Hello, first active topic on my mind "Oil vs Gold Prices and Monetary Inflation"

To start, I'd like to say that I'm going to post about anything and everything that I find interesting, important, and worth a spot on this page. I often find myself spending hours researching particular topics until the wee hours of the night, and I thought that I may as well come up with something to show for it (and possibly even provide a source of interest for others).

What I want to talk about today stemmed from a youtube video, linked just below, about peak oil. Actually, the guy (Loren) has many other great videos as well - I'd encourage you to check them out:


I don't necessarily agree with a lack of focus on global warming (although to be honest, I'm more concerned about how much carbon dioxide we're pumping into the atmosphere for a multitude of reasons, whether global warming is a major byproduct of CO2 production or not). I think that he does present a great job of pointing out the limitations of the media's coverage regarding these topics. They hyper-focus on things like carbon trading while neglecting several other major (and likely more important and changeable) issues.

Anyway, I got reading the comments below the video and there was a guy saying that the only reason that the price of oil would go up is because of monetary inflation, and it can be shown by oil's near constant correlation with the price of gold. In the mindset of thinking about peak oil, I was skeptical about his claim. I thought to myself, "what about the Gulf Oil Crisis" or the undeniable fact that we do indeed have limited reserves of oil on this planet" - particularly in easy and cheap to extract forms. Bitumen and shale oil for example are quite expensive and take tens or hundreds of billions of dollars in investment to get operational on a large scale - and even then it takes awhile to ramp up the capacity.

Turns out, whether you agree or not that gold is an accurate reflection of true value that the correlation is pretty much exactly as he said. Even during the Gulf Oil Crisis, the price of oil rose in tandem with gold and the ratio between the two did not change substantially. This fits with the fact that there was massive inflation during the 70s and a big increase increase in the money supply (78% if I remember correctly - which means that by the end of the 70s there were 0.78 cents created for every dollar that people had, increasing the price of goods and decreasing the value of their savings). This made me wonder what the current trend is.

I decided to do some research. As said in that video (and verified by myself - though I'd definitely encourage you to check for yourself), the amount of oil put on world markets actually peaked back in 2005 while natural gas increased slightly to give an ever so slight increase in net energy production. Hey, oil prices were getting pretty high too prior to the recession, the fall in the price of oil, and the US government printing money like it's toilet paper (which preceded and happened as the price of oil rose again and the value of the dollar fell). With the economy being hot prior to the recession and the production of oil capped, I thought to myself that for sure oil prices would be high compared to gold. Turns out that any differences were pretty minimal and the ratio between the price of gold and oil were not far off each other:
Gold-Oil ratio 2000-09

So, what's the relationship? Many people feel that gold reflects true value as a currency with little change in supply, though in enough abundance that it's not impossible to obtain. It was formerly used as a backing for currency under the gold standard. As a matter of fact, the massive inflation in the 70s occurred around the time that US currency went from the gold standard to fiat - or in other words from an asset based currency to one based upon trust in the economy, the government, and its own intrinsic worth as a means of trading value - but that's another topic. Oil, funny enough, tends to go up in price when large amounts of money are printed and the value of the US dollar goes down. Gold does the same thing (and follows oil almost exactly). Whether this is because gold is used as a hedge against a falling dollar, or gold reflects true value, both it and oil pretty much go hand in hand in terms of price. Here's another graph showing world oil production from 1965 to 2003 (notice the little blip in the 70s - that's the typical explanation for more than doubling oil prices):
Global oil production 1965 to 2003

Going back to peak oil, I still don't believe that it's a non-issue. From the gold-oil relationship you could infer that oil has only risen in price due to inflation in the monetary supply and there have been no major increases in actual oil prices for the past half-century (this is using gold as a measure of value, since even with adjusted inflation the price was higher in the 70s and is higher now than at other times). One could say that, "well, peak oil is a myth and the price will only go higher because of inflation - there's nothing to be concerned about except the monetary supply". I have to disagree though.

Even given the previous argument concerning gold and oil, that doesn't change the inevitable decline of worldwide oil production. I do not know the precise estimates for untapped reservoir potential, but concerning oil that we can get at readily with minimal refinement it's not very high (light sweet crude). Even including heavy oil sources like the Venezuelan heavy oil reserves and Alberta tar sands (I live here currently, and politically it's a no-no to say "tar" instead of "oil", despite that being more akin to what it is) our long term production capacity just isn't there, and the processing methods are incredibly energy intensive. It's true that there are many countries and groups that don't share exact oil reserves for security/national reasons, but even still the continued growth of oil production to meet growing energy needs just doesn't look viable given the increasingly short supply of oil that we have easy access to.


Of course, maybe the world's energy concerns will be mitigated by innovative new tech like this:
Intellectual Ventures TerraPower

That will have to be the topic of a future post however.