Quote:
Originally Posted by opendoor
$3-3.50 was the price for pretty much the entire decade before inflation took off, so it's a pretty appropriate starting point. The equivalent to today would be something in the $70-80 range. But even if you exclude the pre-2014 period (fair enough) and use $50 oil as the baseline, you're still looking at over $500 oil to match the price increases they saw over the '70s and early '80s.
The main issue with the '70s was it kept going up and up and up year after year, which is a big reason why inflation kept going up. It tripled in 1974 in then it went up about 50% in the next few years with no relief, before nearly tripling again in 1979-1980. All that compounding growth led to significant inflation in energy prices. By contrast, our current prices are right in line with what they were 10-15 years ago.
So they're still high, but we're not seeing the unending growth in prices that happened back then. The monthly average oil price has dropped about 25-30% in the last few months, whereas I don't think there was a single point between 1974 and 1982 where monthly oil prices dropped more than 10% from peak to trough.
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Again - it was in that banded $3 - $3.50 range because it wasn't a free market. It was until the creation of the spot by Marc Rich in 1976 - 1977 that oil began to bypass the 7 Sisters and truly become a tradeable commodity. Before that it was controlled by the large oil and gas companies almost exclusively.
I am sure I don't have to tell you that the late 70s and early 80s are not good proxies to base any kind of analysis on in today's market as the Iranian Revolution turned the whole world upside down in terms of energy security.
Regardless, if I take a step back my point is that we don't necessarily need to see a 10 bagger on oil prices in order to severely impact inflation going forward. We are in a much different time where much of the world has enjoyed cheap energy prices and a larger portion of the world has developed. That, coupled with globalization has a magnifying effect for the price of services and goods. My argument is we are much more sensitive to increase in energy costs than we were 40 years ago so a 2 - 5 bagger on oil from $50 is going to have an equal or greater impact than in the good old days. It remains to be seen how high energy goes but the direction we are heading - the lack of investment in production, the lack of technologies to make up the delta, the lack of electrical grid infrastructure, and the inevitable increase in demand make high oil prices virtually inevitable for most of this decade.