Tuesday, January 13, 2015

Is Oil "Cheap"?

by Bill McBride on 1/13/2015 12:32:00 PM

Quick post: I keep hearing how oil is now "cheap" with Brent futures at $46 per barrel. Maybe oil is "cheap" relative to the price of oil over the last few years, but longer term, oil prices have outpaced inflation for some time.

Here is a table comparing the change in headline CPI, Brent oil prices, Food, and Case-Shiller house prices since 1990 and 2000.

CPI is up 40.0% since 2000, but Brent is up 80.4%.

Since 1990, CPI is up 85.9% and Brent is up 116.5%.

Change Since20001990
CPI40.0%85.9%
Brent Oil80.4%116.5%
Food47.7%89.6%
Case-Shiller House Prices65.7%116.7%


I also hear how house prices are now "expensive". Since 1990, oil and house prices have increased the same, and oil is up more than house prices since 2000.

 I'd rather own a house than the equivalent number of barrels of oil sitting in storage - a house would provide either rental income or shelter (historically there is a real return to house prices).

So, compared to 1990 and 2000 prices, oil isn't "cheap".