The Changing Price of Oil Relative to Gold

It is true that a shift in supply or demand will change prices in any market; however, not all market-price movements are necessarily due to a change in market supply or demand — especially in the case of prices for commodities as highly political as crude oil. Longer term trends in the price of oil also reflect cumulative changes in the purchasing power of the dollar. Looking at oil prices relative to gold prices instead of U.S. dollars takes account of the long-term decline in the value of the dollar and allows us to recognize more clearly the effect of supply, demand and public-policy factors that influence the price of petroleum.

The long historical tendency for the price of crude oil to parallel the price of gold and other precious metals is well known. As a whole, the trend is toward an average annual increase in the oil-gold price ratio through 2014 of 1.1 percent. The long-term increase is attributable to:

  • The slowly increasing scarcity of crude oil.
  • The fact that the cost of exploiting crude oil reserves has risen faster than the cost of exploiting gold reserves.
  • The growth of market forces that also govern the relative flow of capital into the oil and goldmining industries.

If it takes two years to half-close the gap in current oil prices compared to the equilibrium price suggested by the table, it would be reasonable to expect the price of crude to rise at an annual rate of about eight dollars a barrel over the next 12 months.

Source: R. David Ranson, “The Changing Price of Oil Relative to Gold,” National Center for Policy Analysis, July 27, 2015.

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