Oil Tops Inflation-Adjusted Record Set in 1980:
Capping a relentless rise in recent years, oil prices hit a record high during the day on Monday, then pulled back to close below the record.
The day’s highest trading price, $103.95 a barrel on the New York Mercantile Exchange, broke the record set in April 1980 during the second oil shock. That price, $39.50 a barrel, equals $103.76 today, when adjusted for inflation.
Peak oil? Nah.
The surge in energy prices is taking place as investors seek refuge in commodities to offset a slowing economy and a declining dollar. Analysts pointed out that financial institutions like pension funds and hedge funds are also buying oil and other commodities like gold as hedges against a rise in inflation.
That trend is expected to continue, especially after Ben S. Bernanke, the chairman of the Federal Reserve, signaled last week that he was ready to cut interest rates further to bolster economic growth, despite rising consumer prices.
“When investors lose confidence in the central bank, they tend to look for hard assets,” said Philip K. Verleger, an economist and oil expert. “The Fed’s capitulation on inflation is driving investors to commodities.”
For example, Calpers, the California Public Employees’ Retirement System, the largest United States pension fund, said last week that it might increase its commodities investments sixteenfold to $7.2 billion through 2010, to benefit from an across-the-board surge in commodities like gold, silver, oil and wheat.
The latest catalyst for the spike in energy prices has been the recent fall in the value of the dollar, analysts said. Currency traders are selling dollars and buying euros to take advantage of the difference in interest rates between the United States and Europe.
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Since 2000, oil prices have more than quadrupled as strong growth in demand from the United States and Asia outstripped the ability of oil producers to increase their output.
The rising prices of the past decade failed to dent global economic growth as consumers absorbed the higher costs. Even now, with the United States economy slowing markedly, the trend has not slowed much. Global oil consumption is still expected to increase by 1.4 million barrels a day this year, driven by demand in China and the Middle East.
Still, today’s market climate is markedly different from the energy crises of the 1970s and 1980s. These were brought about by sudden interruptions in oil supplies, like the 1973 Arab oil embargo, the Iranian revolution of 1979 or the outbreak of the war between Iran and Iraq in 1980.
Also, the United States’ economy was once much more dependent on oil than it is today. The amount of oil needed to increase economic output by $1 has dropped by 25 percent since 1990.
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And here is the three paragraphs of gasoline demand analysis:
With oil setting fresh records, many analysts expect gasoline to approach $4 a gallon on average this summer. Gasoline prices have been rising sharply in recent days and have hit $3.16 a gallon on average, according to AAA, the automobile club. They are closing in on last year’s record of $3.23 a gallon.
There is evidence that these high prices are finally causing consumers to cut consumption.
According to the latest government figures, released Monday by the Energy Department, gasoline demand fell by 1 percent in December 2007 from the previous year. Oil demand was nearly flat last year as well.
