The Crude Reality About Oil

August 9, 2004 – Crude oil is going to $60 per barrel, and probably even a lot higher than that. It is an outcome that is inevitable, but we should not be surprised. Crude oil has been getting more and more expensive for decades, as can be seen from the following chart.

From $1.17 per barrel in December 1945, crude oil has been relentlessly climbing a clearly defined upward track ever since. The ever-higher prices on this chart show how it has become increasingly expensive over the years. There have of course been many fluctuations in crude oil’s price – both up and down – over these decades, but the uptrend in price is unmistakable, and the arrow drawn on the above chart makes this uptrend clear.

Because this uptrend in crude oil’s price is so well established, having endured now for nearly six decades, it is completely reasonable to expect that this trend toward higher priced crude will continue. In fact, there is no reason to suggest otherwise, particularly when we take a realistic look at crude oil’s global supply and demand equation.

Oil is of course being buffeted by numerous geopolitical events like the deepening war in Iraq, mounting civil strife in Venezuela, growing labor unrest in Nigeria, and perhaps most ominously, the internal and external threats to the increasingly unpopular regime ruling Saudi Arabia. But interestingly and perhaps surprisingly, it is not these threats to the supply of oil that makes a $60 price inevitable. The same is true for demand.

Increased uses of crude oil from China, India and other rapidly growing Third World countries that seek to emulate Western living standards is significantly impacting demand, as is the ongoing American love affair with both large-engine SUVs and pick-up trucks with low mileage V8 gas guzzling engines. But again – and also perhaps surprisingly – it is not these demand issues either that make $60 crude oil inevitable.

While supply and demand are of course important components in the oil equation, one factor reigns supreme – it is the US dollar. In short, $60 crude oil is inevitable because the purchasing power of the dollar continues to be inflated away. Thus, crude oil is not becoming more ‘expensive’; rather, the dollar is becoming worth less. This conclusion is clear from the following chart.

This chart measures crude oil prices using two different currencies, the US dollar and the goldgram (which is one gram of gold and the currency of my company – www.GoldMoney.com). It covers the same time span as the previous chart, from December 1945 to July 31, 2004. But there is one important difference in the way the above chart has been prepared.

Crude oil prices in this chart have been based to 100. In other words, rather than presenting the price of crude oil in dollars and goldgrams, this chart assumes that crude oil’s price in both currencies equaled 100 in December 1945. Using this base of 100, it then calculates the price of crude oil for the remaining time periods on this chart. The results will be surprising to those readers who only keep track of the dollar price of goods and services, and ignore their goldgram price

As the chart shows, crude oil prices in goldgram terms are essentially no different today then they were at any time over this nearly six-decade period, which stands out in marked contrast to the dollar. Look how ‘expensive’ crude oil has become when its price is measured in terms of dollars.

To put some numbers to these prices, crude oil in goldgrams terms is 312 compared to the base of 100. In dollar terms it is 3,478, which is more than 11-times higher.

The reality of crude oil is the inevitability of higher dollar prices – first $50, then $60, $70 and then pick a number. But don’t blame OPEC or the other oil producers. The crude reality is that the dollar is becoming worth less and less.