Is it accurate to use "real values" of oil/barrel when comparing oil prices from year-to-year?

[brentspeak]

I keep hearing from the corporate stooge media types (i.e., John Stossel) how "oil really isn't more expensive than it has been in years past; it was really more expensive in 1981, if you adjust it for inflation! Food prices are higher today, too! So, it's really just inflation, not price-gouging! See, it's simple! Nothing to worry about!"

Hold on. Since when has the price of oil/barrel ever risen or fallen in large steps (like from $40/barrel four years ago, to $100/barrel today) due to the rate of inflation (consumer price index)? Isn't it the other way around -- it's the price of oil that can largely determine the rate of inflation for consumer goods?

[Hydra]

1. They kinda have a point

In Euro value, Oil is still about $60-70 dollars a barrel, I think. Our dying currency is making life hell for us.

OTOH, if you're going to use that argument, someone has to take the fall for the currency devaluing. I vote Bushco to be our sacrificial lamb.

[JackRiddler]

2. You're right.

That argument is ridiculous. Oil prices show wild swings that have absolutely nothing to do with inflation and can always be accounted for from other factors, usually related to political developments. And oil price rises contribute to inflation, not vice-versa. John Stossel is an idiot.

This, however, is true: the fall in the dollar relative to other currencies is the single largest factor (but not the only one) contributing to the rise in oil prices in recent years. That also is not due to inflation (it causes it), but arises from the economic decline and foolish financial policies of the United States and its banking system.

[Democrats_win]

3. Agree. Oil is a boom & bust industry. Political & economic reasons affect the price.

Economic reasons include the simple supply and demand rule.

The current oil problem is a little hard to take. First they told us that it was a shortage of refining capacity. Then they said it was greater demand from China. It's weird to hear the excuses when they KNOW that all we care about is that the price is too high.

[sepulveda]

4. yes

oil is a dollar denominated commodity

disclaimer: i frequently trade oil, natural gas, index futures, etc.

ANY dollar denominated commodity has to be understood in relation to the value of the dollar, for the price to have any meaning.

i've been trading a # of commodities (oil, silver, corn, soy, wheat, etc.) and in addition to supply/demand concerns, you have valuation concerns directly related to the strength of the dollar itself

heck, the same can be said for stock values as well (in the same period where the S&P 500 is up 18% the dollar has fallen 38%).

as warren buffet would say - a PRICE is not a measure of value. it's a #.

since the price is denominated IN dollars, you can't make ANY meaningful statement about whether the price is high or low unless you consider what exactly the dollar qua dollar is worth.

pull up a historical chart of any commodity and then NORM it against a constant dollar, and it gives you a much more meaningful insight into what the TRUE cost of that commodity is.

[brentspeak]

6. But the value of currency isn't the same thing as a price index

You're right that the price of oil is dependent in large part by the valuation of the dollar; but what Stossel and other apologists are saying is that the price of oil is dependent on things like the Consumer Price Index. They're saying that as the cost of a loaf of bread goes up, so goes up the price of gasoline. But that's a bogus argument when talking about today's oil prices: recession-type inflation everywhere else will only raise the cost of gas at the pump by a temporary, modest amount -- ten cents, maybe. The huge jumps in the price of oil/barrel is, as you and the other posters point out, largely because of the weak dollar. A weak dollar may cause inflation, but it's not the same thing as inflation.

[sepulveda]

7. indexes

well, i wouldn't say its DEPENDANT on the CPI. The CPI is just a metric of a # of commodities, staples, etc. to give a # for "stuff" that consumers buy. it's kind of nonsensical iow (or a simplification) to say oil prices are dependant ON the CPI. it would be logical to say oil prices will (generally) be somewhat correlated with the CPI. depending on to what extent oil prices are dependant on oil specific concerns (refinery issues, OPEC bla bla blah) the price of oil will more or less closely follow stuff (CPI) in general, and the dollar index.

what i think makes sense is that part of the reason the cost of bread is going up, is because what you are using to buy bread, the dollar, is going down. hence ALL commodities ceteris paribus are going to go up. in that way, what you are saying that stossel is saying, makes sense.

contrarily if the price of any asset goes down or remains stable in an environment where the dollar is falling, the true price of the asset has actually gone down.

actually, in regards to your last point, a weak dollar IS essentially the same thing as saying inflation. that's what a weak dollar means. dollars buy less stuff. since inflation measures how many dollars you need to buy stuff, that is essentially two ways of saying the same thing.

but you have to take into account that what a weak dollar means is largely based on the value of the dollar index $DXY. that is the relative value of the dollar vis a vis foreign currencies. so, it's POSSIBLE that the dollar could go down in value AND prices of "stuff" go down, but it's HIGHLY unlikely. what that would mean would be that "stuff" is going down FASTER than the dollar is relative to other currencies.

[brentspeak]

8. I don't see how a weak dollar is the same thing as inflation

The U.S. inflation rate in 1981 was 10.38%, while U.S. inflation rate in 2006 was 3.23% (using http://www.measuringworth.com/inflation/).

However, one U.S. dollar in 1981, adjusted to the CPI, would be worth $2.22 in 2006 dollars; today's dollar would only buy .45 worth of stuff if used in 1981 (http://www.measuringworth.com/uscompare/)

So, inflation in 1981 was more than three times the rate that of 2006, but the 1981 dollar was more than twice as valuable.

[sepulveda]

9. part of your problem

is that you are confusing RATES (of change) with absolute values

of COURSE the US dollar was worth more in 1981 than 2006. the fact that we've had steady inflation (to lesser and greater extents over that timeframe) means the value of the dollar has eroded vis a vis "stuff".

inflation is a rate of change measurement. dollar value is not.

let me put this in basic terms.

let's say you get a basket of staples. how much of that basket can you buy with today's dollar? a hell of a lot less than you could buy in 1981. why? because of inflation. the dollar is WORTH LESS.

we would have to have many years of high DEFLATION for the dollar to be worth what it was in 1981

one other caveat. some kinds of "stuff" , specifically technology become cheaper over time because they are easier to make. consider the cost of a computer in 1960 vs. a similarly powered computer in 2000 :)

similarly, technological advances can significantly decrease the cost (in man-hours and raws) of growing various stuff, but those advances have not outweighed the deflation of the dollar, generally speaking.

seriously

inflation means prices are higher

prices are denominated in dollars

thus, the dollar is worth LESS

i've explained that there is a difference in regards ot the dollar index ($DXY) since that measures the dollar vs. other currencies vs. inflation which measures the strength of the dollar vs. stuff

but since BOTH things float in value, the concepts are the same

and generally speaking, a currency that is rapidly deflating in terms of stuff is also deflating relative to ther currencies- again, ceteris paribus (don't even get me STARTED ON THE YEN CARRY TRADE)

[brentspeak]

10. I see what you're saying

And you make good points, but I just don't think that dollar valuation and consumer prices due to inflation/deflation are roughly two sides of the same coin. For example, how has the value of the U.S. dollar plummeted so rapidly if consumer prices in today's Wal Mart made-in-China cheaply-with-slave-labor consumer products world have supposedly led to "lower prices"? The junk sold today costs a fraction what it would have cost to have made the better-quality merchandise of yesteryear, so how has the purchasing power of the dollar accrued (downwardly) so fast in an era of "low prices"?

[sepulveda]

11. they are interelated

the more time you spend looking at markets (i spend hours a day glued to a screen with charts of dollars, yen, loonies, the dow, the S&P, the nasdaq, the Tick, The Trin, The Adv/Decline, the Vix, etc. etc.) you realize that there are all sort of relationships (like bonds vs. stocks) that are in some senses very simple, and in others very complex.

but to put it mostl simply. our dollar floats. it is no longer a gold note.

so...

it's value relative to other currencies is based on interbank transfer, spec's, hedgers, and money flow on the Forex market. that's where the dollar index ($DXY) value comes in. for example, part of the reason for the canadian dollars recent strength vs. the US dollar has to do with the fact that the canadian economy is very resource dependant - heck, mining stocks are a canadian staple.

but those flows are not uncorrelated with what's happening internally in the US . to put it mildly.

and the value of ANYTHING is correlated with supply vs. demand.

markets are fractal. what this means practically speaking, is that you can study this more and more and more and more and the same basic relationships hold at nearly all levels. but there are also various other phenomena that emerge at different levels of complexity.

[brentspeak]

12. Sorry, I should have posted before revising my post several times

I added my post to include some stuff about China, but I did that after you gave your reply.

[sepulveda]

13. in regards to your china walmart thang

part of the reason has to do with how the CPI is weighted.

[EmperorHasNoClothes]

5. Peak gas price was $2.80 in March 1981, $3.13 in Sept 2005

and expected to be in the mid-to-high $3's this summer. So the claim isn't even true on it's face.

If you also consider record-breaking oil company profits, it's tough to cast this aside as just "normal" inflation.

John Stossel is a tool.

Edited to add: Those numbers are in constant dollars, by the way. Source: http://zfacts.com/p/35.html

[walldude]

14. Adjusted for inflation... Bwhahahahahaha Tell Stossel to call me

when employers adjust their wages for "inflation". Funny how the minimum wage has managed to stay the same for 10 years in spite of this "inflation" Stossel speaks of. Before I went into business for myself I hadn't received a raise, even a cost of living raise in 7 years.

[GOPisEvil]

15. That point may be valid, but it ignores the stagnation in wages over the same period.

So, guess what, relative to 1981, things ARE more expensive.

[muriel_volestrangler]

16. Adjusting for inflation is valid, but oil is now more expensive than 1981

It peaked at about $35 per barrel in 1981 - see http://news.bbc.co.uk/1/hi/business/7083015.stm - and the CPI in 1981 was about 90 (midyear figure - see http://research.stlouisfed.org/fred2/data/CPIAUCSL.txt ), and is now 212. So, adjusting for inflation, the 1981 price was

35 * 212 / 90 = $82.44

So it is well above that, now.