As the first quarter of 2010 comes to a close, I thought it timely to update last summer’s Oil in Big Macs post. In last year’s edition, I suggested that the price of oil had moved from an era of 10 Big Macs to an era of 20 Big Macs. Now that we have the complete data for the decade–on both the average annual price of oil and the yearly price of a Big Mac–I have updated the Oil/Big Macs chart (click to enlarge):
Despite the serious crash of oil into late 2008 and early 2009, the ratio of Big Macs to Oil held up in 2009 and retained the step change that clearly took place coming out of 2004. If the Big Mac represents a basket of agricultural goods (and I think it does) then trading oil for food, rather than trading food for oil, remains more advantageous. Oil now commands more food. Here is the Financial Times commentary on my article from last year:
Of course, while the current ascent higher (in oil) may look very impressive on a dollar basis, it’s worth considering the price recovery based on some different units in a bid to wipe out the dollar noise. Energy blogger Gregor Macdonald points us in the direction of a much more unusual unitisation: the Big Mac. As he explains:
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.
And the key point is (our emphasis):
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.
The other reason to update last year’s Oil/Big Macs chart is that my chart-making skills have improved somewhat over the past 9 months. Last year’s chart was built in a pale shade of blue. This year I thought it best to add more appropriate colors: that red you see is my best approximation of ketchup. The rest is all cheese.