Real (Inflation-Adjusted) Petroleum Prices

Sue Anne Batey Blackman
William J. Baumol
The Concise Encyclopedia of Economics
Library of Economics and Liberty

"William Baumol et al. (1989) calculated the price of fifteen resources for the period 1900–1986 and found that until the 'energy crises' of the 1970s, there was a negligible upward trend in the real (inflation-adjusted) prices of coal and natural gas and virtually no increase in the price of crude oil. Petroleum prices catapulted in the 1970s and 1980s under the influence of the Organization of Petroleum Exporting Countries (opec). After that, as Figure 1 shows, real oil prices returned to their historical levels, until 2003, when oil prices increased significantly again."

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Venezuelans spend next to nothing and consume more gasoline than their neighbors due to a longstanding fuel subsidy. Though the country loses more money on the subsidy than they spend on healthcare, they are hesitant to remove the perk citizens have come to expect.

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"The plate has always been a great fortifier. Soup to heal, stew to comfort, escape delivered in a good piece of chocolate. But events both at home and internationally are conspiring to shake the confidence of eaters. Global famine, war and disaster are no longer so easy to keep from the table."

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Williams gives an excellent, quick overview of the role markets and prices play in bringing order to society without the need for government control, management, or interference.

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In the name of fighting inflation, price speculation, and unaffordable for the poor, Ecuadorian president Rafael Correa is instituting price controls. However, the inevitable result of this will be a shortage of basic food and unintended consequences like cronyism and black markets.

Von Mises is important because his teachings are necessary to the preservation of material civilization.

The state of Maryland regulates hospital prices, which has kept them from rising as fast as in other parts of the country. However, the costs have been offset by extra Medicare reimbursements of about $1 billion per year. To deal with expenses that have begun to get out of hand, the state has decided to put caps on the price spent per person.

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"When oil prices hit record levels, many people look for a scapegoat, and hugely profitable oil companies are an easy target. Even so, the typical political 'solutions' overlook the crucial role that market prices play in resource allocation, both among competing uses in different areas of the world today and among competing uses in different time periods (i.e. today versus the future)....

The author addresses the economic reality of scarcity. Everything we do has an opportunity cost. To do one thing, we have to forgo another thing. This is not altogether bad, because it means we have more opportunities available. Without opportunities, there would be no costs. These costs can be reflected in prices and help society choose among resources.

The countries of Argentina, Venezuela, and Ecuador are trying to suppress inflation by artificially keeping prices low. The official inflation rate stays low, but the repressed inflation rate still rises, accompanied by a shortage of goods.

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That magical role of prices in directing resources is the bread and butter of economics. But to the non-economist, high prices are just a form of gouging that ought to be stopped. It's wrong to let people profit from the distress of others.

"Over the past 200 years or so, many of the world's conflicts have developed around a little-known debate in economic theory. The outcome of this argument has had an impact equal to that of a major war. As an educator, I find it one of the most important but difficult concepts to teach to students, but let me take a shot at explaining it to adults."

In response to possible congressional price controls on energy costs in California, this article recalls historical lessons from ancient Egypt to Colonial Britain that teach the folly of price controls.

"We spend less of our money on groceries than we did 30 years ago."

Using data from the Consumer Price Index, the author found that, between March 2010 and March 2011, transportation prices had seen an increase of over 9.8 percent (adjusted for inflation). Gas was up 27.5 percent and education 4 percent, while the price of clothing and technology was down.

Dr. Cravens gives a basic explanation of how prices are set based on supply and demand. The author gives an example of how the price on apples is set. Farmers and retailers decide how much to charge based on how many apples they have and how fast customers are buying them. The seller has the power to set the price, but the buyer is always free not to make the purchase. This may encourage the seller to set a lower price.

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"In the same way that a Ponzi scheme or chain letter initially succeeds but eventually collapses, socialism may show early signs of success. But any accomplishments quickly fade as the fundamental deficiencies of central planning emerge. It is the initial illusion of success that gives government intervention its pernicious, seductive appeal. In the long run, socialism has always proven to be a formula for tyranny and misery."

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"...Food inflation hit its all-time high of 28.7% in 1917 (Figure 2)."

"It is constantly reported that the price of attending college is rising. In a time when inflation has been prevalent, what does that actually mean?"

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Chart 1.6 from each year's report shows the percent increase in both CPI inflation and in core inflation between January 2000 and November 2008.

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Analysis Report White Paper

Dr. F.A. Harper examines the question of who should decide the rate of exchange. Should one of the two individuals involved in a trade decide the price? Then one would have coercive power over the other. Should a disinterested third-party decide the price? He would have even less information on which to base his decision.

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Rose gives a very thorough and important lesson on the critical role of prices by showing how information is conveyed through prices, how private ownership is essential for market forces to determine the prices.

This in-depth article lays out the fundamental argument against price controls, namely, that price controls distort the allocation of resources and lead to surpluses, shortages, black markets, and long lines.

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"History shows that price controls lead to shortages and stagnation. So why do we want to control prescription drug prices?" In answering this question, Morton outlines the negative impacts of price controls through history up to the present, and concludes with ways that prescription drug prices could be lowered through the market.

"If public policy ought especially to protect persons during periods of emergency — and that is the claim of some advocates of price gouging laws — then price gouging laws should be repealed if it is found that they lead to more harm than good for such persons."

"My three sons, ages seven to twelve, suffer from a chronic condition I've heard described by economist John Baden as ironitis—the love of anything made of metal. They are fascinated by cars, trucks, backhoes, tractors and—well, you get the idea. The other day, my middle son suggested that my next car should be a convertible.

Video/Podcast/Media

"Is the economy at risk of another boom-bust cycle in housing? Or is there a healthier, more sustainable tint to this new housing surge?"

This interactive tool, adjusted for inflation, calculates how much money will be left over after buying groceries on a budget of $35.46. Remaining amounts after purchase are shown for 2002, 1992, and 1982. More money tends to be left over with each later decade.

"Americans spend less on groceries than they did a few decades ago. That's partly because of new machines and technology that have made it much cheaper to produce food."

Listen in as Munger and EconTalk host Russ Roberts discuss the human side of economics after a catastrophe.

"Prof. Steve Horwitz addresses the common belief that the world is running out of natural resources. Instead, there are economic reasons why we will never run out of many resources. In a free market system, prices signal scarcity. So as a resource becomes more scarce, it becomes more expensive, which incentivizes people to use less of it and develop new alternatives, or to find new reserves of...

"Is price gouging bad? Is Minimum Wage good? We'll see what government price controls do compared to the market setting the price."

Friedman breaks apart the many different natural resources and processes involved in making something so seemingly simple as a wood pencil.

"Have you ever stated economic principles as haiku? Have you tried? Economics professor Art Carden takes the challenge in this short video on the laws of supply & demand."

Prof. Matt Zwolinski shares several reasons he thinks price gouging is not immoral and should not be illegal. He says that raising the price on scarce goods during times of emergency can actually reserve those scarce resources for those who would value them the most. The higher prices also incentivize people to transport more of those resources to the region of scarcity. He reasons that laws against price gouging do not solve the underlying problem of scarcity, anyway.

The short video describes the post-World War II economy in Berlin as a result of wage and price controls imposed by the Allies. Ludwig Erhard abolished the wage and price controls, which resulted in a flourishing economy.

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The Associated Press examines the ripple effect of record high gas prices in a small town in Illinois.

"Why are prices important? Prof. Daniel J. Smith of Troy University describes the role that prices play in generating, gathering, and transmitting information throughout the economy. Information about the supply and demand of different goods are dispersed among different buyers and sellers in an economy. Nobody has to know all this dispersed information; individuals only need to know the relative prices. Based on the simple information contained in a price, people adjust their behavior to account for conditions in supply and demand, even if they are unaware of that information."

Primary Document

Each year, the Chairman of the Council of Economic Advisors issues the Economic Report of the President, which details the nation's economic progress using text and data appendices. It reviews last year's economic activity, makes projections, and, based on the President's economic agenda,...

This economic classic is noted for providing us with terms for and expositions of such key economic ideas as the division of labor, "invisible hand," self-interest as a beneficial force, and freedom of trade.

Kirzner delves into competition and the market process, as well as compares critiques of government regulation on competition and the market process from the "neoclassical" paradigm and the "Austrian" paradigm.

"During the 1991 to 2006 period, U.S. food prices were fairly stable—annual food price inflation, as measured by the Consumer Price Index (CPI) for all food (excluding alcoholic beverages),averaged a relatively low 2.5%. However, several economic factors emerged in late 2005 that began to gradually push market prices higher for both raw agricultural commodities and energy costs, and ultimately retail food prices. U.S. food price inflation increased at a rate of 4% in 2007 and at 5.5% in 2008—the highest since 1990 and well above the general inflation rate of 3.8%. The situation of sharply rising prices came to a sudden halt in late 2008 when the financial crisis hit U.S. markets leading to a severe economic recession. Annual food price inflation dropped to 1.8% in 2009 and 0.8% in 2010, before rising to 3.7% in 2011 driven by improving U.S. and global economic conditions. USDA projects that annual food price inflation will range from 2.5% to 3.5% in 2012 and rise to 3%-4% in 2013."

We know from years of patient refinement that competition insures the achievement of a Pareto optimum under certain hypotheses.

Henry Hazlitt's classic primer outlines a straightforward and accessible portrayal of free-market economics. An unshackled market, Hazlitt says, is the only path to "full production".

Cantillon wrote one major work which was regarded by Jevons and Hayek as an important early contribution to the theory of marginal utility.

"Price is the primary mechanism that links raw farm commodities through the various levels of the market system to the retail food product. The nature of price transmission between farm and retail levels depends, in general, on the size of the farm-value share of the retail price and the degree of market competition at each stage of the marketing chain."

This paper presents, in non-technical terms, an 'Austrian' view of how a market economy works.

Mises explained economic phenomena as the outcomes of countless conscious, purposive actions, choices, and preferences of individuals, each of whom was trying as best as he or she could ... to attain ... wants and ... avoid ... consequences.

"Hundreds of thousands of Americans of all ages continue to enjoy this simple and beautiful explanation of the miracle of the 'invisible hand' by following the production of an ordinary pencil. Read shows that none of us knows enough to plan the creative actions and decisions of others."

"Two days ago, I was favored with your polite and elegant letter of January 22d. I have received so many of your letters, within a few months, containing such important matters, in so masterly a style, that I am ashamed to confess that I have answered but one of them, and that only with a few lines. I beg you would not impute this omission to inattention, negligence, or want of regard, but to...

"The production and use of ethanol in the United States have been steadily increasing since 2001, boosted in part by long-standing production subsidies. That growth has exerted upward pressure on the price of corn and, ultimately, on the retail price of food, affecting both individual consumers and federal expenditures on nutritional support programs. It has also raised questions about the environmental consequences of replacing gasoline with ethanol."

F.A. Hayek presents a very thorough analysis on the role of knowledge and infomation in societies, how it is transmitted in various societies and economic systems, how a lack of knowledge ultimately proves to be the downfall of central planning, and other key topics.

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