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 over the years, 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 a Big Mac, and 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, butressing oil’s claim as the master commodity.
H/T to Triple Threat Joseph Weisenthal (Writing, Photography, Music) whose initial query inspired my search for this post.
EIA Petroleum Navigator for average annual oil prices.
Economist Magazine Big Mac Index Archive for a decade of global Big Mac Prices.