What is the long run average oil price

I read lots of commentary claiming that only now (when Brent is less than $35/bbl) are we getting back to the long run average oil price, which of course is where some economists think it should be. Of course nothing has changed since 1861 so the price back then is just as relevant as last year's price... or perhaps the geology has got a little tougher, and safety standards improved a tad. But the kind of economists who believe in long run average prices probably also believe that technology is making things in the oil patch cheaper and cheaper.

They couldn't be more wrong – electronic and computer technology is an aberration, Moore's Law just doesn't apply much outside that domain. Indeed in some sectors like medical the costs spiral upwards as technology advances.

Of course we can now do things with seismic technology and horizontal wells that we couldn't in the past, but in reality we use the technology to access more elusive reserves and stringent safety and environmental standards have layered cost on the industry. 

That rant is all to justify an assertion that in calculating the average oil price in the past we need to take account of how recent the oil prices we are averaging are. It is patent nonsense to average oil prices from 1861 to 2015 and say that $34.11 is the average oil price and therefore today's oil price is somehow the "right" price. 

So I've come up with a methodology and done a calculation or too. I weighted last year's price at 100% and knocked off 5% per annum all the way back to 1861. That means the price in 2001 is half as relevant as last year's price, that 1987 matters a quarter as much, 1968 a tenth as much and 1861 hardly at all. On that basis the average oil price is $58.23, so if we are reverting to a mean, I think the mean we are reverting to is closer to $60/bbl than $34/bbl.

Data from 1861-2015 BP statistical review of world energy, 2015 EIA

Data from 1861-2015 BP statistical review of world energy, 2015 EIA

Of course we might not be reverting to a mean... we might actually be working our way through all the cheap and easy to develop reserves, we might be adding costs by adhering to higher and better safety and environmental standards and we might be on a pathway to a long run average price of about $80/bbl, but if I say that no-one will believe me.