Topic: Energy
Gold, Oil and Dollars What is the real price of Oil? If it were priced in gold instead of dollars, would it be as expensive?by Bob Nightingale
(Libertarian)
Wednesday, March 12, 2008
I saw this video recently of Ron Paul grilling the Fed Chairman Ben Bernanke, about monetary policy: [link edited for length].
"Devaluation of the dollar" is pretty dry stuff. That is until I had to pay $3.50 a gallon for gas last weekend. That tells me that either gas, or the oil it's made from, is going up, or my dollar is becoming worthless. In this hearing, Bernanke cites that the price of oil will contribute to inflation. "Prices are a mere reflection of the value of the dollar", say Congressman Paul. On average that may be true. But for a particular commodity, prices also have something to do supply and demand, and the perceived value of a commodity.
Ron Paul has campaigned against inflationary policies. He would like us to get on a gold standard. I'm not sure how practical it is, but gold is a more objective measure of value than pieces of paper with old white men on them. Later in that same hearing he asserts that oil prices are flat, relative to gold. I took him up on that challenge.
I looked over the prices of both oil and gold since 1968, since the beginning of the Nixon administration. In 1971, President Nixon took the United States dollar off the gold standard. Before then, back to the end of WWII, gold was fixed at $35 per ounce. After that fateful day in August, the government revved up the printing presses.
Below are the New York market prices of gold and West Texas light crude, for end of year numbers.
In 1974 two things happened: the Yom Kippur war and double digit inflation. Both oil and gold increased in price. Both tracked well until 1980. Oil was about $37/bbl then. It stayed below that level until about 2003. Saddam Hussein was President of Iraq from 1979 to 2003. He needed to pay for his war with Iran and build those wonderful palaces the US Army hung out in after the fall of Baghdad. Supposedly the Iraq war was to have been paid for with cheap oil. Now with oil at over $100/bbl, it isn't very cheap.
But what if we had stayed on the gold standard? What would the price of oil have been in terms of gold these last 40 years? I divided the price of oil by the price of gold and got the following chart.
So even if oil was priced in terms of gold, it's still going up pretty fast since about 1998. The truth is that oil is pretty expensive now. Oil is three times was it was in 2003, if priced in dollars. But compared to the price of gold, oil is up only 40 to 50%.
So, do we have devaluation of the dollar, or short supply of oil? It seems to be a bit of both. In any case, take fewer trips. You can't afford them like you used to.
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Posted By: Jahfre Fire Eater
Date: 2008-03-12 21:32:26
When using graphs, the scale is very important. The standard Bushite reasoning relies on the misleading information conveyed by the choice of scale. I don't know if that was your intent. Whenever I see a graph I immediately question the source and the motives behind it.
At the link Oil Versus Gold you'll see that when priced in Gold there has been hardly any change since about 1950. Only in dollars has the price of oil risen so dramatically. You can find other graphs showing the same pattern with oil priced in various other commodities and currencies.
Also, in your first graph, the only relevant information is the shape of the two lines because the scale for each axis is independent and arbitrary. So, the closer the two lines are in shape, the more stable the gold/oil ratio is. This nearly rock solid stability shown in the first graph is the reason why the scale in increments of hundredths of barrels was chosen for the 2nd graph.
This kind of information is no more than misleading propaganda created by people who have a vested interest in discouraging the general public from knowing the truth about the inevitable consequences of Keynesian economics.
When I was in college we were required to purchase a tiny little book called How to Lie with Statistics. I do believe reading that book was the most valuable few hours I've ever invested.
Point taken. I tried to scale the two curves so that the lines did overlap to some degree. They generally start low and go high over 40 years. I could have scaled up the oil or down the gold until they were identical. But that wasn't the point. The ratio of the two over time is really the better story. I tried to find stats that weren't adjusted for inflation. The ratio should have eliminated that.
There is some correlation, but not a perfect one. Otherwise I'd fill up my truck on gold dust!
What's really scary from the Bureau of Labor Statistics is the Producer's Price Index. Energy and transportation are over 10% and will hit the consumers this summer for sure. Either those costs get passed on, or a company will go out of business. We're talking real pain when it comes to people's jobs.
We haven't hit 1973, but we're on our way. This "stimulus package" is going to fan inflation by a few points, at least.
Posted By: Jeremiah Johnson
Date: 2008-03-13 00:11:15
Another thing to take into consideration is the increased regulations on the oil refineries, as well as issues with price setting of oil by our government for periods of time in the 70s, and also OPEC being a monopoly(or merging of oligopolies) that is fairly supported by our government and it's procedures.
When taking these things into consideration, any disparities can be easily understood within context in which they occurred. Had oil been operated 100% by the free market, I believe we'd even see a closer resemblance.
I saw a chart once (tried to find it, sorry) that compared the price of oil to a 1932 dollar. One dollar in 1932 equaled $1 of gold. The chart I saw compared how much the value of that $1 of gold increased reletive to oil. According to that chart, the two were almost equal. If this is accurate, it proves two things. 1. The gold standard prevents inflation. 2. Our current fiat currency is worthless. Jahfre, you seem like you could verify this information. Can you figure out if that's accurate? Gold was $20.67 and oil was 8.97(!!!!)
Posted By: Ivan from Oregon
Date: 2008-03-13 17:28:19
When I was as young as some of you, I paid $.25 for a gallon of gas. Today I can buy that gallon of gas with a pre-1964 "Roosevelt" quarter (90% silver), worth $3.50 at any coin shop.
Posted By: Wendall Dennis
Date: 2008-03-13 20:12:47
Ivan you put the plug in the jug. In 1955, gas was sixteen cents per gallon in Texas, the result of a constant gas war, while in New Mexico it was about forty cents. At that time, because of highway construction, asphalt was in great demand, and Texas oil was full of it, while Pennsylvania oil was virtually free of asphalt. Conditions and locations create hugh differences, and the price of gold is the most controlled commodity on the planet.
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