Why Oil Prices haven't Crippled the US Economy Yet
Updated Sept 18, 2006
For more current information you might want to
check out the most recent
Oil Inflation Chart
by Tim McMahon
(Click on image to view full size)
The above chart shows why oil prices have not
yet put as big a crimp in our budgets as it did back in 1980. Back then the monthly
average price peaked at $38 per barrel (although the intraday prices spiked much
higher).
The common price quoted is for the all time high of Oil prices is the price
that the highest barrel ever sold for. That price doesn't really have any effect
on the price consumers paid. What really matters is the average price the refineries had
to pay for the whole month.
Adjusted for inflation in September 2006 dollars this $38 peak is the
equivalent of paying $100.52 today. This number is constantly changing as we adjust for
inflation at the current moment.
In other words, Oil would have to average $100.52 for the entire
month to be as high as the price we saw in December of 1979. But we are "only"
paying about one half that amount.
Another factor that makes the Oil price worse in 1979 is the
fact that back in '79 interest rates were two to three times higher than they are now,
peaking in the high teens. Combine lower mortgage rates with lower taxes and the modern
household actually has $500 extra cash available each month... which will buy a lot of
gasoline.
Another key issue is that unemployment rates for workers with four
years or more of college are running much lower than the overall unemployment rate at about 1.5%-2%. These are the highest wage earners
who pump the biggest percentage of cash into our overall economy. Having them fully
employed is keeping our economy burning.
Overall, with these other mitigating factors even if we had $100 a
barrel oil today the shock would not be as severe to our economy as $38 oil was in 1979.
But as you can see from the chart we are getting closer but still aren't at $100/barrel Oil average
monthly price.
How Did we get here?
From 1946 until the early
1970's the nominal price of oil remained basically flat but the inflation adjusted price of Oil actually declined
slightly.
The
tremendous spike in the 1970's resulted from the Arab Oil embargo
and OPEC taking control of Oil prices. Prior to that the US
government had forced US producers to produce oil at controlled
prices so U.S. production had declined and more and more oil had
come from overseas. This is what eventually resulted in OPEC gaining
enough power over our supply to allow the embargo to have any teeth.
Whenever prices are artificially held back it works like a stretched slingshot,
eventually when it is released it will explode in an effort to return to the free market
price causing major disruptions in the process.
As the oil price adjusted to true market
pricing it spiked up and has been floating freely ever since.
Recently, forces have converged to
create a similar situation. But this time it is a
transportation/refinery shortage problem.
Remember the Exxon Valdez (the ship that
crashed off the coast of Alaska) which spilled millions of barrels of
oil all over the coast? Well believe it or not, that was the
beginning of our current problem. Because of that accident and a
couple of others like it, governments around the world began
outlawing single hulled tankers.
This created a shortage of double hulled
tankers. And double hulled tankers are very expensive to build and
weren't very profitable with oil at $20/ barrel. So there was no
rush to build them (plus they aren't built in a day even if there
was a rush!)
In addition to not enough tankers, there
aren't enough pipelines or refineries either. Who wants a pipeline or refinery in their
backyard?
So we are caught in a crunch between
inadequate transportation, maxed out production and an increase in demand for oil. Because
the US and China are both coming out of a recession both countries
are also demanding vast increases in oil.
Chart courtesy of
InflationData.com see Inflation Adjusted Oil Price Chart
for Current Inflation Adjusted Oil Price information.
This article
is dated Please see
Current Inflation Adjusted Oil Price Chart
for more current information.
Tim McMahon is the editor of Financial Trend Forecaster in addition
to the editor of
InflationData.com "The Place in Cyberspace for inflation
data" and the editor of Your Family Finances. He has also
written a book on
Geographic Tongue and other tongue problems called
Healthy
Tongue Secrets.
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