Compared to manufactured goods, oil prices are falling, but . . .
. . . the Prebisch-Singer hypothesis points to higher inflation driven by shortages of oil
In a terrific article on Bloomberg yesterday, also published in the Washington Post, analyst Javier Blas sees OPEC suffering from inflation in that a barrel of oil will buy less manufactured goods today at $70 oil than a few years ago at the same price. The article comments on the Prebisch-Singer hypothesis, an economic theory dating back to the 1950’s, that suggests that commodities will fall in price relative to manufactured goods and a given amount of a commodity will be worth less expressed as the amount of a given manufactured good it can buy over time. The article uses the Ikea bookcase as a proxy for the manufactured goods and says at $70 today a barrel of oil will buy fewer bookcases than it did when selling at $70 a barrel a few years ago. Oddly, Blas ignores the fact that a barrel of oil today buys more bookcases than it did in 1980, 1990 or the year 2000. But he is right that in the current inflationary period, oil’s price will buy less manufactured goods than it did a few years ago and the fifteen year trend is downward. I will argue that shortages of oil are the cause of the inflation and the shifting “value” of oil the result.
Mr. Blas argues this is a problem for OPEC. In reality, it is a problem for everyone else.
As oil shortages created by nonsensical theories that carbon dioxide causes global warming (CO2 demonstrably cannot do so) and widespread attacks on fossil fuels by left wing fossil fools, production of oil, gas and coal will keep falling in relation to demand and oil prices will tend to rise to try and balance the market. Oil finds its way into pretty well every manufactured good either directly (in the case of plastics or other goods made from petrochemicals) or indirectly through electrical energy used in production or energy used in transportation. I have no doubt that even an Ikea bookcase can trace a portion of its cost to the cost of fossil fuels.
Economists Prebisch and Singer nailed this one despite describing their theory as an hypothesis and despite the debate that the theory triggered among economists. Stated simply, if manufactured goods rise in price faster than commodities but commodities remain essential to the production of the manufactured goods, rising commodity prices will compel even higher prices for the manufactured goods. Higher prices for manufactured goods can best be described by a popular term of art among economists - inflation.
Since relative price is the subject of the Prebisch-Singer hypothesis, no one should be confused by my statement that higher commodity prices = higher prices for manufactured goods. That is precisely the outcome of the Prebisch-Singer theory and has been the world’s experience since the 1950’s when the theory was first published. It is not that the value of oil has declined but in reality it is that the relative cost of everything else has risen. Oil’s value (and that of coal and natural gas) is fixed as a number of units of energy (often measured in British Thermal Units or BTU’s) and a BTU is no more valuable or less valuable today than at any time in history. The price of the BTU may change but its value cannot and will not.
Fossil fuels create something like 80% of the energy the world economy relies on. Trillions of dollars squandered on “renewables” have made a barely measurable contribution to world energy production. Despite their inroads, global demand for fossil fuels continues to rise.
The left wing dream of a world powered by “renewables” is not only a dream but is also a nightmare for billions of people living in under developed areas devoid of clean water, reliable electrical power or modern transportation and related physical and social infrastructure. The specious climate alarm, created by socialists to rally support for a global authoritarian government and to redistribute wealth from developed nations to lesser developed nations, is doing just the opposite.
CO2 is harmless but leftist ideology is toxic to progress in the third world. If the trillions spent by Western democracies on promoting “renewables” and curbing output of fossil fuels had instead been directed to helping underdeveloped nations build roads, schools, water and sewage treatment facilities, LNG terminals, natural gas powered electricity generation and oil & gas and mining development, those nations would have the foundation of industrialization. In parallel, millions would escape poverty, disease and famine.
But no, the progressive “do-gooders” who populate the halls of power in Washington, Whitehall, and Ottawa (among others) talk a good line and enact policies that harm millions across the globe. It is time for the 25% of the world’s population that benefit from both democratic institutions and the capitalist system to use their voting power to end this charade and bring about change that will actually make the world a better place rather than only making Biden, Pelosi or Trudeau’s wealth increase despite their meagre salaries.
Today, only the Republican party in the United States and the Conservative party in Canada offer any hope of that change.