If you measure in barrels, we're doing OK
The good ship USA, as measured by the Barrel Standard, is doing nicely, thank you very much. You may not feel that way if you have any money invested in the stock market, but it is. Apple shares have been knocked back to their level of about a year ago. So has the S&P 500. XLE, the energy sector ETF, has been knocked back to its value in late 2010. Trillions in market value have been lost.
But plummeting stock prices notwithstanding, we're doing rather well.
How can I say this? Easy. Just change the measure from dollars to barrels. This benchmark measures the value of America, or its stock market, in something many believe has more value than mere paper money. It measures the value of America by its industrial lifeblood - barrels of oil.
When the price of oil shrinks, as it has been doing, the value of America rises. So while the stock market has been sinking miserably when measured in dollars, it has been doing quite nicely in the stuff we all really need, barrels of oil.
Here is an example. In 1970 - well before the first OPEC oil embargo - the price of oil was $3.18 a barrel and the S&P 500 index was 92.15. If you had 1,000 barrels of oil, you could buy 34.51 units of the index. Now fast-forward to 1975. That's when the price of oil had more than doubled to $7.67 a barrel, while the S&P index dropped to 90.19. So the same 1,000 barrels would buy 85.04 units of the S&P 500 index.
That was great for Saudi Arabia. Not so good for America.
Since then we've had a lot of ups and downs. But even now, with the S&P 500 index down and oil recently at $40 a barrel, the same 1,000 barrels of oil would buy only about 20 units of the S&P 500. Our productive enterprises trade well against oil.
Now, let's take it to another level. Let's measure the value of America - of the collective net worth of all American households - in barrels of oil. In 1970 the net worth of all households, according to Federal Reserve figures, was $3,418.5 billion. So with oil at $3.18 a barrel, you could have bought the whole country for about 1,075 billion barrels.
Ten years of inflation and economic misery later, the situation was worse. By then oil was $21.59 a barrel and the net worth of all households was $9,468.6 billion. So 438.6 billion barrels would have bought our country, lock, stock and ...
But now, Federal Reserve figures for the first quarter of this year indicate household net worth at $84,924.6 billion. So with oil recently around $40 a barrel, it would take 2,123.1 billion barrels to buy our country. When measured in oil, our country is worth two times what it was worth in 1970 and nearly five times what it was worth in 1980. Measured in another way, American households have a net worth that is about twice as large as the proven reserves of OPEC.
The message here is that whatever buffets us from one moment to the next, we have reason to believe that things are getting better, not worse. The collective value of Western civilization continues to rise. Better still, several worries are now much diminished. Here are two big ones:
• Hubbert's Peak, the notion that global oil production would inevitably peak and decline, has been dismissed. At worst, the peak has been deferred into a much more distant future. Better still, in a remarkably short time our country has moved from serious energy dependence to an active debate about allowing exports of our surplus oil and gas.
• The Middle East is still the largest pool of oil reserves in the world. But we in the United States, at least, are less dependent on it. That is a profoundly good thing. For all the worry about Iran, it is very likely that ISIS will be more of a worry in the future. That concern could easily reach the oil fields of Saudi Arabia, Kuwait and Africa, as well as Iraq.
• Scott Burns is a principal of the Plano, Texas-based investment firm AssetBuilder Inc., a registered investment adviser.
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