I was reading an email form an ex-colleague in America this morning. He was arguing that the oil price would hit $300 a barrel should the US invade Iran. This seems more and more likely in my mind as the rhetoric ratchets up - and I hold my head in despair.
I fear that an attack on Iran is becoming a real and present danger, despite US government denials. After all, I remember Donald Rumsfeld saying on TV soon after 9/11 that the US government hawks would not use the terrorist attacks in New York as an excuse to attack Iraq. We all know what happened next.
The thought of oil at $300 is shocking, but is it realistic? Isn't oil really expensive at the moment as it is?
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Well, although I believe that $300 a barrel is unlikely in the short, or even the medium term, but I don't think that oil is particularly expensive at the moment, despite it being at historic nominal highs.
Latest Videos FromMoneyWeek
I expect the price to rise we should easily see $100 a barrel next year maybe even this year should the White House warmongers hit the red Iran button.
If you adjust for inflation, the oil price peak at the start of 1981 was in excess of $100. We are still below that figure. But this is not why I believe that the current oil price is cheap. Let's take a look at some figures to illustrate my point of view.
First, let's ask ourselves a basic question how much crude is there in a barrel of oil
One barrel of oil officially contains 42 US gallons
This converts into 35 imperial gallons
There are 8 pints in a gallon
That means one barrel of oil contains 280 pints...
WTI futures are currently approximately $87 a barrel
That means one pint of crude oil costs 31 cents, or 15p in real money...
When put like that, it does not sound as outrageously expensive as some commentators claim. So, what else can you buy for 15p a pint?
I took a quick look around Tesco.com to try and find out
One pint of milk costs 40p.
The one pint equivalent of Evian water costs around 70p.
The cheapest vegetable oil costs 39p a pint.
Extra virgin olive oil costs 227p a pint.
And then there's beer The average cost of a pint of beer in the UK is 250p, according to a report I read on the BBC. However, that's not what it costs the pub. It is not exactly easy to find out how much your local boozer pays for its beer, so I have to go as far back as 2004 and a written submission from the Federation of Small Businesses to the Trade & Industry Committee.
In this submission, it was revealed that Carlsberg-Tetley charged 42p a pint for Carlsberg lager when it supplied it to a freehouse. You can expect it to be higher than this level now, but 42p for a pint of Carling is significantly higher than 15p for a pint of crude.
Now, of course we are not really comparing like with like here, I understand that. Crude oil is a feed substrate not a finished product like the items on my Tesco shopping list or a pint of beer from a brewery. However, I think for illustrative purposes it makes a good point.
The truth is that oil is NOT extortionately priced and it is almost inevitable that the price is going to rise.
Also worth noting is that in 1981, when oil hit its peak price because of the Iran-Iraq war, a pint of milk cost 17p. That is still more expensive than a pint of crude costs today; without even taking the monster of inflation into consideration.
Oil is cheap, despite the newspaper headlines. The world population is soaring and demand is rising significantly. According to US government forecasts, world petroleum liquids consumption is expected to increases from 83 million barrels per day in 2004 to 118 million barrels per day in 2030.
That's an increase of almost 30%... and we are not finding enough new oil reserves to meet this demand.
The price of oil has to increase otherwise it would be betraying the laws of economics. I bet that in 10 year's time after the Asian population has boomed and gentrified and peak oil has hit home hard, you will have to agree with me that oil at $87 a barrel was cheap, cheap, cheap
This article is taken from Garry White's free daily email Garry Writes'. For more information please click here
