Oil Hits Inflation-Adjusted Record Price

Oil touched $103.95 a barrel in New York earlier this week, and adjusted for inflation, that represents the highest price ever paid for 31 US gallons of crude. Before that, the April 1980 price of $38 a barrel, during the Iranian Hostage Crisis, was the highest. The reason, though, has less to do with political instability and more to do with a weak dollar.

It is true that there is some political difficulty related to the current record levels in the oil markets. Venezuela, a major producer of rather heavy oil, is threatening to invade neighboring Colombia, and such saber-rattling is never good for markets. Nigeria is having another in its long list of local kerfuffles. And the mess in and around the Straits of Hormuz remains messy.

It is also true that the $103.95 is not accepted by everyone as the inflation adjusted record. In 1980, there was no futures market for oil. Some say this is comparing apples to oranges. John Kingston, global oil director at Platts (a publisher in the oil and energy field) told the Los Angeles Times, “We estimate the number is over $104, so we do not think that the inflation-adjusted price has been hit yet.” This journal begs to differ, as one can derive a pretty good number from past data – comparing a Golden Delicious to a MacIntosh is more apt.

Be that as it may, the current high price of oil comes at a time when the US dollar is at an all-time low against the euro. David Yergin, whose book The Prize won a Pulitzer for his study of oil markets, said, “the people who are driving this bus are in the financial markets.”

And this suggests that there could be an oil price bubble that may pop in the coming months. After all, financiers are notorious for over-shooting prices that the supply and demand curves suggest are “correct.” That being the case, interest rate cuts in Europe or an end to cuts in the US have more to do with oil’s future price than today’s OPEC meeting.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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