The Independent Market Observer

Oil and Commodity Prices: Back to the Future

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Apr 27, 2015 1:18:00 PM

and tagged Commentary

Leave a comment

oil and commodity pricesToday seems like a good time to pull out the wayback machine again, for a look at commodity and oil prices. I’ve focused quite a bit on oil prices here, and what they might mean for the U.S. economy, but other commodities are also important.

Note that we’ll be looking at real prices in this post. Although commodities (and everything else) are priced in nominal dollars, we need to remove the effects of inflation in order to make valid comparisons over the time frames we’re talking about. The previous two wayback posts, on employment and interest rates, didn’t present this problem. But for anything dealing with prices, we have to account for inflation, so the numbers here may look a bit different from what you remember.

Real oil prices seem to be normalizing

As of today, West Texas Intermediate prices are around $46 per barrel. (I’m using approximate figures, as, of course, they vary.) Oil was around $74 per barrel 5 years ago; 10 years ago, it was around $57; 15 years ago, around $37; 20 years ago, around $25; and 25 years ago, around $31.


Remember, these prices are in real terms, adjusted for inflation, so we can see a couple of things:

  • Even though oil looks cheap in terms of the past 10 years, it’s still fairly expensive when you look further back. Any discussion about how cheap oil will change the world should factor in the 2000s and the 1990s, as oil was even cheaper then.  
  • If anything, it’s the run-up from 2004 through last year that looks abnormal. In many ways, current oil prices are just moving back to normal levels, from an economic perspective. You can see this more clearly in the annotated, but slightly less current, chart below.


Ditto for other commodities

When we look at other commodities, we see roughly the same thing, per the chart below.


Here, there was more volatility from 1990 to 2005 than in oil (but still a general range in which commodities traded), then run-ups in the late 2000s and early 2010s, followed by a decline back to where prices were in previous decades.

What’s driving this?

The first answer is that it almost doesn’t matter. Prices are what they are, and what we see is that they’re moving back to normal levels.

For the future, though, it does matter, and I would say that two trends were responsible for driving prices higher:

  • Financialization. Investors rather than users were buying commodities, which created a much larger and price-insensitive group of buyers. No wonder prices were bid up! This group of buyers, however, is ultimately constrained by reality, as higher prices inevitably give rise to more supply, which can explain both the run-up and the decline, especially in oil.
  • The rise of China. With today’s lower Chinese growth rate and the planned shift from construction to consumption, Chinese demand should remain lower than in the boom years—which also explains both the boom and bust in commodity prices over the past couple of decades.

Absent these one-time factors, we are probably moving back to a calmer environment for oil and commodity prices. This should help moderate both inflation and deflation, as well as enable businesses to plan better and more effectively.

What it will not do is substantially change how the economy operates, for better or worse, but simply take us back to a more stable environment—which, come to think of it, should be a force for good.

Subscribe via Email

New call-to-action
Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®