Putting oil's price in perspective -
Friday, April 2, 2004 4:50:56 PM
ANNANDALE, Va. (AFX) - With unleaded gasoline now going for more than $1.75 a gallon, up from just 95 cents five years ago, politicians are doing the obvious: They're blaming the other guy
Which means that many Americans will develop a sense of outrage about gas prices, and those who would exploit the issue for political gain will whip this outrage to a fever pitch
Yet in many ways the story about the current high price of gasoline is that there is no story
Consider gas in real, or inflation-adjusted, terms. If all gas prices since 1976 were expressed in terms of today's depreciated dollar, we'd discover that the average is $1.77 a gallon
This means that today's price is almost precisely equal to the long-term average
So outrage over today's apparently high price of gasoline is guilty of what economists sometimes call "money illusion," in which consumers are fooled into believing that a dollar is a dollar is a dollar
It isn't, of course. But most politicians don't want us to be aware of what inflation is doing to the value of the currency
Take a look at the accompanying graph, which plots the price of a gallon of unleaded gasoline in two different ways. The first, represented by the red line, is based on what the actual price of unleaded gas was at each point along the way over the past three decades
The second, represented by the blue line, shows what those actual prices would have been had they been expressed in terms of today's dollar. This leads to a big adjustment, since one dollar today is equal in value to around 30 cents in terms of a 1976 dollar (as judged by the Consumer Price Index)
Therefore, as you can see in the graph, even though you could buy a gallon of unleaded gasoline in January 1976 for 60 cents, in today's dollar that price would have been around $2
One newsletter editor who has drawn attention to gas prices in real terms is John Dessauer, editor of John Dessauer's Investors World. In his midweek update to subscribers, he pointed out that "gas prices in real terms, adjusted for inflation, are back at 1985 levels" and therefore nowhere near to record highs
The real story here, according to Dessauer, is that the supply of oil "far exceeds demand." He reports that, because of weak demand, worldwide supply of oil is growing 3.5 million barrels per day
As a result, OPEC "is terrified of an oil price collapse like 1998." And that's why it has cut production and announced that it most likely will cut production even more this summer
Dessauer believes that oil's price is in the latter stages of a classic market bubble, helped along by "massive speculation in the oil market" by "hedge fund managers and other speculators." That speculation has, up until now, kept oil's price from reflecting the underlying fundamentals
But Dessauer is confident that fundamentals will eventually win out: "Crude oil prices will come down." That, in turn, will be good news for the economy and the stock market
Dessauer, therefore, is advising clients to remain fully invested in equities
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