Pricing Oil in Big Macs

There’s a temptation to believe that if one stripped out the USD from the price of oil, a better picture of oil’s cost would emerge. Over the years, people have expressed Oil in Euros, Swiss Francs, and of course Gold – which does make some sense as gold is a kind of currency without a country. Indeed, expressing Oil in Gold terms has been quite common, until Gold itself gets volatile and then the search for the perfect oil lens starts all over again.

All of these methods simply lead to different portraits of oil’s price. By themselves they are mostly incomplete. At a time when Oil is being measured also against natural gas, a BTU relationship which recently hit a multi-decade extreme, I thought I would try measuring oil in terms of Big Macs.

Now, this chart won’t win a graphic design award, but what I find useful is to have left out the price of both the Big Mac, and the price of oil. I just want to look at oil in terms of bread, soy, beef, cheese, and the labor to put it all together.

What you are seeing here is the average annual price of NYMEX oil starting in the year 2001 through 2009, in terms of Big Macs. In 2001, a barrel of oil cost you 10 Big Macs. At the highs in 2008, oil cost you 27 Big Macs. Currently, oil will set you back about 19 Big Macs. And yes it’s true. I got the idea to measure Oil in Big Macs from the Economist Magazine, which cleverly started measuring the purchasing power of currencies via the Big Mac over a decade ago.

Two aspects of this chart surprised me. First, even as oil began to take off in 2004, there was still a trailing stability in its relationship to the Big Mac. A barrel of oil could still be purchased for less than 15 Big Macs throughout much of 2004.

The second insight I gleaned from this chart is that despite the advance in the price of the Big Mac since 2001, and equally despite the spectacular price crash of oil from the highs of 2008, a barrel of oil still costs nearly 20 Big Macs. In some sense, therefore, we can think of Oil as having moved from a previous pricing era of 10 Big Macs, to a new era of 20 Big Macs.

It’s true that a Big Mac is much more than just its agricultural inputs. The Big Mac is a consumer good, and one with attractive profit margins for McDonald’s. In addition, the price of a Big Mac varies quite alot globally, owing to distortions in local currencies and different–sometimes radically different–costs of labor. One could easily make the above chart for the price of Oil in Chinese Big Mac terms, for example. (you may be surprised: Yuan-USD stability likely makes the chart’s shape quite similar).

Nevertheless, despite the fact that the Big Mac is a global brand, an impulse buy – or even a luxury good to some – it still represents a nice basket of global inputs against which to measure oil. One might even detect a hint of oil’s primacy in the Oil/Big Mac chart, buttressing its claim as the master commodity.

H/T to Triple Threat Joseph Weisenthal (Writing, Photography, Music) whose initial query inspired my search for this post.

Source Material:

EIA Petroleum Navigator for average annual oil prices.

Economist Magazine Big Mac Index Archive for a decade of global Big Mac Prices.

Comments

[J. Crighton:]

This was not an article to read having first skipped breakfast this morning, though I did appreciate it.

Jun 09 08:49 AM

[john s. gordon:]

always wondered why a big mac is followed by a gas attack.
> jack

Jun 09 08:52 AM

[Bob van der...:]

You have a great concept in starting a movement in using the MacDonald's menu items to the cost of a barrel of crude oil. The media's fixation with reporting of the ups and downs in the price of crude oil distorts the real picture in the pricing of fuel.

It would be interesting to do the same with the average price @ $3.75 per gallon of gasoline in 2008 that would have bought you one Big Mac. This year we hope to buy a quarter pounder @ $2.75 for the same average price of gasoline. And we started the year off with the just the plain hamburger price @ $1.50 for a gallon of gasoline.

We could then take to the next step and start comparing Disney Dollars at their various theme parks around the world to the U.S. dollar and Euro. The concept of uniting the entire world under a single currency was first introduced in the 16th century by an Italian nobleman. But we can update the movement and start calling it by its unofficial name "Wally Money".

Let me know if you want me to lead this new movement.

Jun 09 09:05 AM

[Ferdinand E...:]

The Economist - or as I call it, a compendium of London wine bar gossip - takes the Jumbo Prize insofar as economic analysis is concerned.. I seem to remember informing my students after examining the Big Mac - Dollar index that the only place 'burgernomics' should be taken seriously was in the beginning courses at Boston Public.

Jun 09 09:47 AM

[Moto:]

One should measure the energy output from fat in a Big Mac versus oil for another comparison.

Jun 09 09:50 AM

[isaac the t...:]

Other useful oil price comparisons would be oil vs. the minimum wage, or oil vs. the poverty level, or oil vs. the average US home price. These type of metrics would also factor in affordability, measures of inflation/deflation, the worth of the dollar.

Jun 09 10:31 AM

[LOLcapitali...:]

The most surprising thing about this chart to me is the variability. Aside from the labor to assemble the burgers, Big Macs are essentially made from oil & gas. Large amounts of nitrogen fertilizer [natural gas is a primary input in the production of nitrogen fertilizers] and diesel fuel are used to grow corn, which is converted into beef and, to a lesser extent, cheese. Same for the lettuce and grains. Diesel is used throughout the transportation chain and a significant chunk of the electricity for the processing plants comes from gas-fired generation. I would guess that most of the variability in the chart actually comes from the real-time nature of the oil markets versus the relative stickiness of retail pricing for a global QSR like McDonald's.

Jun 09 01:22 PM

[tuj:]

"One should measure the energy output from fat in a Big Mac versus oil for another comparison. "

Nah, there is more energy in a chocolate bar than in TNT per gram; its just that the TNT liberates all that energy at once. So does oil. Unless you want to load up a gasifier with Big Macs, but at that point, you might as well take on MSW and get paid for your fuel source.

Jun 09 03:43 PM

[Jimbo989:]

An interesting point the author neglects, is a Big Mac contains almost as much actual oil as a barrel of oil, more actually if get the value meal and supersize the fries.

I think we should measure the price of open heart surgery in Big Macs, so we can understand rising healthcare prices. Does anybody know how to use powerpoint?

Jun 09 04:41 PM

[FI:]

So Big Mac from what country did you use?

Jun 09 08:40 PM

[bigmoney:]

>> Aside from the labor to assemble the burgers, Big Macs are essentially made from oil & gas.

indeed. I'd like to see an equivalent measured in a pure organic hamburger, with the entire production and distribution chain using American citizen labor. Using genetically modified ingredients, chemical fertilizers, along illegal alien labor is gaming the system, and hides inflation. Our grandparents enjoyed much higher quality foods, assuming they could afford it.

Jun 09 11:02 PM

[JC Chia:]

I like this comparison of Oil and Big Macs. Really never thought of such correlation. Mmmm enjoyable, entertaining...

Joanna

Jun 09 11:32 PM

[RatWatcher:]

LOL an infinite number of such ratios can be plotted. Since we're there...mine is the Combo Meal / Minimum Wage relationship. Basically, one hour's work at the minimum wage buys a burger, fries and drink combo. Pick any year.....

Jun 10 01:25 AM

[john s. gordon:]

is it true that budweiser is the breakfast of champions?
> jack

Jun 10 10:01 AM

[TurtleTrader72:]

Interesting article..but how next time we use the Whopper :)

Jun 10 10:20 AM

[Vuke:]

The Big Mac is too susceptible to manipulation to serve as a pricing indicator.

You'd soon see Comex and ETF's selling coupons by the boxcar load to influence the price of oil and other commodities.

Jun 10 10:36 AM

[ValueInvestor:]

Sorry, but this is one of the stupidest articles I've seen in a while.

Jun 10 11:43 AM

[Todd Peterson:]

The Big Mac Index gets its value from comparison between countries around the world. Of course it is also helpful for comparisons to a commodity like oil that is so unpredictable within a country.

But what you need to do next is track the cost of oil in Big Macs in other countries, such as France, Germany, China, Japan, etc.

Jun 10 11:50 AM

[SteadfastMason:]

...am thinking the Messiah's economic team may really like your chart. Watch for their next policy move to nationalize McDonald's and peg the value of the U.S. Greenback to the Big Mac, followed by a bill being introduced in Congress to rename Fort Knoxx the "Golden Arches" and special Obama-bucks being minted to commemorate that most holy event.

SteadfastMason

Jun 10 02:01 PM

[mdmrjsds:]

The only pricing indicator that matters is energy return on energy invested; call this the thermodynamic price of oil.. For simplicity, how many barrels of oil do you get for a barrel of oil. Links I've followed from SA articles show that in the past 1 barrel of oil expended in extracting oil yielded 100 barrels of oil. That is now down to 25 barrels of oil and falling (an average). It is unlikely to go up as we exploited the easiest and richest fields first. What's left is not in the category of 100 barrel return. From memory of what I read, the 20 billion barrels off Brazil are 10 barrels return and the tar sands in Canada are 4 barrels return (estimated).

For instance, Saturn's moon Tritan has oceans of hydrocarbons. But the cost of a barrel of oil equivalent from there here on earth is probably several thousands of barrels. Will we exploit that resource? No. The same applies on earth. If it costs more than, or even close to, a barrel of oil, to get a barrel of oil, even if oil exists we won't exploit it.

The great thing (or terrible thing depending on your perspective) about the thermodynamic cost of oil is that the universe doesn't let you fudge it. You pay what the universe asks or you don't get the goods. And financial legerdemain doesn't affect it; that is just shuffling the shells with the pea under them, determining who is going to pay the cost and who is going to profit, and doesn't affect the true cost.

Jun 10 02:55 PM