Shocking News! We Had $200 Oil in 1980: Here's Why

Dr. Joe Webb

Monday, April 25th, 2011

There are numerous news reports about the sudden rise in the price of gasoline, and the extreme burden these price increases are having on households and the economy. In none of those news reports have I heard of any mention of the devaluation of the dollar and the role of monetary policy in the rising prices of commodities, nor any analysis about the difference in prices in dollars and other currencies.

The government's Energy Information Administration (EIA) publishes a table that shows the consumption of energy, its comparisons with GDP, and other factors such as greenhouse gas and carbon dioxide emissions. Our ability to get more output from less fuel is an untold story, even though it is right there in front of us.

Back in April 1980, a barrel of oil sold for about $39.50, approximately $70 less than today. That is, until you adjust for inflation. Using the Consumer Price Index (CPI) from the Bureau of Labor Statistics, that 1980 price translates into about $109 in today's dollars.

We don't use that same barrel of oil in the same way today, either. Because of our efforts to reduce energy use, we use that energy far more efficiently. It's not how much a tankful of gas costs; it's how many miles you can get from that tankful that really matters.

According to the EIA chart, back in 1980 it took 13,380 BTUs (British Thermal Units) of energy to produce a dollar of GDP. By 2009, it only took 7,280. We've nearly doubled the economic output of the same unit of energy. That $39.50 barrel of oil in 1980 is actually $200 adjusted for both inflation and our increased energy efficiency. That's how much we would have had to spend in today's dollars to get the same amount of energy output as we do at today's current prices.

That means that today's energy prices are actually much lower than they were during the oil crises of the 1970s. This is one of the reasons why the constant dire predictions about energy prices having devastating effects on the economy never quite come to pass. Energy's consumption is mostly inelastic; consumption is more related to overall economic activity than it is to fluctuations in energy prices. Everyone seems amazed when people keep driving to work, going on vacations, and doing other activities that require energy. When families think airfares are too high, they drive and consume more gas because that minimizes their total cost. When they're short on cash, they'll drive alone in their their sedan and save the SUV in the driveway for errands with the family, or they'll bring lunch to work instead of going out. Everyone makes subtle adjustments from day to day depending on that day's need and circumstance.

All of these changes are subtle. No one really sees the inflation when prices move up and down as often as they do with gasoline. One week it's $4, a year later, it's $2.75, and a year after that, it's $3.50, all seeming to occur without any rhyme or reason. No one really sees energy efficiency, either, when it occurs at the rate of 1% a year. It's too small to detect in every day life, and can only be seen in longer passages of time.

For us old-timers, here's our chance to say, “Back in the old days, oil was twice what it costs today.” Facing our listener's disbelief, we can offer the more important economics lessons about inflation, productivity, and ingenuity, and how the most amazing aspects of economic behavior are unseen. These are lessons no one seems to find while watching or reading the news.

About Dr. Joe Webb

Consultant, entrepreneur, and economics commentator Dr. Joe Webb started his career in the industrial imaging industry more than 30 years ago. He found his way into business research, planning, marketing and forecasting executive positions along the way, as well as consulting for firms ranging from large multinationals to small businesses. Dr. Webb started an Internet-based research business in 1995, selling it to a multinational publisher in 2000. Since that time, his consulting, speaking, and research projects have focused on the interaction of B2B economics and technology trends. He is a doctoral graduate in industrial and corporate education from New York University, holds an MBA in Management Information Systems from Iona College, with baccalaureate work in managerial sciences and marketing at Manhattan College. He has taught in graduate and undergraduate business programs in a number of Northeast US colleges, and currently resides in Rhode Island.