Graph of the week: Oil prices; bad picture, good story
This is not a good graph. It is busy and attempts too much. However, if you could squint with me for a minute, an interesting story emerges. The red line (which overlaps with the black for recent years) provides an interesting yardstick for understanding oil prices in relation to their history. Although low, the current oil price actually is not as low as we are made to think. In fact if anything, oil prices in the 2000s (and its average) are the ones that have been exceptional. We cannot rely on this to forecast either the immediate future or further ahead. But two thoughts occur as I browse through history:
1) if indeed current prices are not abnormal by historical standards, we cannot really talk about them as a shock! And by implication we cannot really use oil prices to necessarily characterize current low inflation as "temporary". What the picture shows is a "reversal to mean". We would need to understand what other "reversals" this would cause.
2) Also, it is important to appreciate that there is an associated redistribution of wealth from those that produce oil to those that consume it. A protracted redistribution of that sort will surely cause shifts with geopolitical implications. Naturally, if those heightened wealth gains that oil producing nations had during the rather protracted "good times" have been put to productive use, the picture may not change that fast.
Source: http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Chart.asp
