Sunday, March 11, 2012

Measured in Gold, the Price of Oil is Below Average

From the Forbes article by Louis Woodhill "Gasoline Prices Are Not Rising, the Dollar Is Falling":

"As this is written (2/22/2012), West Texas Intermediate crude oil (WTI) is trading at $105.88/bbl. All this means is that the market value of a barrel of WTI is 105.88 times the market value of “the dollar.” It is also true that WTI is trading at €79.95/bbl, ¥8,439.69/bbl., and £67.13/bbl. In all of these cases, the market value of WTI is the same. What is different in each case is the value of the monetary unit (euros, yen, and British pounds) being used to calculate the ratio that expresses the price.

In terms of judging whether the price of WTI is high or low, here is the price that truly matters: 0.0602 ounces of gold per barrel (which can be written as Au0.0602/bbl). What this number means is that, right now, a barrel of WTI has the same market value as 0.0602 ounces of gold.

During the 493 months since January 1, 1971, the price of WTI has averaged Au0.0732/bbl. It has been higher than that during 225 of those months and lower than that during 268 of those months. Plotted as a graph, the line representing the price of a barrel of oil in terms of gold has crossed the horizontal line representing the long-term average price (Au0.0732/bbl) 29 times.

At Au0.0602/bbl, today’s WTI price is only 82% of its average over the past 41+ years. Assuming that gold prices remained at today’s $1,759.30/oz, WTI prices would have to rise by about 22%, to $128.86/bbl, in order to reach their long-term average in terms of gold. As mentioned earlier, such an increase would drive up retail gasoline prices by somewhere between $0.65 and $0.75 per gallon.

At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot. And, because the dollar is currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices."

MP: Measured in terms of a stable commodity in relatively fixed supply like gold, the price of oil now is below its historical average, as the chart illustrates, and suggests that the falling value of the U.S. dollar is contributing to record high gas and oil prices, when measured in dollars. Measured in gold, oil and gas are now historically "cheap," not expensive.

HT: Juandos


31 Comments:

At 3/11/2012 5:34 PM, Blogger Nicolas Martin said...

I wish this blogging software allowed efficient posting to Facebook.

 
At 3/11/2012 5:41 PM, Blogger Rufus II said...

Did I mention that Gold extraction peaked in 2003?

 
At 3/11/2012 6:17 PM, Blogger PeakTrader said...

The article states: "Gasoline Prices Are Not Rising, the Dollar Is Falling"

Speculators are preventing shortages through higher prices (or slowing demand, including in Asia and Latin America).

Measured in median family income, the price of gasoline is higher than the 2008 peak.

U.S. Consumers Spent Record on Gasoline in 2011

The average U.S. household spent more than $4,000 on gasoline this year. That represents about 8.4 percent of the median household income...It was as low as 3.9 percent (since 2000) as recently as 2002.

Chart

http://energypolicyinfo.com/wp-content/uploads/2011/12/Median-Household-Income-Spent-on-Gasoline1.png

It's even worse in Europe:

Reuters, 2/27/12

In euro terms, Brent crude rose to an all-time high of 93.60 euros last week, topping its 2008 record.

 
At 3/11/2012 6:22 PM, Blogger rjs said...

gold is in a speculative bubble; what is the price of oil measured in some other necessary commodity, such as wheat or cotton?

 
At 3/11/2012 6:25 PM, Blogger rjs said...

actually, it makes as much sense to say "measured in oil, gold is above average...

i'm sure you can find hundreds of such comparisons, enough to do posts on for weeks

 
At 3/11/2012 6:45 PM, Blogger PeakTrader said...

It seems, the E.U.-17 had a weaker economic recovery than the U.S.:

E.U.-17 Real GDP Growth

2008 0.4
2009 -4.3
2010 1.9
2011 1.4

And the E.U. is in recession again:

Euro zone slips into recession on growth revision
March 7, 2012

The euro zone economy slowed at the end of last year and is now in a "mild recession", EU officials said.

The latest data and comment from the European Union point to a so-called double-dip recession within three years for the 17-nation euro zone, still struggling to overcome the debt crisis.

 
At 3/11/2012 9:13 PM, Blogger Paul said...

I fill my tank with dollars, not bricks of gold (yet.)

 
At 3/11/2012 9:14 PM, Blogger Michael E. Marotta said...

Of all the common commodities, gold is the most stable over time - decades, centuries, and millennia - by simple empirical fact. So, it allows comparisons with some validity. However, as many have pointed out, what counts is productivity and that comes from trade. (I just finished a first read of The Rational Optimist by Matt Ridley. ) About a thousand years ago, I was shooting hoops with a libertarian friend and said that it would be cool to go back to Rome with classic American coins such as the Peace Dollar and Mercury Dime. He asked me if I thought that silver had more value now or then. "Then," I replied. "You could buy a man's life with a handful of coins." He said, "No amount of silver would have bought a basketball."

As a security guard, I have an upscale men's store among the businesses under my eye. A wool suit still costs an ounce of gold now as it did 100 years ago.

 
At 3/12/2012 12:14 AM, Blogger SBVOR said...

1) Does anybody think this chart (of gold prices) looks anything like a speculative bubble?

http://www.usagold.com/reference/prices/2012jangoldprice.jpg

That bubble wildly distorts this analysis.

2) The rising price of oil is (by far) primarily a simple function of global demand exceeding global supply (just as it did the last time oil prices soared):

http://sbvor.blogspot.com/2012/03/world-oil-balance-vs-price-of-oil.html

 
At 3/12/2012 2:03 AM, Blogger Ron H. said...

This comment has been removed by the author.

 
At 3/12/2012 2:11 AM, Blogger Ron H. said...

"Did I mention that Gold extraction peaked in 2003?"

No, you didn't, and you probably shouldn't.

According to GFMS Group's Gold Survey 2011,

"World mine production reached an all-time high of 2,689 tonnes, in 2010, the second successive year of y-o-y annual growth, surpassing the previous record of 2,646 tonnes in 2001."

And, unlike oil and other consumables, nearly all gold ever mined still exists somewhere as gold.

Like everything else dug out of the ground, the amount produced depends a great deal on the current price.

 
At 3/12/2012 5:38 AM, Blogger Larry G said...

"And, because the dollar is currently a floating, undefined, fiat currency, there is no inherent limit to how far the price of gold in dollars can rise, and therefore no ultimate ceiling on gasoline prices."

so how is the worldwide price of gold and oil determined by US monetary policy?

is there a chart for that?

 
At 3/12/2012 5:40 AM, Blogger geoih said...

But you must remember, there is no inflation. Those higher gasoline prices (in dollars) are more than offset by your stagnating wages and falling home prices.

 
At 3/12/2012 5:59 AM, Blogger Ed R said...

When measured in gold the prices of almost everything is near record lows. Becuse the price of gold is near a record high. Duh!!

When measured against stronger currencies - yen and Swiss franc (or even the Euro) -- the price of oil is not below average.

 
At 3/12/2012 6:30 AM, Blogger Larry G said...

why wouldn't China's manipulation of it's currency also affect the world price of gold and oil?

 
At 3/12/2012 6:45 AM, Blogger Ed R said...

"why wouldn't China's manipulation of it's currency also affect the world price of gold and oil?"

The China policy of keeping is exchange rate below market levels increases its cost of imported oil.

 
At 3/12/2012 7:46 AM, Blogger Junkyard_hawg1985 said...

Great Post! As John Tamny is fond of saying, "Oil is not expensive, the dollar is cheap." This is why most commodities are more expensive (except natural gas).

 
At 3/12/2012 8:54 AM, Blogger Hydra said...

Gold is not in fixed supply. Just like oil, more of it is mined when the price goes up.

 
At 3/12/2012 9:11 AM, Blogger morganovich said...

i think there is little question that the dollar is falling.

it lost half its value against the swiss franc in the last decade or so.

this is absolutely driving hikes in commodity prices.

so how is it you can see it driving inflation in gold and oil, but not in everyhting else?

are all these dollars magical neutralized when renting apartments, buying food, healthcare, or education?

productivity can keep up in a few places (like consumer electronics)
but it has not doubled in a decade for most items and barely moved for many.

i find it interesting than many of the folks happily agreeing with the "the dollar is cheap" notion on this thread are also the ones who so frequently claim that inflation has been low.

you can't have it both ways guys.

 
At 3/12/2012 9:43 AM, Blogger Jon Murphy said...

I have to admit, I'm a little uneasy buying into this idea. I understand the point being made by Woodhill, but I don't really buy it.

As many of you know, I like to use hours worked as a measure of the cost of something. A quick, bar-napkin calculation shows that during the Oil Embargo in 1973, the average American had to work about 51 minutes to fill up a 12-gallon car. Using current gas prices, the amount of time has doubled to over 2 hours of work to fill a 12-gallon tank of gas.

Of course, this method does not take into account improvements in vehicles (such as gas mileage).

 
At 3/12/2012 10:44 AM, Blogger Junkyard_hawg1985 said...

Hydra,

While more gold is being mined, the total amount of supply only increases by about 1.5% per year (2500 tonnes mined and 165,000 tonnes of supply). Since real per capita GDP should be increasing 2% per year and gold supply is only increasing 1.5% per year, this suggests that there should be a deflation rate of 0.5%/yr. During the 19th century, this was the CAAR of inflation for the century (-0.5%).

There is a great single page chart about gold at All the World's Gold.

 
At 3/12/2012 11:16 AM, Blogger Rufus II said...

That site gives the all-time high production year as being 2001, with 2,600 tons.

 
At 3/12/2012 12:44 PM, Blogger juandos said...

"i think there is little question that the dollar is falling.

it lost half its value against the swiss franc in the last decade or so.

this is absolutely driving hikes in commodity prices.
"...

Bingo!

From Zer0Hedge: Why China Is Dumping The Dollar - And Why You Should Read Up on the Weimar Republic

 
At 3/12/2012 2:47 PM, Blogger Ron H. said...

"so how is the worldwide price of gold and oil determined by US monetary policy?"

It's isn't. We've been over that in great detail on a previous thread.


"why wouldn't China's manipulation of it's currency also affect the world price of gold and oil?"

Because the rest of the world doesn't buy oil or gold with yuan.

While it's possible to price anything you wish in terms of anything else, there are some qualities that make some things more useful than others as "money".

Money should be something that is rare, durable, divisible, fungible, easy to identify, and easily transported . Silver and gold have all of these qualities, and have been the most widely trusted choices as money, everywhere on Earth, since humans began trading, so it's not unreasonable to measure the prices of other things in terms of gold.

Jon Murphy's preference for hours worked is also a good way to express prices, but to trade actual hours worked for other things, it's nice to have a medium of exchange.

 
At 3/12/2012 3:52 PM, Blogger Hydra said...

Since real per capita GDP should be increasing 2% per year and gold supply is only increasing 1.5% per year, this suggests that there should be a deflation rate of 0.5%/yr.

=================================

Only if you believe Gold is the one, true currency.

If you beleive in supply and demand, then you would have to believe that higher prices will result in more gold being mined (WITH SOME CONSIDERABLE LAG TIME).

If you do not believe that, then you cannot beliee the claim that high enough prices will result in limitless quantities of oil being available.

 
At 3/12/2012 4:23 PM, Blogger Ron H. said...

"Only if you believe Gold is the one, true currency."

Almost anything can be used as currency, but gold does a better job than most other things.

That's not just my opinion, it's the result of numerous popularity contests throughout history, all over the world.

More recently, clever authoritarians have realized that they could gain greater power over a population by controlling the money, than they could by force of arms.

Fiat currencies give them almost unlimited ability to spend money that doesn't even exist, except that they say it does.

 
At 3/12/2012 4:58 PM, Blogger Eric H said...

"Fiat currencies give them almost unlimited ability to spend money that doesn't even exist, except that they say it does."

Yes! Now look at any of these discussions about currency and prices of commodities in that light. If it is a fiat currency, so what? It will eventually return to its intrinsic value (ours is green toilet paper that is too rough).

Also on Rufus' comment on "peak gold". You are forgetting the gold and silver ETFs. There is a lot more "fiat" gold and silver paper out there than physical product, so the price in dollars is actually artificially low - and there is certainly a bubble burst coming.

 
At 3/12/2012 6:27 PM, Blogger OBloodyHell said...

This comment has been removed by the author.

 
At 3/12/2012 7:14 PM, Blogger OBloodyHell said...

>>> As many of you know, I like to use hours worked as a measure of the cost of something.

The problem is, it is literally IMPOSSIBLE to do a basic search for raw data on what actual gas prices were. I can recall somewhat what they were but not exact by year.

EVERY single table I've found with multiple search attempts are "adjusted" numbers.

Everyone sells you their "interpretation" of what gas prices were "back when", which involves a host of gimcrackery associated with inflation, etc.

It's pretty ridiculous that you can't just get a simple historical chart of what Americans paid at the pump by year, on average.

:-S

It's similarly impossible to get just basic actual raw data on what the average median wage was in the USA per year. Again, no one gives anyone raw data, they only give you interpretations of the data.

I'm not amused by this in the least. >:-/

 
At 3/12/2012 10:43 PM, Blogger Ron H. said...

OBH: "EVERY single table I've found with multiple search attempts are "adjusted" numbers.

Well, I guess I'm just lucky. A Google search on "historic gas prices" brought up this page as the second entry.

"The following plots show how much I paid for each gallon of gas I bought over the past 32 years or so."

The mind boggles.

I know this isn't enough to draw conclusions from, but it's interesting.

 
At 3/15/2012 5:45 PM, Blogger VangelV said...

MP: Measured in terms of a stable commodity in relatively fixed supply like gold, the price of oil now is below its historical average, as the chart illustrates, and suggests that the falling value of the U.S. dollar is contributing to record high gas and oil prices, when measured in dollars. Measured in gold, oil and gas are now historically "cheap," not expensive.

This is why the US needs to get back to a hard currency system that permits the real economy to grow rather than depend on the fiat fuelled FIRE sector that robs ordinary people of purchasing power.

 

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