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If you measure in barrels, we’re doing OK

Consumption

The good ship USA, as measured by the Barrel Standard, is doing nicely, thank you very much. You may not feel that way if you have any money invested in the stock market, but it is. Apple shares have been knocked back to their level of about a year ago. So has the S&P 500. XLE, the energy sector ETF, has been knocked back to its value in late 2010. Trillions in market value have been lost.

But plummeting stock prices notwithstanding, we’re doing rather well.

How can I say this? Easy. Just change the measure from dollars to barrels. This benchmark measures the value of America, or its stock market, in something many believe has more value than mere paper money. It measures the value of America by its industrial lifeblood — barrels of oil.

When the price of oil shrinks, as it has been doing, the value of America rises. So while the stock market has been sinking miserably when measured in dollars, it has been doing quite nicely in the stuff we all really need, barrels of oil.

Here is an example. In 1970 — well before the first OPEC oil embargo — the price of oil was $3.18 a barrel and the S&P 500 index was 92.15. If you had 1,000 barrels of oil, you could buy 34.51 units of the index. Now fast-forward to 1975. That’s when the price of oil had more than doubled to $7.67 a barrel, while the S&P index dropped to 90.19. So the same 1,000 barrels would buy 85.04 units of the S&P 500 index.

That was great for Saudi Arabia. Not so good for America.

Since then we’ve had a lot of ups and downs. But even now, with the S&P 500 index down and oil recently at $40 a barrel, the same 1,000 barrels of oil would buy only about 20 units of the S&P 500. Our productive enterprises trade well against oil.

Now, let’s take it to another level. Let’s measure the value of America — of the collective net worth of all American households — in barrels of oil. In 1970 the net worth of all households, according to Federal Reserve figures, was $3,418.5 billion. So with oil at $3.18 a barrel, you could have bought the whole country for about 1,075 billion barrels.

Ten years of inflation and economic misery later, the situation was worse. By then oil was $21.59 a barrel and the net worth of all households was $9,468.6 billion. So 438.6 billion barrels would have bought our country, lock, stock and …

But now, Federal Reserve figures for the first quarter of this year indicate household net worth at $84,924.6 billion. So with oil recently around $40 a barrel, it would take 2,123.1 billion barrels to buy our country. When measured in oil, our country is worth two times what it was worth in 1970 and nearly five times what it was worth in 1980. Measured in another way, American households have a net worth that is about twice as large as the proven reserves of OPEC.

The message here is that whatever buffets us from one moment to the next, we have reason to believe that things are getting better, not worse. The collective value of Western civilization continues to rise. Better still, several worries are now much diminished. Here are two big ones:

• Hubbert’s Peak, the notion that global oil production would inevitably peak and decline, has been dismissed. At worst, the peak has been deferred into a much more distant future. Better still, in a remarkably short time our country has moved from serious energy dependence to an active debate about allowing exports of our surplus oil and gas.

• The Middle East is still the largest pool of oil reserves in the world. But we in the United States, at least, are less dependent on it. That is a profoundly good thing. For all the worry about Iran, it is very likely that ISIS will be more of a worry in the future. That concern could easily reach the oil fields of Saudi Arabia, Kuwait and Africa, as well as Iraq.

• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser.

Daily Herald



55 Comments on "If you measure in barrels, we’re doing OK"

  1. makati1 on Mon, 28th Sep 2015 6:17 am 

    Onlooker, I enjoy most of the word bouts but avoid the most narrow minded. I just skip over them as they are not worth my time. I also either laugh at or ignore jabs at my view of the world. I went through army officer candidate school long ago and was harassed by the best of the tactical officers, as they weeded out the weak (2/3 of the class), so nothing anyone can say here is going to shake me or my convictions. I did get my commission by the way.

    I use this forum to keep learning and to look up anything I am not sure of. The internet is better than any library and I will make use of it for as long as I can. I wish all of the people here success in their preps and hope we all make it through the next decades with minimal pain. Even those I ignore.

  2. Davy on Mon, 28th Sep 2015 7:27 am 

    The above should read I use this forum as my bully pullpit for an anti-American agenda.

    I won’t go into the reasons why he does this anyone here for any length of time knows I have covered his mental illness well.

  3. shortonoil on Mon, 28th Sep 2015 8:18 am 

    38% of LTO has an API greater than 50. These lighter oils do not make fuels, and are separated out to be used as feedstock.

    http://www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/energy/images/eneene/sources/petpet/images/refraf1-lrgr-eng.png

    Since the lighter oils never participate in the combustion process (because they are not processed into fuels) they contribute no energy. Because it takes about half of the energy in a unit of oil to extract, process, and distribute it, LTO barely provides enough energy to power its own production. In other words, you could not run a modern economy using LTO.

    The energy content of a liquid hydrocarbon can be calculated, or measured in a lab, and it is directly proportional to its API rating:

    http://www.thehillsgroup.org/depletion2_011.htm

    In the graph above we did the calculations for various fractions of liquid hydrocarbons, and plotted the results. The exergy, or energy content, of a liquid hydrocarbon falls as its API increases. LTO is a very light oil because its formation temperatures, and pressures are high enough to break the larger hydrocarbon chains into smaller fragments. These smaller fragments are useful for the purposes of feedstock production, but they are not useful for fuel production; that is an energy source.

    The Shale industry’s PR machine has been promoting the American energy independence meme for years. This is disingenuous, and borders on an outright lie. Shale will never contribute to the energy budget of the nation because Nature just not give it the necessary molecular structure to do so. Now that the industry is in serious trouble from the collapse in price the industry will need all the public support it can muster to survive. Its history of lies, and manipulation are likely to ensure that it will not receive that support! The industry appears to have done a spectacular job of shooting itself in the foot!

    http://www.thehillsgroup.org/

  4. BC on Mon, 28th Sep 2015 9:09 am 

    As to the IMF global real GDP reports and forecasts, note that China’s “reported” growth alone has contributed 50-75% of world GDP growth since 2008.

    However, China’s real potential GDP has “actually” decelerated to ~0%, i.e., the same post-2007 trend rate for the US, EZ, and Japan.

    China’s CCP authorities are literally arresting reporters and traders for not following the party line and shorting stocks. These Stalin- and Mao-like tactics are clearly evidence that the CCP officials fear losing credibility, legitimacy, and authority to “manage” the data and thus perceptions.

    Also, note that global trade is contracting, which is historically recessionary.

    Therefore, if one adjusts for China’s actual growth since 2008, global real GDP is significantly slower than has been reported and will continue to decelerate to the global new normal for secular stagnation and LTG of ~0% in the years to come.

  5. shortonoil on Mon, 28th Sep 2015 12:21 pm 

    The related energy function almost guarantees that the world is already in a deflationary contraction of 2 to 3% per year. Creative bookkeeping, and shooting short sellers can disguise a lot of irregularities. The flow of petro-dollars back into the US as the petro-states unravel is producing the appearance that all is not that bad here. Once those dollars cease to flow, which they must, the situation will begin to deteriorate rapidly!

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