April 20, 2011

Crude Oil Prices - Just a Spike?

Crude oil prices are currently sitting at $107 per barrel.  That's high, but a lot of reports in the media have called it a spike.  Is it a spike?  Maybe.  I went back into history and got some data from Inflation Data on both nominal and inflation adjusted crude oil prices since 1946.  It doesn't look like a spike, it looks more like a trend, even where the inflation adjustment is available, prices are almost uniformly uni-directional.

I made this chart from the data to illustrate my point.

While it looks like the inflation adjusted numbers in the mid 70s to mid 80s rival today's prices and argue for a  more cyclical or event-sensitive pricing basis, Inflation Data offers this caveat in the notes on it's data;
Price controlled prices were lower during the 1970's but resulted in artificially created gas lines and shortages and do not reflect the true free market price.
I would argue that those price controls created a lagged inflationary effect in prices, but I haven't investigated that, it's just a hunch. But let me give you a couple of talking points when dealing with liberals on oil prices.

If they insist on saying that the prices are a spike, then you can argue that the whole peak oil myth is a waste of time and windmills and solar power are a waste of time because like other commodities, prices are cyclical and driven situationally.  But most liberals won't take that point of view.  They'll flip the argument the other way and say that prices will only continue to grow because of supply and supplier issues.  Fine.

If prices are going to rise uni-directionally, then why not mitigate that with domestic drilling of both oil and natural gas and even coal until their pie-in-the-sky windmills start to pay off?  Take a look at that trend.  Citizen cannot afford to wait 5 years let alone 10 or 50 for the alternative energy solution.

Another take away from this is that oil is potentially correlated to inflation here.  Spiking prices will impact all other goods down the road. That's yet another reason to mitigate prices by freeing up both offshore and onshore drilling.  However it's also a reason to think that inflationary pressure is going to play a part in the 2012 election cycle and possibly make things bad for the President.

Is what's going on with the prices a spike?  I don't think so.  The chart, minus the 1970's issue seems to have changed since 1998.  And even if it is a spike, we aren't talking about a 3 year spike, it'll take time to come back down, just as in the 1970's, even without price controls, because there is a lot more going on in the Middle East than post the 1973 Arab-Israeli war.  Everything right now is in wild card mode in so many countries and events could change rapidly for the worse but more slowly for the better.  Improvement always takes longer than destruction and disaster.

No comments:

Post a Comment

Disagreement is always welcome. Please remain civil. Vulgar or disrespectful comments towards anyone will be removed.

Related Posts Plugin for WordPress, Blogger...

Share This