Adjusting for inflation
I want to compare current oil prices to the prices of the previous oil price bust – from the 1980’s – I’m going to adjust for “inflation”. First I will start by adjusting the West Texas Intermediate (WTI) price. I need a measure of inflation to adjust this price, so I will use the most commonly used measure of inflation – the consumer price index (CPI). I merged two WTI price series and divided each series them by the “default” index date of 1982-1984 (all data sets from FRED).
Comparing other prices
Unfortunately, I could not find price series extending as far back as WTI. However, I do know that a few years ago, a disparity formed between WTI price and other benchmark prices (such as Brent and Dubai). I’m going to stick with what is available at FRED and add the Brent series to the previous graph, adjust for inflation, and zoom in on the past 10 years.
What does it all mean?
At this point, inflation adjusted oil prices are above their 1990’s level. The “bottom” was not as low as the 1980’s oil bust, and it was as low as the 2009 dip in prices. However, using inflation adjusted data does not give fine enough detail to understand current the state of disparity between WTI and other oil benchmarks. To solve this problem, for my last graph, I took the difference between WTI and Brent (WTI – Brent) and divided by the average of the two ([WTI + Brent] / 2).