Most of us fall into the habit of not checking facts that have gained a certain level of credibility. This is nothing to be ashamed of, as most of us lead fairly busy lives, and we don't have time to double check the accuracy of everything we hear and read. None-the-less, I decided a while back, that I'd do a better job of looking into the accuracy of common quoted facts, and sometimes I've done better than other.
At a recent family reunion, I got into a discussion with some of my relatives about oil. A few of my relatives are either in the oil business, or retired from it. I didn't press any of my issues too strongly, as it isn't good for harmony at a family reunion. I was however disappointed that I didn't hear anything very different from what I've read from official sources in the oil industry. I'm not implying that they lied to me, but I believe they honestly believe these things... such as, there is plenty of oil; new technology will provide decades of relatively cheap oil; oil is still cheaper than it was in 1981 when adjusted for inflation.
Ah, inflation. First let me stress that I am not an economics professional, nor do I play one on TV. I admit freely that I could be misinterpreting the data that I'm about to share with you; but I'd argue that common sense seems to be on my side. So what about inflation? It seems this is something that is very often "spun" by the press, industries, and governments. For the sake of this discussion, I'm really only concerned with the assertion that seems to be common held as fact that oil is cheaper today than it was in 1981 when adjusted for inflation. Take a look at price comparisons in the table below.
|1st Class Stamp||$0.18||$0.39||116.7%|
|1 Gallon, Unleaded Regular||$1.400||$2.947||110.5%|
|Barrel of Oil||$37.||$74.||100%|
|Dozen Eggs, Grade A, large||$0.836||$1.206||44.3%|
|1 lb. Chicken Breast, bone-in||$1.447||$2.053||41.9%|
|1 lb. Coffee, 100% ground roast||$2.538||$3.349||32.0%|
|1 lb. Long Grained White Rice||$0.575||$0.549||-4.5%|
|Most of this data was obtained from the U.S. Department of Labor, Bureau of Labor Statistics, for the months of May 1981 and May 2006. I was unable to find a single source of information for Barrels of Oil for both those time periods so I used a rough estimate obtained from multiple sources.|
I admit this is only a cursory analysis, but it illustrates a point. I could only find one item's cost that grew more than gasoline since May 1981. That was the cost of a 1st class stamp. I'd argue that the cost of fuel plays a huge role in the cost of a 1st class stamp, which could explain why it's increase exceeds the increase in gasoline. Of course, the price of gasoline affects the prices of nearly all our goods and services, so you'd have to attribute some of the increase in the other items listed above to the increase in fuel costs.
Unfortunately finding historical data for prices is not easy. I would have liked to have compared more items, such as the newsstand price of a major newspaper, the average cost of a certain class of automobile, the cost of admission to a feature film, the cost of an X-ray, a gallon of milk, etc.
I'll once again mention that I'm not an economics professional, but common sense would say that oil is indeed at its most expensive in 2006, even when adjusted for inflation. I don't understand the complexities of how the Department of Labor calculates annual inflation. And I recognize that it is quite possible the people who claim oil is cheaper today than it was in 1981 when adjusted for inflation are correct. It just doesn't appear so to me.
I suspect if I'm correct, then it has something to do with the fact that energy costs (specifically oil) must play a major role in determining the rate of inflation. If this is indeed true, that energy is weighted heavier than other items when determining what the rate of inflation is, then it "favors" energy. Imagine oil was the only item considered when determining the rate of inflation. You can't then turn around and say, "See, oil is the same price today was it was in 1981 when adjusted for inflation". That doesn't make any sense. I see it as being analogous to the Heisenberg Uncertainty Principle... you can't calculate an accurate view of inflation without heavily weighting the importance of oil, but by this action you skew the usefulness of using inflation data when comparing historical prices for oil.
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