Oil Prices: Where Are They At Compared To The 1980’s Price Bust?

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).

Oil Price
Inflation adjusted monthly WTI price

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.

Oil Price 2
Inflation adjust monthly WIT and Brent price

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).

Oil Price 4
Examining the daily oil price disparity using the formula: (WTI – Brent) / ([WTI + Brent] / 2)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s