At $115.07 a barrel, oil prices appears to have hit an all-time high. But the Economist reports that a Deutsche Bank analyst says chill; that oil is still more affordable than it was in the 1980's. Michael Lewis adjusts oil prices for inflation, by which he proves that pegged to the producer-price index oil is at an all-time high. BUT when you adjust the price for gains in the consumer-price index, oil has to hit the $118/barrel mark to reach a new record. This revelation led Lewis to compare the price of oil to gains in Western consumer's incomes. He found that the annual income of a G7 citizen would have bought 318 barrels of oil in 1981. To match this price (relative to income), oil would have to increase to $134/barrel. What's more, in 1980 American consumers spent some eight percent of their disposable income on energy, compared to 6.6 percent today; a difference that would require oil to climb to $145 to match. By measuring global oil consumption, Lewis also finds that worldwide spending also peaked in 1980 at 5.9 percent, compared to 3.6 percent today. To reach that percentage of global expenditure, oil would have to jump to $150/barrel. In short, gas prices have risen, but global gains in prosperity mean that oil is actually cheaper today than it was at the end of the Carter Administration. Whew!
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WTI (ICE) for one month delivery is at 117,73 as of right now.
When I frst drove circa 72 gas was 46.9 cents per Imp gallon. Then the min wage was $1.78
Now gas is $1.2X per litre, mn wage is $9 sh, plus very hard to find anybody to work for min wage.
Back then a computer was probably as expensve as a Rolls Royce. You need a programmer to operate her.
Now u can buy a whole set for 2-300. And download everything except the kitchen sink.
But when it creeps up so fast is totally annoying.
My fear is that there is nothing to stop oil from hitting $134 a barrel.
Nothing to stop it in the next two months
Ooops. That’s 118.52 for WTI at one month, up 1.92 in the last fifteen minutes.
Watch this rocket fly.
Actually, the market has taken a hard look at T. Boone Pickens’ estimation that oil is headed to 125 over the span of a few days, and they are agreeing with him.
http://www.bloggingstocks.com/2008/04/17/t-boone-pickens-says-oil-is-headed-to-125/
Stein, you beat me to it.
Part of the reason (by no means, all of it) is the fact that the US Dollar is collapsing in value against virtually everything else.
http://www.breitbart.com/article.php?id=080422145732.d83dmg2q&show_article=1
This means, while the price of gasoline goes uppity up up UP for Americans, it is not going up nearly as fast for people in the rest of the world. (Except for northern England and Scotland, due to an impending strike / closure of their only oil refinery).
Gee, if I were a person with a tin-foil hat, I’d say there was some kind of collusion somewhere along the lines, in order to push up the price of fuel for Americans, in order to get us to reduce consumption (sarcasm alert).
@menno
Yes, the oil traders were sniffing at 100 just a few weeks ago, thinking that barrier was unbreakable, until someone took a quick plunge, saw it worked, and then the dam broke.
I’ve seen serious projections showing 200 before the year’s over.
The problem with Lewis’ analysis is that it compares average incomes.
What that fails to recognize is the enormous growth in wealth/income disparity (particularly in the US) since 1980.
http://en.wikipedia.org/wiki/Income_inequality_in_the_United_States
The fact that Warren Buffet is spending about the same (relative to his income) on gasoline as he did in 1980 means nothing to the truck driver, dental assistant, grocery store cashier, etc.
Eric_Stepans, you beat me to it.
I’ve been running this argument around in my head a lot recently, because it seems that every time oil or gas prices reach a new inflation adjusted record the argument about cost relative to incomes is trotted out, but no one ever mentions how little income and wealth growth the majority of Americans have actually experienced.
Who is gettng paid to rationalize how well off we all are, when most working Americans know in their hearts and (empty) bank accounts that this is not true?
While I’m not a socialist, the growth in income inequality since the 1970’s as noted in Eric’s link, is complete bullshit. In the intervening period, our top 1% have simply become more skilled at manipulating money to the disadvantage of the remaining 99%. It is exactly these conditions which lead to the original revolution in the U.S., where those who actually produced a product simply wanted a fair share of the profits produced by their labors. Now that our country has started creating profits by disecting companies which took decades to build, or by magic fund manipulation, it is time that we looked again to recreating a healthy and vibrant middle class of people who create, produce and maintain the very things that we use in our everyday lives.
The growth of executive compensation, something which was thrashed severely in a recent series of posts, should be of concern to everyone in America who struggles from paycheck to paycheck. In the 1950’s, the U.S. economy was strong and vibrant with a top tax rate approaching 91%, thereby disincentivizing the development of schemes through which people are bilked of their money. Jobs were being created and everyone shared in the wealth of the nation. Today, the top tax rate is only slightly more than a third of what it was in the 50’s and we are not creating meaningful jobs or innovative products and services.
I have to chime in with this, edgett. Perhaps if the taxation of Americans followed a logical, limited and – gasp – Constitutional line, it would work out well for everyone.
Let me elaborate. The Constitution, prior to the illegal implementation of the 16th Amendment (which did NOT get passed in the required 3/4s of the states) only allowed for Federal Tariffs on imports (this would obviously including oil imports, encouraging US energy conservation as well as US energy production, providing jobs) and Excise Taxes (i.e. point-of-sale-taxes on selected items purchased by all of the public).
Excise taxes could be placed on non-essential goods, i.e. anything other than food and clothes, and still be Constitutional.
http://www.thelawthatneverwas.com/new/home.asp
In plain English, we’re being lied to, stolen from and scr@wed by our “leaders” and have been for some 95 years. Likewise, the Federal Reserve is neither federal nor are there any reserves!
Essentially, the banking cartels were given the right to print money, something the Constitution specifically retains as the specific right of the Congress, and only the Congress, and which has never been changed by a ratified legal Amendment to the Constitution.
P!ssed off yet?
The tax rate of the richest few has little to do with the middle class getting scr@wed, in my humble opinion. If greedies are going to be greedy, they are going to do it no matter the tax rate. If they are going to export jobs, they are going to do it because they have no reasons not to. Like tariffs making for a level playing field vis a vis cheap-labor nations, for example.
The people of the United States had better wake up quick or it’s all over.
Given the posts about inequality of wealth and the lowering of the top tax rate I must ask: what is a fair minimum wage and what should the top tax rate be?
The top 50% already pay 97% of the taxes in this country. How much more should they pay?
What about the minimum wage? If $5.85 ($6.55 this summer and $7.25 next year) isn’t enough, then what is? Remember that only a very small amount of workers are making minimum wage and most of them are students.
If the minimum wage is raised to $10 per hour, what does that mean for the guy who works in the local factory making $20 per hour after ten years? Does his wage double? If not, is that fair?
If you mandate an increase in then minimum wage then, in all fairness, everyone’s wage should increase proportionally which puts us back to square one. There will always be people who are poor unless you move to a socialist system. If you raise everyone’s wage, then the poverty line will just move up.
@menno:
Can you explain how the 16th amendment, the Illuminati and the Protocols of Zion might account for the effrontery of high oil prices?
What would $6 gasoline do to YOUR budget?
Wow, $4/gallon gas, civilization as we know it is about to collapse.
In Europe where gas is nearer $8/gallon it’s already happened. There’s hunger and plague on every street corner in England, the French are revolting (’nuff said), and the Germans are marauding the countryside in dune buggies with gun turrets looking for supplies.
Meanwhile it costs over a hundred bucks a week to fill up my monster SUV (I NEED one to move the horse trailer twice a year to prevent being charged residency tax on it) so Mr.Bush, please tell the Chinese and Indians to just go back to their agrarian societies and leave OUR oil and standard of living alone.
Rusbodger wrote: “What would $6 gasoline do to YOUR budget?”
My continued modest use of gasoline (modest by USA standards anyway) isn’t going to change in the face of $6 gasoline. My annual fuel bill will be about $2500. By comparison, my current annual property tax on a 47-year-old tract house is nearly $6 per square foot of house per year. (Yes, I live in Sunnvale, CA 94087.)
However, $6 gasoline will have consequences far beyond my control. Increased taxes (to subsidize everyone else’s fuel guzzling) or the collapse of government (due to budget shortfalls) will both be financially devastating.
Gasoline here is nearly $4/gallon. To get to $6/gallon just based on oil changes will require oil to increase by $2/0.025 = $80 per barrel. So, when we see $200/barrel oil, we’ll see $6/gallon gasoline.
TexasAg03:
“What about the minimum wage? If $5.85 ($6.55 this summer and $7.25 next year) isn’t enough, then what is? Remember that only a very small amount of workers are making minimum wage and most of them are students.”
Hey don’t forget most of those minimum wage earners don’t have health insurance. Of course a lot of them are young, students, or working a second job in the household for extra money (someone else is earning the big dough). But they get to be counted as the uninsured too. Do they want insurance? No. Do they need insurance? No. But that doesn’t matter, they are “uninsured”. Oh my God! We have to do something! No problem, an “extra” 200 billion a year will take care of it. (Of course it will go up in the future.)
The government could take of those who really need insurance but cannot afford it with a small to modest program but why stop at that when it can run the whole show?
While the dollar is going down, oil is going up no matter what currency you use – even gold. It still comes down to a supply/demand issue.
Also, the Fed isn’t so much printing money so much these days. Technically, it’s lending it and allowing money to be lent. Which means it’s all supposed to be paid back. Sometime.
Ultimately, the dollar will make a comeback. And oil prices will snap back temporarily any day now. But generally, oil prices will continue to trend up as long as somebody in the world (BRIC) is willing to pay for it.
BTW: Hospitals will treat everyone that walks in the emergency room. Failing to pay the resulting bills will ruin your credit (and the doctors will probably treat you with the lowest quality care), but there’s always that option if you absolutely need it.
Just to stir the pot a little more…
One of the ways our business/political/media elites have lied to us over the past 50-60 years is by using very simplistic and misleading economic measures.
The most common one used is GDP, but GDP measures activity, not wealth creation.
When a person catches cancer, GDP goes up. When a family gets divorced, GDP goes up. When a Hurricane Katrina devistates a coastline, GDP goes up. When the government borrows $600 billion and spends it on a meaningless war, GDP goes up.But that does not necessarily mean that we are ‘wealthier’ as a society, either in economic or quality of life terms.
http://www.rprogress.org/sustainability_indicators/genuine_progress_indicator.htm
what a strange and interesting turn the comments have taken. is this perhaps what’s really on americas’ minds?
@creamy:
There are a great many people who are wondering if we would be better off as a socialist nation. Unfortunately, they’re registering new ones every day faster than the Republicans can.
windswords,
Hey don’t forget most of those minimum wage earners don’t have health insurance. Of course a lot of them are young, students, or working a second job in the household for extra money (someone else is earning the big dough). But they get to be counted as the uninsured too. Do they want insurance? No. Do they need insurance? No. But that doesn’t matter, they are “uninsured”. Oh my God! We have to do something! No problem, an “extra” 200 billion a year will take care of it. (Of course it will go up in the future.)
The government could take of those who really need insurance but cannot afford it with a small to modest program but why stop at that when it can run the whole show?
Exactly. There are many people who, by choice, do not have insurance, but they get counted among the uninsured. Some of them are not making good decisions, i.e. buying TVs, cars, etc… instead of purchasing insurance.
I know there are people who need insurance and legitimately cannot get it for some reason, but I don’t believe the number is 47 million.
No doubt, the real cost felt by consumers is lower on average than in 1980/81. Who else here other than me was paying for gasoline in Volker dollars then?
Certainly there are some people whose real incomes haven’t kept pace with the averages since then. If my Dad were still alive, he certainly would not be enjoying 3.5X the unadjusted dollars income as in 1980, past his peak earning years and facing retirement. But the demographic center of gravity today is Boomers, and most of us were either early in our careers or just emerging from college into a ~9% unemployment / 10% inflation economy. For most of us, the gain in raw dollars income has more than kept pace with this latest rise in energy prices. But we did spend many years in a period of virtual energy deflation, so it feels like a spike now if memory is short. Nevertheless — and my example isn’t too unusual — $1.05 premium gasoline in 1980 has become $4.06 premium fuel in 2008, but my unadjusted income compared to my first job after grad school is 20X higher. If it were only 5X more in unadjusted dollars, I’d be ahead, and for lots of people that multiplier or better is true. It’s been a matter of choice (and increasing government regulation) that my $4.06 fuel goes into a 20mpg car rather than a 38mpg car in 1980. But I also drive fewer miles today than then.
More to the point, energy is the least of it. My first new car loan in 1980 carried 18% interest. My first mortgage in 1983 was at 13.5%. Today, my most recent car loan was under 7%, and my mortgage is 5.625%. Those 1980 interests costs were incurred then even by poorer people. Consider how many potential energy, car, entertainment, vacation dollars those interest costs crowded out.
Now to anyone much younger, perception creates a different mindset. If you are a trucker who bought your first rig in, say 1995, today’s fuel costs are both disruptive and unprecedented. A blue collar commuter, a self-employed plumber or carpenter, even a $120,000 software developer. If your frame of reference for your prior economic decisions was energy circa 1993 – 2004, this either feels like, or is, pain. If you were starting out a new adult life and made vehicle and lifestyle decisions with 1999’s $1 gasoline in mind, the current energy situation might look alarming. But if you were a gasoline and heating oil buyer in 1973 through 1984, you witnessed two energy price shocks that doubled costs almost overnight with no change in income, so this situation looks manageable and gasoline feels more affordable than it was in 1980, because it in fact is.
Phil
My first new car loan in 1980 carried 18% interest. My first mortgage in 1983 was at 13.5%. Today, my most recent car loan was under 7%, and my mortgage is 5.625%.
Excellent point. Those costs were incurred by most everyone. Even if someone was a renter, those costs would have been passed on to them.
this situation looks manageable and gasoline feels more affordable than it was in 1980, because it in fact is.
QFT
My first new car loan in 1980 carried 18% interest. My first mortgage in 1983 was at 13.5%.
The prospect of a mortgage at 14% scares me big time.
The prospect of a mortgage at 14% scares me big time.
Yup. But guess what? We still bought houses. As late as 1992, 30 year mortgages were still 10.5% for people with good credit. Today looks pretty good.
Circa 1979 we also heard mainstream thinking that the USA was finished, manufacturing was gone, living standards would never be as high again. There was a drumbeat of climate catastrophe overlaid with media certainty that nuclear war was inevitable, Peak Oil has passed, mass starvation was on the horizon, social security would soon be in collapse, inflation was untamable, America could never win another war, Japan would own the bulk of our assets, the dollar would be perpetually weak. We went from the world’s largest creditor nation to the world’s largest debtor country in under 3 years, and that alone was certain to doom our prospects. The Soviets were lunging for Mideast oil via Afghanistan and we were spineless to stop them. If you lived in a liberal coastal city like Boston, the future was deeply bleak if you believed the intelligentsia.
Uh….I didn’t.
Phil
My first new car loan in 1980 carried 18% interest. My first mortgage in 1983 was at 13.5%. Today, my most recent car loan was under 7%, and my mortgage is 5.625%.
You forgot to mention what your first house cost in 1983 and your first new car cost in 1980. The interest rate is part of the game played on the ignorant. Just like the 0 down 0 percent interest B.S. If you think the financing (or auto or housing) company is giving up ANYTHING with those lower interest rates, you’re naive indeed.
You forgot to mention what your first house cost in 1983 and your first new car cost in 1980. The interest rate is part of the game played on the ignorant. Just like the 0 down 0 percent interest B.S. If you think the financing (or auto or housing) company is giving up ANYTHING with those lower interest rates, you’re naive indeed.
This is a non-sequitur response. The lower interest rates today reflects a lower cost of money to the banks. The prime was much higher then. No one is giving up anything in the rate differences I cited between 1980/3 and 2004/8.
Nevertheless my car and house cost less then, of course. In 1980, the average price of a new car purchase in the US was about $8,000. I bought an $8,500 car. Today, the average actual US automotive purchase is ~$30,000 ~3.5X. So the average car purchase has been chased by the average fuel price today in unadjusted terms. Cars are more affordable than in 1980 on an absolute basis, and factoring in the much lower interest costs, even more so. Money is way cheaper.
My current house was bought at 12X the cost of my first house in unadjusted dollars, but my income is about 8X what I earned in 1983. However, my first house financing required 20% down and had an interest rate over twice as high as currently, due to a much higher prime rate. So my current mortgage payment is only 4X that for my first house, despite a financed amount 11X larger.
Circa 1980 was a bigger crisis than today, in affordability, for most people who lived through both eras.
Phil
Oil is now expensive.
The important thing is that is is going to get A LOT MORE expensive in the near term and will forever stay that way in our lifetimes.
Lets do all these same comparisons in a few years time, and there won’t be so many people that justify the high prices at that point.
And the American dollar has a long way to fall yet. Fundamentals but also momentum. Too many Americans have realized in the last year that they need to diversify to markets outside the US. Even Buffett is doing this and he is big time pro USA capitalism.
BTW, my posts have been consistent on this for a while. Everybody was laughing at people like me when we were talking 100 dollar oil five years ago. There are just too many people that want the stuff now and the line of people wanting more of it is growing longer.
@Phil
We can all play the “fun with statistics game” in order to make what’s troublesome go away, or even appear more troublesome.
Here’s an interesting statistic, going back to 1992:
http://preview.tinyurl.com/5lcdja
@gsp
“Oil is now expensive.”
Yes, reached 119.5/barrel in NY yesterday.
Not that long ago I was subjected to some (famous bank name here) analysts who claimed it would go down to 35 during 2007. I wonder whether they are the guys GM have been listening to?
Stein: Can’t read your URL, so can’t comment. The link goes to a forbidden page. Whatever it points to, I’m not trying to make the “troublesome go away,” merely making the point that coping strategies trump alarmism.
The important thing is that is is going to get A LOT MORE expensive in the near term and will forever stay that way in our lifetimes.
Maybe; maybe not. We’ve heard this before. Truth is, we know a lot more about demand than we do about supply.
Everybody was laughing at people like me when we were talking 100 dollar oil five years ago.
Not me. The potential for $100+ oil was latent in the cards even back in 1999 when gasoline in the US was sometimes under a buck per gallon. This is a market that is manipulated, susceptible to locally and temporally restricted disruptions, and constantly vulnerable to an unknowable insecurity tax assigned by the futures traders. The fact that we have such moderate price rise in the face of a 5 year old conflict in the heart of the oil zone, and a leftist regime in Venezuela suggests the basic economic moderators of business imperative.
Lets do all these same comparisons in a few years time, and there won’t be so many people that justify the high prices at that point.
Well, OK. But fuel isn’t truly expensive yet. It’s still the cheapest volume liquid most people buy and use. At some point fuel price increases begin to displace other currently preferred targets for spending my money. But frankly, barring any other change in my circumstances, even $10 gasoline wouldn’t change my driving requirements. More to the point, there is an array of unconventional oils and other energy options that become viable at elevated price levels. We’re not at that point yet, but those price levels — when reached — will improve the supply equation relative to demand.
As a laymen commentator noted in the LA Times today on a real estate blog, a house in foreclosure with a high-end SUV on 24″ polished rims in the driveway simply indicates a preference in where to spend disposable income.
There are just too many people that want the stuff now and the line of people wanting more of it is growing longer.
Which is why more continues to be found in progressively more inconvenient places.
Phil
Stein,
OK, now I see your link. The embedded link above didn’t work for me, but the link in the email feed from this thread did. California foreclosures spiking, huh?
No kidding. I live here. This has nothing to do with my affordability comments pertaining to 1980 vs. now.
Foreclosures in California are primarily spiking among people who took out negative equity loans, below-market interest only loans subject to sudden market rate adjustment, stated income loans, no downpayment loans, etc. In the earlier era, these types of loans were completely unavailable, so far fewer people could get into this kind of trouble.
Certainly there could be some cascade effects if the crisis isn’t mitigated, but the basic equation still holds — foreclosures are mostly driven by people having bought houses they could not intrinsically afford. Job loss is not the primary driving factor for foreclosures today, whereas in earlier recession-prone eras it was.
Phil
@Phil
What’s your response to a burning house?
Sorry, but I see your comments here and in the Krugman thread as pure whitewash, not convincing at all.
What’s your response to a burning house?
Best is to prevent a house from burning in the first place. Next is to extinguish the fire post haste. But what if the house isn’t burning at all?
Look, I’m not saying energy prices haven’t risen. But I am pointing out that people like Krugman are writing about this as though we have no prior relevant experience. In fact, energy prices spiked faster against a backdrop of less robust economies and a state of general economic crisis more than a generation ago. In real terms, energy was less affordable in 1980 than it is today, unemployment in most western countries was much higher, inflation was much higher, money was much more expensive, and confidence was very low. Many people look at the situation today and perceive it as unprecedented (it’s not), and harbinger of doom because they don’t have sufficient historical context. Pain for people experiencing it is real. But panic among those who aren’t in pain will exacerbate underlying problems and generally inhibit orderly application of real remedies.
Phil
I can’t see the URL at all, but I am always suspicious of a statistic that starts in a year like 1992. Why not 1990?
Phil is not whitewashing anything. Quite the opposite. Oil is still CHEAP. No one here would do the job for cheaper than the oil companies now do it, and last I checked, Exxon was making 10%. Would you start a company to make 10%? I sure would not, not even if it was a guaranteed 10% on a government contract. Speculators, government officials, and those they favor are the only people making real money on this. Okay, a lot of top level oil execs are making insane money, but that’s not limited to oil companies.
Which brings up wealth discrepancy. It may be a problem, but I have seen no cure that isn’t worse than the disease. Taxation will INCREASE the real disparities. Laws and Regulations will likely hurt the MIDDLE class more than the wealthy.
We need a market correction, not a government one. Perhaps we need to get the fund managers to be more responsive to their investors? I don’t know.
Hmmm, Google has blocked the tinyurl.
The graph showed the enormous rise in foreclosures in CA over the past four years – where it had remained fairly stable since 1992 until today. I’m sure the CA real estate statistics can take you all the way back to the SF earthquake if you want, Landcrusher. (Joke intended.)
Where foreclosures per annum were at the 100 thousand mark we’re now seeing 450 000 per year.
Do also bear in mind, if the statistics game is to be played, that US households have fewer dollars on their hands today than they did in 2000; that there’s actually been a real drop in disposable income; and that the rate of people’s earnings that would go into savings have fallen from 2.3% to 0.7%, due to the predatory lending practises of recent years.
We’re seeing a lot of factors that are joining to squeeze wage earners. People are moving to shorten their commutes, are downsizing their cars, are lining up at the cheapest gas stations to save a few cents.
In other words, it’s a very delicate and unstable economy, given to serious jitters.
Thanks for the response, Phil. This probably all comes down to the somewhat interesting fact that from the same set of measures, you can have endlessly varying conclusions – just watch the Sunday bloviators on parade for reference.
We’ll soon find out.
Stein,
Okay, let’s take that one apart. If we are going to have “fun” with stats, then do what you want, but if we are actually discussing the world…
I stand by my statement about picking dates. Without a stated reason, and sometimes I even find the reasons suspicious, I am skeptical about date picking in any stat.
Just looking at this stat does not tell you much. Your proposed causation is what? 1992 was the beginning of a real estate boom after the whole REIT thing was it not? Lending practices may have gotten more predatory, or they may have just gotten more lax due to the lack of percieved risk. What does this mean to you? All I see is a government caused, rather than prevented bubble.
Drop in disposable income measured how? Household income is deceiving since the average household is getting smaller. Incomes have increased on average and median for the most part, every year. Is the average person somehow worse off than they were thiry years ago? Twenty? Ten? Or, is their really just a decrease in perceived wellness? I suspect that the press telling them that they are getting poorer, while the rich get filthy rich is the real culprit, true or not.
People who made foolish decisions based on ten dollar oil are now having to correct their mistakes. I believe their worries, while real, are completely out of proportion. Call me when we have tent cities and soup lines, 20 percent unemployment, and other real problems. Then I will agree we are having it tough.