Record Real Oil Price?

Sean O’Grady writes:

Gold hit a new high near $980 an ounce, and crude oil set an all-time high of above $103 a barrel – both beating the real-terms peaks reached in 1979-80.

How does this $103 a barrel compare to the inflation-adjusted oil prices from around 1980? Paul Krugman provided a series in Feb. 2008 explaining his sources for data as:

I took oil price and CPI data from FRED, the Federal Reserve Bank of St. Louis database — an incredibly useful resource. I just guessed at 0.3 percent inflation for February, and used an oil price of $100 for the last data point.

Using the approach, the April 1980 inflation-adjusted price was $103.24 so no real record just yet. Oil prices may have increased by 160.76% but CPI increased by 161.37% over this period.

But suppose that we took nominal oil prices relative to the GDP deflator? This deflator is reported only quarterly but from 1980QI to 2007QIV, its increase has only been 131%, which would suggest real prices are almost 13% higher than they were as of April 1980. WTRG Economics present crude oil prices in “2006 dollars’ from 1869 to 2007. Their 1947 to 2007 graph can be seen here with the peak price being less than $70 a barrel. Since the price index for February 2008 is about 5% higher than it was for mid 2006, the 2006$ price of oil now is just under $100 a barrel. The series that Paul used for the numerator and the series used by WTRG were different, which explains some of the differences in their graphs. But I also suspect that WTRG used a different deflator such as the GDP deflator. Since the CPI deflator has increased by more than the GDP deflator since 1980, folks that are making such intertemporal comparisons should be clear which one they have chosen to use.

As a side note, Paul linked to this 8/30/2005 article where Steve Forbes predicted:

Forbes said the high oil prices currently dampening the US economy, which peaked at more than 70 usd a barrel yesterday as Hurricane Katrina headed for the US Gulf Coast, would fall to 30-35 usd a barrel within a year. ‘I’ll make a bold prediction… in 12 months, you’re going to see oil down to 35-40 usd a barrel,’ he said, according to Agence France-Presse. ‘It’s a huge bubble, I don’t know what’s going to pop it but eventually it will pop — you cannot go against supply and demand, you cannot go against the fundamentals forever.’

Oil prices were around $75 a barrel in August 2006. OK, the January 2007 price was only $57 a barrel but the price has dramatically increased since then. I’m not sure if Steve Forbes really understands the fundamentals of the oil market.