Oil Tops Inflation-Adjusted Record Set in 1980
Jad Mouawad, New York Times, 05 Mar 2008Capping a relentless rise in recent years, oil prices hit a record high during the day on Monday, then pulled back to close below the record.
The day’s highest trading price, $103.95 a barrel on the New York Mercantile Exchange, broke the record set in April 1980 during the second oil shock. That price, $39.50 a barrel, equals $103.76 today, when adjusted for inflation.
The surge in energy prices is taking place as investors seek refuge in commodities to offset a slowing economy and a declining dollar. Analysts pointed out that financial institutions like pension funds and hedge funds are also buying oil and other commodities like gold as hedges against a rise in inflation. ... Read full article
MISI Occasional Paper on Peak Oil
Many have been questioning the recent press releases warning that oil prices are again approaching or passing the inflation-adjusted high price of "$102.53" (Reuters, 2/28/08).Or was that "$101.70" (Reuters, 10/26/07)? Or, didn’t I just read "$90.46" (BP Statistical Review June 2007)? Confused? You should be.
Let's first clear the air; there is nothing nefarious going on here. It's a matter of the Press creating and marketing news. When it comes to Peak Oil, this actually may be good because it puts the subject back on the front page. In the cases above, all prices are probably calculated using acceptable techniques, but periodicity and timing interfere. First, the prices above reference a daily closing price of some type of crude oil. On that day in April 1980 when Iran and Iraq started their war, how many organizations actually signed oil contracts at those prices? How many organizations actually purchased oil that week? Not many, because oil traded on the world market at an average price that month of $33-$35. As we will see later, that price is actually just over $78 in today’s dollars. The second factor is inflation. Today, while the governments calculate inflation on a monthly, quarterly and annual basis, it is highly likely that inflation is actually rising daily. So, in fact, that daily $103 price cited most recently can be equivalent to the $102 price cited months earlier. It's a moving target, and one can expect to see the "inflation-adusted peak price of oil" increase to $105, then $106, etc. over the coming months.
While this all plays in the Press and the Nightly News, it is not good for energy analysts. Even short-term forecasters don’t like to use data with a period of less than a month. Some of the things we keep in mind when analyzing the long-term price of oil include:
MISI’s current monthly price series for WTI, displayed in the figure below, shows that since January of 1979, the inflation-adjusted low price of oil reached $14.10 in December of 1998. And, the previous high price of $84.76 in January 1981 was first surpassed in October of 2007 and subsequently exceeded every month since. The new and, no doubt, short-lived inflation-adjusted peak price was set in back in November 2007 at $94.77.
So, let the Press educate the public about the impending day of Peak Oil by creating headlines. However, when it comes to actually working on the Peak Oil problem, we need to stick with the data that affects our world and national economies.
Monthly Price of Cushing WTI Crude Oil, January 1979 – January 2008
U.S. Energy Information Administration, Monthly Energy Review and Petroleum Navigator, 2008; U.S. Bureau of Economic Analysis, National Economic Accounts, 2008; Management Information Services, Inc., 2008.
Bob Wendling is Vice President of Management Information Services, Inc., co-author of the Hirsch report [2005] and the Bezdek report [2006], and former Director of the U.S. Department of Commerce’s economic statistics office, STAT-USA.