Inflation Adjusted Oil Prices Nearing All Time Highs

For months now the buzz on the street has been about how Oil was at all time highs. Now we are actually getting very near in inflation adjusted terms!

(PRWEB) October 24, 2004 -- For months I have been telling you that Oil at $35 or even $40 was not at all time highs when you adjusted it for inflation. Well, everything has changed!

Recently the buzz on the street has changed to spreading the false notion that Oil has to top $90 a barrel in order to top the all time inflation adjusted high set in 1981. This is also untrue! The $90 Oil price is based on adjusting 1981 dollars to 2000 dollars.

When we adjust the price to 2004 dollars we only need to top $66.20! This is "only" a rise of about $11.30 from current prices.

Several months ago, $11.30 would not have been called "only" since it would have meant a 33% increase in the price. But in light of recent events... we have seen just about that exact rise over the last month!

Inflation Adjusted Oil prices are actually beginning to look very scary! As you can see from the attached chart of nominal and Inflation adjusted prices of Oil since 1949 we are actually getting very close to the record all time high, set in 1981.

Chart Available at: http://inflationdata.com/inflation/Inflation_Rate/Historical_Oil_Prices_Chart.asp

From 1949 until the early 1970's the nominal price of oil remained basically flat but the inflation adjusted price of Oil actually declined.

The tremendous spike in the 1970's resulted from the Arab Oil embargo and OPEC taking control of Oil prices. Prior to that the US government had forced US producers to produce oil at controlled prices so U.S. production had declined and more and more oil had come from overseas. This is what eventually resulted in OPEC gaining enough power over our supply to allow the embargo to have any teeth.

As the oil price adjusted to true market pricing it spiked up and has been floating freely ever since.

Recently, forces have converged to create a similar situation. But this time it is mainly a transportation problem.

Remember the Exxon Valdez ship that crashed off the coast of Alaska and spilled millions of barrels of oil all over the coast? Well believe it or not, that was the beginning of our current problem. Because of that accident and a couple of others like it, governments around the world began outlawing single hulled tankers.

This created a shortage of double hulled tankers. And double hulled tankers are very expensive to build and weren't very profitable with oil at $20/ barrel. So there was no rush to build them (plus they aren't built in a day even if there was a rush!)

In addition to not enough tankers, there aren't enough pipelines either. Who wants a pipeline in their backyard?

So we are caught in a crunch between inadequate transportation and an increase in demand for oil. Because the US and China are both coming out of a recession both countries are demanding vast increases in oil.

So there you have a typical supply crunch. And there is no quick fix. As I said, we can't build tankers or pipelines in a day! And as Winter approaches demand for oil will increase. So will we see record high Oil prices before the winter is out? My guess is that we probably will!

Tim McMahon is the editor of Financial Trend Forecaster in addition to the editor of InflationData.com "The Place in Cyberspace for inflation data" and the editor of Your Family Finances. He has also written a book on Geographic Tongue and other tongue problems called Healthy Tongue Secrets.

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