Today's falling oil prices are still much higher than its historical price and as a result so is the price of a gallon of gasoline. Both move in the same direction. Outside of Saudi Arabia's oil embargo in the 1970's the Saudi's supported a stable price that does not bounce back and forth wildly. That is one reason they have not cut their production. With the event of a new Saudi king we will find out soon enough if that country changes its tune.
A stable price is better for the economy even for those countries who produce most of the oil. It is also good for the economy in general for all nations. An example: Louisiana is seeing its state revenue falling from lower taxes collected. The oil industry has already announced cuts and layoffs. A strong U.S. dollar, weaker energy consumption and economic conditions in Europe are also playing a part in the falling price. But those are market related and do not cause the wild swing in price when the price is at a stable level.
The following information is taken from Inflation Data.com, Historical Crude Oil Prices, 1946 - Nov. 2014. Prices shown are the nominal price and the price adjusted for inflation to 11/2014. The prices shown represent the average yearly price of a barrel of oil and not the higher or lower price but the yearly average.
From 1969 - 2003, a total of 35 years, the average yearly nominal price for a barrel of oil was $18.37. When adjusted for inflation the average yearly price was $42.19 per barrel. From 2004 - Nov. 2014 a period of 11 years the average yearly nominal price of a barrel of oil was $70.92. When adjusted for inflation it was $76.95 a barrel.
The numbers show the price of a barrel of oil started its climb in 2004, nine months after the invasion of Iraq and continued its rise until just a few months ago. That 11 year period saw the highest sustained price for a barrel of oil over the past 46 years. It appears to this writer that the price is trying to settle some where around its historical number with maybe some adjustments. Its important for the U.S. economy to continue to grow and stay strong at home and abroad. Stability has an equalizing effect on economic conditions. That was seen during the Clinton administration with lower inflation, lower unemployment, balanced budgets, increase in middle class wages and guess what else? The most stable oil prices in that 46 year period. The average yearly nominal price for a barrel of oil was $18.02; adjusted for inflation it was $26.84.
Stable economic conditions lifts every one up and the oil producing countries, including the U.S., the oil traders and manipulating prices becomes less effective and sustainable. It makes economic sense for the price of a barrel of oil to return to a stable price level with only minor movement. What is taking place now is a prelude to where the price may finally settle. For those who think the added oil production from "fracking" will make Saudi Arabia moot, forget about it. Saudi Arabia does not compete with "fracking." In fact they are still pumping while some U.S. "fracking" operations are being reduced because of the cost.
The 11 year stretch of high prices resulted in doubling the cost of filling up an automobile with a tank of gas. That can not be sustained without damaging the U.S. economy and helped prolong the recession of 2008. That is money taking out of the economy. Consumers spend more when the economy has balance. The past has proved that and understanding the past is still the key to a better future.
This commentary written by Joe Lorio
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