The latest impact of the Russian invasion is the price of oil, which today rose to $139/barrel. The world enjoyed more than five years of "low" gasoline and petroleum prices. Read the following to make you an expert in petroleum. Let me start with the inflation adjusted monthly average crude oil prices in 2022 dollars:
- The all time high occurred in 2008, reaching $147.27/barrel.
- But if you appropriately inflate the price of this value to 2022 dollars, you would get:
- a real price of $177
- real value in consumption of $179
- labor value of $202
- income value of $192
- economic share of $208.
- In other words, that $139/barrel would actually have to go up to around $200/barrel to get close to what the true price of petroleum was in 2008.
- A second note is that the graph above, for reasons I don't understand, only showed a 2008 peak of $126.33/barrel. Using that figure and averaging all those inflation categories, the 2022 price shown was $162.31/barrel.
- Which is the correct number? I think something closer to $200/barrel is right.
- However, the price of oil is somewhat artificial, and can be chimerically volatile. For example, it got own to MINUS $37.63/barrel in April of 2020. This steep drop was caused by a sudden lack of demand for petroleum because of the COVID-19 pandemic.
- The U.S. Energy Information Agency just predicted the future price of oil:
- WTI at $64/barrel in 2025, $86/bbl by 2030 and $178/barrel by 2050
- Brent in those years at $66/bbl, $132/bbl and $185/bbl.
- But wars and politics are indeterminable, and these are the factors that govern.
- Whether it is the Department of Energy or the Chicago Mercantile Exchange doing the speculation, future prices of petroleum are almost meaningless.
- As you can see, there is another complication to petroleum. There are different prices depending on source. One of the graphs above shows a purple line for Brent Crude and black line for WTI Crude. Actually, there are three international benchmark oils:
- Brent Crude controls two-thirds of all world contracts, and refers to this product from the North Sea (Europe).
- West Texas Intermediate (WTI) Crude, representing oil extracted from wells in the U.S., specifically sent via pipeline to Cushing, Oklahoma. This petroleum is sweet and ideal for refining.
- You rarely see this term in the U.S., but in the Middle East it is Dubai/Oman Crude, which is a lower grade than WTI or Brent, with more sulfur, and thus is said to be sour.
- There are other terms like the derivatives market, crude futures, speculative trading and bitcoin investment, but that will be for another day.
I might mention one more obvious bit of information:
- Note that oil is sold in barrels.
- There are 42 gallons in a barrel.
- But because there are additives, one barrel produces 44 gallons of products.
- From one barrel, refineries produce about 19 gallons of gasoline, 10 gallons of diesel and 4 gallons of jet fuel.
- Read this to understand how crude oil affects gas prices at the pump.
Let me close with what you buy. Gasoline and diesel.
- As a first approximation, divide 42 into the $139/barrel peak reached today, and you get $3.31/gallon as the future price of what goes into the products you buy.
- The actual crude oil is only around half the cost of both fuels.
- So what will you actually pay in the future? You can do the math. Oil companies always get their desired profit, so do the various government agencies and middlemen.
- Oh, one more thing, the relationship between the price of crude oil and gasoline is rockets and feathers. When oil prices jump, gasoline immediately shoots up like a rocket. When oil prices drop, gasoline prices settle very slowly like a feather.
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