Thursday, September 23, 2010

Oil prices

Dec.15, 2005 Rising oil prices have had a major impact upon western economies ever since the creation of OPEC during the 1970s. If we look at a time series of oil prices going back to 1946 and run the series to the present converting the price to 2005 US prices the price of a barrel of oil has fluctuated between $14.53 in 1998 to as high as $90.39 in 1980. From 1971 to 1975 the price of oil rose from $17.68 to $45.08. It rose again from 1975 to 1980 from 45.08 to $90.39 triggering the steep rise in inflation, followed by rising interest rates and the deep recession of the early 1980s.

The current price of oil on an annualized average basis is $50.15 for 2005.(as of September 2010 the price is over $74 a barrel) This is a major increase over 2004 when oil prices averaged $39.61.(In the last three years in 2008 oil prices peaked at over $137 a barrel, thereby helping to bring about the deep slump that followed) see charts below) In fact from 1998 to the present oil prices have averaged as follows. 1998 $14.53 1999 19.72 2000 31.61 2001 25.83 2002 25.19 2003 29.93 2004 39.61 2005 50.15 In Canada oil prices in current dollars ranged from $$3.20 a barrel for Alberta well head crude in 1947 to $2.62 a barrel in 1962.The exact range in this period was as follows. 1947 $3.20 a barrel at the wellhead 1948 2.68 1951 2.44 1953 2.65 1955 2.49 1957 2.67 1958 2.42 1962 2.62 Source: G.Cambell Watkins, Canadian Oil and Gas Pricing in E.Berndt et al, Oil in the Seventies, The Fraser Institute, 1977.table 1 Watkins relies on data from the Alberta Energy Conservation Board. If we were to adjust this time series for the rate of inflation since this period to 2005 prices we would have to multiply the price by a factor of between 5 and 6. Hence the current dollar price during this period never exceeded 20 dollars a barrel. What explains this enormous and clearly capricious increase. The defenders of the oil cartel claim it is simply supply and demand. But something else is at work - the cartel organized by OPEC and the willingness of speculators to take advantage of world events to drive up the price when hysteria grips the markets. Surely it is high time for our central banks to disconnect themselves from this hysteria and not make matters worse whenever the cartel drives up prices in this way. Increasing unemployment does nothing to weaken the power of the cartel. Instead we should be bringing on stream as much of our Canadian supplies as possible, increasing our supply of ecological alternatives to petroleum consumption and increasing public transportation as much as possible. This, rather than unemployment causing interest rate hikes, should be the basis of our anti-inflationary policy.

Published on February 6, 2008