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Oil prices reach a post-recession high




This chart shows the spot price of Arab Light Crude, and I feature it because oil prices have moved to new post-recession high ground in the past few weeks, after having been range-bound for most of the recovery. As with the story behind commodity prices, I think there are two things driving higher oil prices: 1) accommodative monetary policy from almost every central bank in the world that is weakening the purchasing power of currencies, and 2) an ongoing and probably-strengthening global economic recovery that is causing the demand for commodities and energy to exceed the expectations of commodity producers.


This chart shows the price of Arab Light Crude in constant dollars (using the PCE deflator). In real terms, oil today is not only at a post-recession high, but also higher than it was in the early 1980s. I've argued before that this is not necessarily an ominous development, since U.S. consumption of oil per unit of output has fallen by more than half since the early 1980s. In other words, we are much less reliant on oil to run the economy, so higher prices are less harmful than they were before.


The chart below compares the real price of crude (using the CPI) to the worldwide drilling rig count. Not surprisingly, higher prices are providing an extra incentive to producers to increase drilling and exploration activity, and that should eventually bring more supply to the market, thus capping the rise in prices.


The last chart compares the price of crude to the price of gold, and it shows that crude prices are roughly in line with the gold prices from an historical perspective. The ramifications of this are many, however, and I'll have to leave that for later.

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