NEW YORK Nov 8, 2007 (Dow Jones Newswires)
Oil prices are tantalizingly close to real, or inflation-adjusted, all-time highs, but just how close is a matter of debate.
While new nominal records are being set almost daily in crude oil futures prices on the New York Mercantile Exchange, experts disagree over when crude oil prices will breach levels equivalent to oil price highs set in 1980 just after the Iranian revolution and the start of the Iran-Iraq war.
Depending on your data point, oil prices are on the verge of breaching a modern, post-World War II record, set in 1980, or as far back as 1870.
All agree, however, that at current levels, futures are drawing nearer to the point when crude oil prices can lose the asterisk that indicates nominal record highs, as opposed to real all-time highs.
Front-month Nymex crude oil futures, for December delivery, settled down 91 cents Thursday at $95.46 a barrel. The contract hit an intraday high of $98.62 a barrel on Wednesday, the highest price since Nymex began crude oil trading in March 1983.
Market focus has zeroed in on the $100 a barrel threshold, a fanciful notion when prices were at half that level in mid-January. Traders said strong interest in $100 options are adding fuel to a bullish market which is nervous about adequate near-term oil supplies.
Part of the reason why there's debate over the inflation-adjusted high is that the oil market is fundamentally different from that which existed back in 1980, a widely-accepted comparison point for the last time oil prices traded near current highs in real terms. For one, the futures market, the global price-setter now, didn't exist in 1980.
The market was far more structured, with major producers fixing official selling prices for their oil, often on a quarterly basis. Cash-market oil trading was a relatively small part of the market dominated by official prices.
The benchmark U.S. crude oil price, steady at $14.85 a barrel from August 1977 through January 1979, began rising in the unrest that led to the Iranian revolution. By April 1980, the fixed price for U.S. crude rose to $39.50 a barrel and stayed there through July. That price, adjusted for inflation, is widely seen as the modern inflation-adjusted high.
According to the Paris-based International Energy Agency and the Federal Reserve Bank of Dallas, the inflation-adjusted record-high price on a monthly basis of U.S. benchmark West Texas Intermediate crude oil is $101.70 a barrel, dating back to April-July 1980.
That came in the aftermath of the Iranian revolution, which at its peak caused the loss of 5.6 million barrels a day of crude oil, or about 9% of supply to a market then consuming around 63 million barrels a day, according to the IEA. Prices are calculated using the U.S. consumer price index as the inflation barometer.
The $39.50 price held as the modern-era nominal high for U.S. crude oil until late September 1990, after Iraqi President Saddam Hussein threatened to damage Iraqi and Kuwaiti oil fields if U.S.-led forces tried to push him from Kuwait.
Records Back To 1800s
Some records show that crude oil on an inflation-adjusted basis, traded higher than the modern-era record of $101.70 a barrel in the early days of the industry.
On an annual basis, using data going back to 1870, Stephen P.A. Brown, director of energy economics at the Dallas Fed, said the highest inflation-adjusted price he shows is $118.70 a barrel back in 1871. But, he said, he's uncertain these prices can be correctly measured against the WTI benchmark.
BP PLC (BP), in its Statistical Review of World Energy, published in June 2007, said the highest-ever annual price was $104.35 a barrel for U.S. crude, reached in 1864, after oil was discovered in Pennsylvania.
BP's historical database uses a mix of different grades of crude at different times, highlighting the complexity in determining records. Between 1945 and 1983, BP tracked prices using the longtime world benchmark, Arab Light crude from Saudi Arabia. The prices in this time were largely fixed by the seller, rather than in open-market trade which took over in the early 1980s when North Sea crude oil became a rival to OPEC and its fixed-price structure.
For 1980, the year in which others pin the high for U.S. crude at $101.70 a barrel in April, BP reports an inflation-adjusted annual average price of $90.46 for Arab Light. That's the highest price for any year since BP's 1864 assessment for U.S. crude.
The U.S. Energy Information Administration, the independent, analytical and statistical wing of the Department of Energy, argues that the valid benchmark price to track in the U.S. market is the refiner acquisition cost, or the price that refiners pay to import crude they use in their plants.
Use of that price takes into accounts various grades of fuel and minimizes the impact of heavy speculative trading by investors who use the Nymex futures contract as a financial instrument.
In August, according to the latest EIA data, crude oil imports of 10.284 million barrels a day were equal to about 66% of U.S. refinery runs of 15.679 million barrels a day.
Refiner Costs May Elude Record Highs
EIA data show that the highest-ever refiner acquisition cost of imported crude, adjusted for inflation, was $93.48 a barrel in January 1981, when the nominal price was $38.85 a barrel.
Based on EIA forecasts through December 2008, the cost of imported crude to U.S. refiners will hit a nominal record high of $83.25 a barrel this month, up $3 from the estimate for October. That level would still be more than $10 below the highest ever price, assuming EIA is calling the market right.
EIA projections, released Tuesday in its Short-Term Energy Outlook, also show that prices of diesel fuel and home-heating oil, though expected to hit nominal record highs in November and December, respectively, will still be below inflation-adjusted highs.
"The absence of a transparent global crude oil spot market in the early 1980s makes it difficult to choose a specific nominal price from that era," to calculate inflation-adjusted highs, THE EIA said in an Oct. 24 report. It chided estimates using U.S. crude prices from the early 1980s, noting the posted prices used were unchanged between April and July 1980s.
"The bottom line is that a simple question often has a complex answer," EIA analysts wrote in its This Week In Petroleum report. "Given changes in oil markets over time, there is no single correct way to determine the inflation-adjusted record price of crude oil.
"Notwithstanding the challenges in calculating inflation-adjusted oil prices, almost everyone, with the possible exception of some oil suppliers, agrees that current oil prices are very high," EIA analysts said.
Copyright (c) 2007 Dow Jones & Company, Inc.
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