Posted: September 8, 2008

It’s time for a reality check. Oil prices are not plunging. Compared with this time last year, U.S. pump prices are more than 80 cents a gallon higher, while spot crude prices are roughly $30 a barrel higher.

Even if crude falls another $30 a barrel, that will still only put its price at roughly year-ago levels after a summer when Americans drove a lot less than the year before, precipitating all the talk about “demand destruction.”

It’s not just foolish to track oil prices on a day-to-day basis, instead of on a year-to-year basis the way corporate earnings are measured. It’s also dangerous, especially when day-to-day declines are used to explain why equities should go higher, as well as why the U.S. Federal Reserve doesn’t have to worry as much about inflation.

What’s happening now is generally what happens every year when the peak U.S. summer driving season is over and refiners are preparing to switch over to winter blends whose main additive costs less.

Virtually every other media outlet has called the recent decline a plunge. Stock markets, too, have proclaimed it so. But the percentage loss is so far roughly in line with the percentage losses in 2006 and 2005. In neither of those years did anyone think oil prices were “plunging.”

In the fall of 2007 the seasonal decline was less than 10%. It was followed by a prolonged upward price move that experts attribute to growing concern about global demand outstripping the world’s productive capacity, a condition known as “peak oil.” As demand has slackened recently, those concerns have ebbed. But they can reassert control over market psychology at any time.

The takeway for investors is: despite all the attention that’s been paid to “demand destruction,” oil prices would have to double their recent decline just to get back to year-ago levels, despite Americans’ concerted efforts to drive less. The year-over-year numbers say the oil crisis is hiding in plain sight.