Oil Prices Rocketed in the 00s

December 30, 2009

The past decade saw a quantum leap in oil price pressures.  When oil and other commodity prices shot up in the 1970s, central banks lost control of inflation.  Although general goods and services prices were very subdued nonetheless over the past decade, so too was economic growth.  In the United States, for example, inflation of 7.4% per annum was associated with 3.3% real economic growth in the 1970s, whereas inflation of 1.7%  per annum in the noughties through last month was coupled with economic growth of just 1.7% per annum this decade through 3Q09.

Oil prices have climbed a long way since averaging $14.49 per barrel in 1998 and $10.87 per barrel in the final month of that year.  To get a sense of the long-term upward trend of oil prices, I compared annual averages in West Intermediate Crude with the level ten years earlier expressed as a percent per annum change.  Using daily closing prices, the 2009 mean price though today has been $61.92 per barrel, and the average price ten years ago in full-1999 was $19.19 per barrel.  $61.92 is 222.7% greater than $19.19, or 12.4% per annum above the earlier year’s mean.  The table below gives the comparable ten-year per annum changes for 1998 through 2008 as well as 2009.

  USD Per Barrel 10Yr Chg, % per annum
2009 61.92 12.4
2008 98.39 21.1
2007 72.44 13.4
2006 66.35 11.7
2005 56.76 11.9
2004 41.44 9.2
2003 30.93 5.3
2002 26.08 2.4
2001 26.01 1.9
2000 30.11 2.1
1999 19.19 -0.3
1998 14.49 -1.0

The figures above highlight a hidden cost of the war on terrorism, which was a much higher trajectory of energy price inflation.  Oil prices were actually lower in the final two years of the ninety’s than in 1988-89, and prices between 1991-2 and 2000-01 rose at a manageable pace of 2.0% per annum.  By 2003, the start of the Iraq War, the ten-year rate of advance had accelerated to 5.3% per annum, and it doubled again to 11.9% per annum in the ten years between 1995 and 2005.  This year will be the fifth in a row to show a double-digit rate of increase over the prior ten years.  Central bankers can take little solace from the 37% price drop from $98.39 in 2008 to $61.92 this year.  At $79.39 per barrel today, the price is within a dollar of the mid-point between the 2008 and 2009 mean levels and 11.8% per annum higher than the average level in December 1999.  OPEC is sitting in clover.  Oil importers, on the other hand, have less discretionary spending power after paying their energy bills and will continue to experience economic growth in the next decade that lies below long-term historical norms.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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