The REAL price of oil: it’s lower than you think!

Inflation_Adj_Oil_Prices_Chart2

The price of oil matters, and it matters a lot. So it is critical to look at oil prices over the longest period possible, but also to factor in the effect of inflation. I remember the price of oil spiking in 1979, but it was to “only” US$40. Doesn’t seem so bad, but that would be over $115 in today’s money!

The chart above is updated as of March, and the oil benchmark they use is Illinois Crude (Sweet.) It was $52.50/barrel back in March, and as of August 8th had fallen even further to $37/barrel. What does this mean in proper historical perspective?

  1. Oil is about $100 per barrel cheaper than it was in 2008.
  2. Oil is about 43% cheaper than the average since 2000.
  3. Oil is about 31% cheaper than the average since 1980.
  4. Oil is about 11% cheaper than the average since the end of WWII in 1946.

This has enormous implications for the C$, money flows in the Mid-East, Putin’s behavior, sales of electric vehicles, viability of solar, population of suburbs vs. urban living for millennials, and so on.

I have no idea what the price of oil will do in the future, but current levels are suggesting a VERY different energy economy that what most people have become used to.


I wrote the above on the weekend on Facebook, and have decided to make it a blog post, based on a few stories published today, and my own further analysis.

  1. Russian GDP for Q2 came out this morning: down a shocking -4.6%. Will this cause Putin to act more conservatively, and try to get sanctions lifted? Or will it make him more aggressive, to distract attention from the weak economy? Students of Soviet and Russian history would bet on the latter. Nothing like fighting with the west to distract and rally the population.
  2. Tesla is a lowering its production forecasts, and a Reuters article says that Tesla loses more than $4,000 for every car it sells. Low oil prices don’t seem like they would make electric cars more attractive.
  3. People tend to make decisions based on extrapolations of recent trends. “What have you done for me lately” aka the recency bias. Why does this matter? As an example, the price of installed solar panels has fallen by about 50% since 2009. That’s amazing – surely that will cause massive adoption of solar? The problem is that in the same time span, the price of oil has fallen by even more (73%!) That’s going to have an effect on the perceived attractiveness of solar versus diesel generators, for instance.
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