Thursday, April 24, 2008

Oil Is Still Not As Expensive as In 1981

By some measures, oil is nowhere near record price levels. According to The Economist, the pain of energy costs is still not intense enough to force the reduction in demand that would impact suppliers.
A CASUAL observer might be forgiven for thinking that the oil price reached a new record, of $115.07 a barrel, on April 16th. And so it did, in nominal terms. But by other measures, oil is not quite as expensive as it seems. That, in turn, may go some way towards explaining why demand for oil continues to rise in many countries, despite prices that would have been unimaginable just a few years ago. adjustment for inflation, however it is measured, takes no account of the growth in Western consumers' incomes over the years. Back in 1981, the annual average income within the Group of Seven countries would have been enough to buy only 318 barrels of oil. To set back Western consumers by the equivalent today, Deutsche Bank calculates, the price of oil would have to rise to $134 a barrel.

By the same token, the American government reckons that energy ate up its biggest share of Americans' disposable income in 1980: 8% compared with about 6.6% now. To drive spending on energy to the same level again, says Deutsche, the price of crude would have to rise to $145.

Spending on oil as a share of global output, which is about 3.5%, also peaked in 1980, at 5.9%. Other things being equal, oil will not swallow as big a share of the world's GDP unless the price reaches $150 a barrel. Economist
Okay, so by some gauges, oil needs to go above $150 a barrel to inflict record levels of pain on the US and global economies. I do not expect that to happen within the next year or two, although I have been known to be wrong once in the past.

As long as people believe that the US is in a deep depression, and that oil costs have never been higher, the people who control the gateway of information--and the people who could actually make things worse if they wanted--will probably be satisfied.

H/T Technology Review

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