Strictly: Drilling and oil-field services Message Board

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Gold/Mining/Energy : Strictly: Drilling and oil-field services

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To: edward miller who wrote (71922)	8/29/2000 11:43:41 AM
From: Jon Cave	Read Replies (3) of 95453

Why $33 oil is not as inflationary as it used to be. But... I got a good answer from a friend in the oil industry. Thought I would post it here. Most of you knew it already. <Why is $33 oil not inflationary? Jon, I don't anyone who has "the" answer for that question. I tend to think it is inflationary myself, but maybe not as much as twenty/thirty years ago. In my opinion, there are three reasons: 1) the gov't always tries to play down the impact of rising energy prices in their CPI numbers - remember you always here them say "but if you take out increases in food and energy prices...." Thus official "inflation" is always understated when you use the numbers that Jon Q Public believes. 2) I don't think the economy is as sensitive to energy price increases as it was 20/30 years ago for two reasons. First we are using energy more efficiently than we used to. Secon,d, and what I believe is the biggest reason, $33 oil sounds high in nominal (present) dollars. However, we still have relatively cheap oil in real terms. For example, look at $30 oil in 1980-81. You could buy the nicest new pickup made for less than $10k. Except for farm commodities, precious metals and electronics everything was cheaper then, which made oil much more expensive in relative terms then. Since the economy has "grown up" around the price of oil and so I believe $30 oil today is just not the same kind of shock to the system as it was then. I think it will still have an impact, but not a shock. The only thing that cuts against that is when you take into account the debt load people are carrying now (as noted in the articles you sent me yesterday). If it is that high, people are already spending every dollar they have on installment payments. If fuel prices double, they may have to cut back in other places. These cuts may be more drastic than they would if people were not so far in the whole for consumer goods.

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