Wednesday, October 21, 2009
Crude oil is in the spotlight these days, as its price climbs above $80/bbl. The trigger for higher prices appears to have been the news that gasoline inventories were much lower than expected. Surprise! Lower prices earlier this year combined with a rebounding economy added up to increased demand for gasoline. Is this a cause for concern? Hardly. Recoveries do not bring with them the immediate seeds of their own destruction. Prices are up because demand is up. The economy is stronger. If there is any cause for concern, it is that this is one more of many examples of why monetary policy is too easy these days, and why the Fed should be tightening.
These charts help put things in perspective. To begin with, in real terms oil is no more expensive today that it was in the early 1980s. It's actually much less expensive, when you consider that consumers spend about half as much of their disposable income on oil today as they did back then. The reason for that is conservation: our economy has become far more energy efficient. We use about half as much oil per unit of output today as we did back then. U.S. oil consumption today is about 19 mbd, which is the same as it was in 1980, and that's a rather remarkable fact since the economy has grown about 120% since then.
Posted by Scott Grannis at 10:36 AM