Tuesday, June 02, 2009

Can the U.S. afford an industrial economy ?

The U.S. Economy has been progressively less able to afford to buy Oil since December 1999.

This graph shows (in dark blue) the number of barrels of Oil which the 'value' of the S&P 500 will buy you.

The data runs from 1950 through to the present.

I don't make any magical claim for the number itself, which peaked just above 110, but I do think that is proportional to "How easy is it for the industrial economy to afford its lifeblood".

The raw data for this graph comes from public sources. Better data may be available, I have used monthly prices here.

The 1973-1974 oil shock can be clearly seen... the price of oil rocketed and its affordability dropped like a stone (by a factor of about 4 immediately, and by 11 from December 1972 to April 1980).

Note that the core 'affordability' graph is plotted on a log scale, so the peak around December 1999 is very significant (more than a doubling and halving again over 4 years).

I think that by using unadjusted dollars for both S&P500 and Oil Price (WTI) it is reasonable to assume that inflation effects are factored out.

There may of course be increases in the efficiency with which the economy can use oil but not, I contend, of an order of magnitude in the past 10 years (although it may have seemed like it with all the cheap money sloshing around - money is unfortunately not a good substitute for oil - although perhaps if you print enough then you can burn it! and yes, I realise that thermodynamics would prevent this being a useful source of energy - a bit like hydrogen really).

I am assuming that the S&P500 is a good proxy for the purchasing power of the industrial economy of the U.S., and that the WTI Oil Price is a good proxy for the cost of energy.

WHAT does this mean ?
The graph is MUCH less noisy than either the underlying stock market prices or the oil price. It looks as though the graph will punch down through the 10 level, despite a recent rally up, within the next few months. This could be because Oil becomes more expensive (rising above $95/barrel) or the S&P could fall below 650, or some combination of moves in both directions. Indeed the S&P could continue up to 1500, but if it does so then I would expect (from this graph alone, and not because of any special knowledge) that the Oil price would rise above $150/barrel.

I contend that:
1) a relationship does exist and that a strong downtrend in affordability of energy has been underway since December 1999;
2) the peak shown in December 1999 was the true 'peak oil' because after that point oil is less affordable, and will always be less affordable in the future (absent an suitable alternative in sufficient volume);
3) up until 2040 the affordability of oil will continue to decline (IN S&P500/WTI terms) this will cause repeated severe disruptions to the U.S. economy
4) The U.S. is a good proxy for all oil-dependent civilisation and the rest of the world should not be complacent about peak oil or the damage which it will vent on their way of life;

Ask yourself...
What number does S&P/Oil Price have to fall to before you can't afford to run two cars ? One car ? Your heating ? Your business ? or to obtain your oil enriched food ?

Thank you to MBM for his time discussing this area and convincing me to take it further back in time.

The U.S. is to be commended for making the required information for this sort of amateur investigation readily available, finding similar information in the UK is difficult;

S&P from any source


  1. Good job, Mr Excessive.

    I agree, oil availability was highest in 1998-99. In the interim the markets have swung around from being balanced toward favoring the producers.

    I suspect Peak Oil actually happened - in dollar for dollar terms - in 1998.

  2. I am somewhat skeptical of using the S&P value in your ratio. Stock prices are not the best measure of what people can spend. And the stock market usually is an indicator of what people think will happen a number of months out. Perhaps using GDP would be a better indicator than the S&P.

    Also, I don't think the price of OIL is a good proxy for the price of ENERGY. Your graph is good for the affordability of OIL but not ENERGY as the price of say coal & natural gas do not move in lock step with the price of oil.

  3. I like the concept of affordability that you came up with. It gives an additional view on peaking resources. However, I am somewhat skeptical of your use of the S&P in your ratio. Using stock prices as a proxy for amount of available money doesn't factor in the bubbles that occur. Stock prices are not the best indicator of how well the economy and hence the average person/business is doing. It is also usually "weighted" towards future expectations. How about using GDP instead?

    Also, I think your chart is good for the affordability of OIL but not ENERGY. Although there is usually some correlation of oil prices to other forms of energy such as coal & gas, there are big differences in trends. We appear to be at or near peak oil, but not peak coal or natural gas yet.

  4. Thanks for your feedback.

    I agree that stock prices are not a proxy for available money - especially in these days of pumping free money in all directions - however I do think that stock prices are a suitable proxy for the purchasing power of companies.

    Any bubbles caused by excessive 'money' often show up in both stock and commodity prices, so I think the ratio between the two does provide an extra useful piece of information.

    I'm using oil as a proxy for energy because I think it is the most important energy source for the way we have economies organised at present. It is possible to produce petrol and diesel from coal, but I think that crude oil is the preferred base material for a reason.

    I really should update this graph!