December 18, 2005
The price of Oil
Another look at the current high price of Oil at Financial Trend Forecaster (hint: it is not that high)Why Oil Prices haven't Crippled the US Economy YetGreat call on the interest rates too -- this affects everyone and isn't generally cited when comparing prices. Here is a thumbnail of the chart they are referring to -- go to the article for the full-size version:
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 July 2005 dollars this $38 peak is the equivalent of paying $96.81 today. This number is constantly changing as we adjust for inflation at the current moment.
In other words, Oil would have to average $96.81 for the entire month to be as high as the price we saw in December of 1979. But we are "only" paying a little over 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.
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