Equalized Natural Gas and Crude Oil Over Decades
The goal of this chart is to attempt to show the impact of energy costs in the current economy. We use equal amounts of natural gas and crude oil according to economic websites, so a chart that shows the year-over-year % change of energy costs would be useful to look at so we aren't confused by headlines.
Everyone seems to be looking at crude oil as the main driver of inflation, but at the same time refusing to see that natural gas has fallen quite dramatically over the same time window.
What I have done with this chart is to plot the ratio of the price of crude oil to natural gas using the 2nd month contract because of the negative price of crude oil in 2020. The current ratio is around 26, so I then used the 26 ratio to plot the top chart. I multiplied NatGas by 26 and added it to Crude Oil to get a "total energy cost" to the economy. I then did a 1 year rate of change to show the oscillations of "bearish headwinds" of inflation and "bullish headwinds" of deflation. Obviously, lower energy prices are supportive of the economy and higher energy prices are inflationary and imply producers and sellers will raise prices, putting pressure on the Fed to raise rates to cool off the economy.
Currently, we have a -31.59% YOY% change for the total cost of energy and as recently as May we were at -61%.
Granted, energy is not the entire economy. Energy is only 6% of the economy so it is just a small part but it feeds into everyone's costs.
Next I will work on some ways to create specific market buy and sell signals to see if we can make a permanent indicator for this idea.
Wishing you all well.
Tim West
9:06AM EST, Wednesday October 4, 2023
Everyone seems to be looking at crude oil as the main driver of inflation, but at the same time refusing to see that natural gas has fallen quite dramatically over the same time window.
What I have done with this chart is to plot the ratio of the price of crude oil to natural gas using the 2nd month contract because of the negative price of crude oil in 2020. The current ratio is around 26, so I then used the 26 ratio to plot the top chart. I multiplied NatGas by 26 and added it to Crude Oil to get a "total energy cost" to the economy. I then did a 1 year rate of change to show the oscillations of "bearish headwinds" of inflation and "bullish headwinds" of deflation. Obviously, lower energy prices are supportive of the economy and higher energy prices are inflationary and imply producers and sellers will raise prices, putting pressure on the Fed to raise rates to cool off the economy.
Currently, we have a -31.59% YOY% change for the total cost of energy and as recently as May we were at -61%.
Granted, energy is not the entire economy. Energy is only 6% of the economy so it is just a small part but it feeds into everyone's costs.
Next I will work on some ways to create specific market buy and sell signals to see if we can make a permanent indicator for this idea.
Wishing you all well.
Tim West
9:06AM EST, Wednesday October 4, 2023
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