Oil at Record Price? That Depends.
Wednesday, November 7, 2007
When it comes to the price of oil, there is no shortage of ways to calculate the all-time record price.
According to some calculations, a new high has already been set. But others say that a record is still $3 to $5 a barrel away. Economists don't even agree on when the previous record was set.
Cambridge Energy Research Associates says the record is $99.04 a barrel, a level it said was reached in inflation-adjusted terms in April 1980.
The International Energy Agency agrees that April 1980 was the peak month, but it said that the price would translate to $101.70 a barrel today.
The Energy Department's Energy Information Administration has a completely different view. It said that the previous inflation-adjusted record, $93.48 a barrel, was set in January 1981. That would make the price reached yesterday, $96.70 a barrel on the New York Mercantile Exchange after a $2.72 increase, a new record closing price. The price reached $97.10 during trading.
All three groups agree that the previous high was reached because of tensions in the Middle East. Cambridge Energy Research Associates notes that in April 1980, as now, tensions between the United States and Iran were causing prices to rise. That month, there was a failed U.S. attempt to rescue American hostages held in Iran, threats by Iran to choke off supplies from the Persian Gulf and a suspension of Iranian oil exports to Japan.
"Today's high prices have a 'back to the future' quality," said Daniel Yergin, chairman of the consulting firm.
The Energy Department said, however, that it was not until the next year, after war had broken out between Iraq and Iran, that the previous price high was set.
Two key factors account for the differences: which price is used as a benchmark and what inflation rate is used to translate into 2007 dollars.
Today, most people point to the crude oil price for the delivery in the nearest month on the New York Mercantile Exchange. The type of oil used for that benchmark is a variety of crude known as West Texas Intermediate.
The New York Mercantile Exchange did not establish crude oil trading until March 1983. So Cambridge Energy used what was known as the average "posted price" that U.S. producers said they would charge for crude oil. It changed every month. In April 1980, it was set at $39.50 a barrel in 1980 dollars.
But Energy Information Administration analysts said that the price U.S. refiners paid for imported oil is a better indicator. It said that the posted price did not change from April to July 1980, suggesting that it wasn't responding to events or market forces. The price of imported oil, by contrast, is "a fairly representative measure of world crude oil prices based on actual transactions," the Energy Information Administration said in a recently published analysis.
That isn't perfect either, though. Today, upgraded refineries can use cheaper, lower quality oil than they could in 1980. That makes it hard to compare today's prices to those a generation ago. Jonathan Cogan, a spokesman for the Energy Information Administration, acknowledged that imported oil today costs on average $2 to $3 a barrel less than West Texas Intermediate. Cogan said, however, that the January 1981 date is closer to the inflation-adjusted peak for retail gasoline prices than April 1980.
"The way we determine [oil] prices has fundamentally changed from early '80s until today," said James Burkhard, who did the calculation of peak prices for Cambridge Energy. "It's not a perfect apples-to-apples comparison."
Inflation also comes in different sizes. The reason for the difference between the Cambridge Energy and International Energy Agency figures is that Cambridge used an annual average inflation rate based on the consumer price index, as did the Energy Information Administration. The International Energy Agency used monthly figures.
The Energy Information Administration said that the gross domestic product deflator would be more accurate and that would produce an even lower record price. The consumer price index is used for goods bought by consumers; crude oil is used by refineries to make the gasoline and heating oil that consumers buy.
"A case could be argued for using any of the three price measures, with no real strong right or wrong answer," the federal agency said. But the GDP deflator is not published on a monthly basis, making it difficult to use.
"Given changes in oil markets overtime, there is no single correct way to determine the inflation-adjusted price of crude oil," the agency said. Nonetheless, it said, "almost everyone, with the possible exception of some oil suppliers, agrees that current oil prices are very high."