Hockey Stick Graph for Oil

Today's WSJ article by Peter A. McKay called "It's Getting Tough to Find an Energy Boost" once again showed plots of oil prices adjusted for inflation over the past 35 years. You can find an almost identical graph here. The main gist that usually gets conveyed (and annoys me to no end) relates to how oil prices have remained constant when adjusted for inflation. In other words, we don't have it so bad. The qualifier "adjusted for inflation" becomes the standard disclaimer.

My own standard disclaimer goes: economics is the dismal science. I conjecture that these numbers should not, in general, get corrected for inflation. As a thought experiment, instead of looking at oil prices adjusted for inflation of the dollar, look at oil prices in the context of a different currency, namely that of oil itself. That may seem strange at first glance, but as time goes on, oil itself may gradually replace all other artificial forms of currency. In that case, plotting oil adjusted for dollar inflation would seem as foolish as plotting the value of the dollar in terms of dollars -- adjusted for inflation. In elementary (non-Ponzi) logic we call that a tautology.

In other words, scarcity of oil itself leads to inflationary pressures on the dollar. And at some point, and especially if we hit a wave of inflation or stagflation in the coming months, we will have to stop plotting these bloody graphs as "adjusted for inflation". Basically, we need to start facing facts instead of massaging numbers.

As an outcome of reverting to a reality-based perspective, we can start looking at trends afresh. For example, what happens if we track only non-inflation-adjusted oil prices over time. In my own interpretation, it essentially matches that of the "hockey stick graph" well-known in global warming prediction circles. By matching that type of graph, I mean that we can begin to use the same statistical methods to discern trends that climatologists have used over the last few decades. This includes filtering out noise, etc.

When we do hit the knee in the hockey stick for oil, as many people think we have for average global temperatures, we can start to track the inexorable rise in cost. Unfortunately, like global warming, it won't stop until we put into place a real course correction.