Oil Prices in Real Terms

The big news of the weekend is definitely the unprecedented crude oil price hike on Friday.

There have until recently been reasons to be complacent about rising oil prices. I am old enough to remember both Muldoon and carless days pretty well. So I am well aware that in real terms oil prices have been nowhere near the levels they reached in the second oil shock in the early 80s. Moreover oil supplies have been less important to the economy than they were in the 70s with the price of oil consumed being a relatively small fraction of GDP. Thirdly high oil prices seem like the most straightforward way to contain carbon emissions.

James Hamilton points out that the first two are not the case anymore, at least in the US. As the price went over around $100US per barrel earlier this year it went over the previous peak in oil prices (in 2008 $US) at around 1980. On the other hand, the value of oil consumed in the US peaked at around 8% of GDP in the early 80s and went as low as 1.1% in 1998. At an average price for the last year of $98US it's now about 5% of GDP.

Now the weakness of the US dollar may mean these figures are not so dramatic outside the US. If I was the Treasury gnome responsible for the oil price projection in the budget I would be trying to work out what the equivalent figures are for New Zealand.

(I saw the Treasury oil-price projection on an NZ blog in the last week but I can't remember where, and couldn't find it just now, so whoever you are I owe you a hat-tip.)