Friday, August 12, 2005

Something In The Electrons, II

by Tom Bozzo

News flash! "Record" oil prices, in "real" (inflation-adjusted) terms
are only records because inflation has raised prices across the board. In real terms, oil's record price was reached shortly after Iran took hostages in the US embassy, way back in 1979, when a barrel of oil cost roughly $90 of today's dollars.
says Megan McArdle at Instapundit. Her source? A blog post at Outside the Beltway complaining about the reporting of the records. This is not quite a triumph over "MSM," though. As it happens, the AP story that's the first listed offender notes:
While oil prices are about 46 percent higher than a year ago, they would need to surpass $90 a barrel to exceed the inflation-adjusted peak set in 1980. That — and the fact that the U.S. economy burns fuel much more efficiently than it did 25 years ago — helps explain why the country's financial engine is still going strong, analysts said.
(The first sentence also appears in another version of the story via the New York Times, too.)

No doubt, the talk of "record" prices comes off as a somewhat lame effort by the reporters to add some spice to otherwise thrilling commodity market reporting. But it's not like the inflation-adjusted record just dawned on the right blogiverse on Thursday.
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One of the parts of that AP story is the understated "the U.S. economy burns fuel much more efficiently than it did 25 years ago."

Since we no longer spend about 25% of GDP on fuel--thanks in large part to CAFE standards, manufacturer incentives to produce more energy-efficient appliances (e.g., tax incentives, more attention being paid by consumers to TCO, and, probably most significantly, import from countries more oil-constrained than we are) we spend it on other things.

Which tends to reduce the appearance of inflation.

Those pretending that the "inflation-adjusted" number would be a true comparative are like those who note that a single from iTunes is cheaper than what we paid for a petroleum-made one in 1978.
I could have given Steve Verdon some credit for not denying that oil prices are a potential problem, but wasn't feeling that fair-minded.

There's also the issue that over 24 years, small biases in the deflator will have big effects on "real" price comparisons.

The magnitude of the shock, particularly measured from the trough in 1999 or thereabouts, is certainly plenty big. With the incidence of this shock falling heavily on households, I'll be curious to see just how stressed the finances of the most auto-dependent of them turn out to be.
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