oil, or their designates, are running the US for their own interest.

    Still can’t connect these dots? Then watch who big oil and the Republicans run for the next Presidential Election. If it’s Jeb Bush or another former big oil executive – remember this commentary while you riding the bus to work. As long as big oil is in charge you will never see any progress in other fuels or energy sources.

  14. Charles says:

    The problem isn’t going to be solved by more fuel-efficient cars, straightening out those greedy oil companies, or the politicians who eat out of their greasy hands. Here is the truth that pundits and oil companies don’t want you to know: the world is past peak oil production. Saudi Arabia, the world’s leading oil producer and source of 1/4 of the world’s oil, no longer has the capacity to act as a swing producer (taking up the slack when production drops in other parts of the world). In fact the Saud’s Ghalwar oil field, the monster that supplies most of their oil, is nearing ruin as they pump more and more seawater in to get at the last of the oil. The implications of passing peak world oil production necessitate some explaining: As the demand for oil hungry countries continues to rise (China, India, European, and led by the US)the production continues to fall and the oil companies’ROI plummets (return on investment: the deeper the oil is in the ground, or the more difficult it is to refine, the less of a return you get on the money you invest in extraction, to a point where oil very deep in the ground or difficult to refine such as shale oil becomes economically inviable)and the world enters a series of recessions as markets become destabilized. Eventually, the world enters a recession that worsens into a depression, in this case one that never ends. This is because every industrial economy in the world is based upon continued growth, and world financial markets are leveraged based upon growth predictions, and once the cheap oil is gone and growth slows and then stops, the markets implode. The claim that the US economy isn’t oil dependent is delusional in the extreme. Chew on this: the US consumes 25% of the world’s oil, every day. Why? Because of our increasingly dystopic suburban-sprawl living arrangements, our McHouses and Wal-marts and SUVs and fried chicken shacks. That is America ladies and gentlemen, and it really sucks down the fuel. Additionally, since we have outsourced nearly all of our heavy industries and gutted our manufacturing base (thanks Wal-mart!)the American economy now is becoming more an more detached from reality, as we produce very little of real value any more. Witness the growth in the real-estate bubble, is is a last-ditch shuck-and-jive by shysters in an economy that has no basis in reality any more. Sorry, but the world doesn’t run on big macs and vinyl-clad houses. Alternative fuels aren’t going to save us either, because there is a fundamental difference between technology and energy: the 2 are not mutually interchangeable. Our oil-orgy of the past 100 years was based upon burning off millions of years of stored solar energy, in the form of organic compounds buried in the ground. You don’t simply switch over to a hydrogen economy by retrofitting the gas stations and buying a new car — the energy has to COME FROM SOMEWHERE, remember your high school physics lessons on the law of conservation of energy? It’s the one that basically says you don’t get something for nothing. And there aren’t a lot of free hydrogen atoms floating around in this part of the universe, it has to come from somewhere. It just so happens that one of the only cost-effective sources of hydrogen comes from methane, i.e. natural gas. Whoops, natural gas prices are 3 times higher now than in 2003, because that resource is past peak as well. It all amounts to a future that we are woefully unprepared for, and the more we deny and cling to our unsustainable car-based culture, the worse the reckoning will be.