Does it feel like energy prices are going through the roof? Are we all feeling like the world is coming to an end because the price of fuel is outrageous?
Unfortunately, our feelings do not properly reflect what is going on. It is because we buy into them that we lack the insight into what is truly occurring. This is what causes people to consistently miss in their forecasts. When it comes to investing, an an example, this could be fatal.
We become accustomed to how things are in the moment. The recent past is what we remember while overlooking what took place far back. It is very common in the stock market during every bull run. As the market is extended, people forget what happened before and keep piling in. After all, markets only go up.
Of course, we know what happens. The pigs get slaughtered due to the combination of greed and forgetfulness. Sadly, it happens every time.
Why do we not remember the distant past? That is outside the scope of this article and might require hundreds of head doctors. Nevertheless, we do not need to know why to accept that it is what occurs. Evidence is all around us of the actions in this direction.
Energy Prices
It is hard for many to believe this next statement in light of their frame of reference. Nevertheless, the reality is that energy prices are dropping and did so over many decades. This is something that the media doesnt want you to know. After all, their job is to make you either fearful or angry. That is what keeps people tuned in and hostage to what they are espousing.
Here is a charge that shows energy prices as a percentage of PCE (Personal Consumption Expenditure). The goal of this idea is to see the drag on the economy that energy prices wield.
In the late 1950s through the early 1970s, we saw the percentage reside between 6%-7%. Then we got the oil embargo of the 1970s and that sent prices skyrocketing. As we can see, 9.5% of household were related to energy goods and services.
The next wave saw a huge decline throughout the 1980s and much of the 1990s. After bottoming, they rose during the 2000s, peaking when oil ran up to $140 per barrel. Of course, this was not sustainable and the Great Financial Collapse sent the next wave down. The reflation period coming out of the recession was once again stamped out as we almost double-dipped. It did, however, set off the run to the all time low (up to that point).
Again we saw another run up in commodities only to have it reverse prior to the pandemic. Naturally, once this hit we saw another rush to a new mark on the downside. Now we are getting the bounce upwards as energy prices are on fire.
This does look very similar to a 25 chart of oil prices. If we start with the first chart, we can see that starting around 1997, they track similar. There was a run up and dip in the above before starting an upward trend. Oil prices, on the other hand, simply ran up at a steady pace until the $140 peak.
We Consume More
When it comes to energy, consumption is only on the increase. We have more devices plug into walls than ever before. Our electronics grow exponentially. There are phones, tablets, laptops, gaming consoles, Chromebooks, routers, and an assortment of other devices that use electricity.
If this is the case, how is this declining?
Much of the answer comes from technology. Everything, on an individual basis, uses less power as time passes. Innovation and technological development ensure that things are more energy efficient. We have cars that get more miles per gallon as compared to those 50 years ago. Hence, the same amount of gasoline goes 2, maybe even 3 times as far.
Our major appliances are also consume a great deal less power. This helps to lower the power bill. We see the same thing with air conditioning units. All this makes an enormous difference when you chart it over an extended period of time.
Energy is one of those components of the household budget that cannot be altered a great deal. Sure, during times of high oil prices, the SUV gets parked in favor of the Honda Accord™. We also see people push up the temperature on the AC or down on the heat when times are tight. However, while this use to be commonplace in the 1970s (and the residual in the 1980s), most forgo this step. Ultimately, due to the efficiency of the devices, it doesn't make a great deal of difference.
This is a trend that we can expect to continue over time. With all the calls for $100 oil (and some absurd ones at $200 or $300), it is best to remember the long-term flow of things. Energy costs are continually being reduced.
As they say in the commodity world: the cure for high prices is high prices.
Eventually, either a change in behavior or technological advancement tand to crush any overpricing that takes place.
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