The Oil Bubble

On the one hand, high oil prices are the result of commodity markets at work. More demand and less supply means higher prices.

Meanwhile, prices are still out of whack with actual supply, both on and in the ground. Methinks therefore we are in a bubble of some kind. A couple days ago the Wall Street Journal said the same thing. (But I can’t find the piece online, hence no link.)

What will happen when it pops?

14 comments

  1. Rex Hammock’s avatar

    Here’s my obvious prediction for when the oil price busts: Oil companies and speculators will seek a government bailout.

  2. Mike Warot’s avatar

    I had a nice juicy comment with lots of facts and sources… and it just disappeared…. ugh!

  3. Mike Warot’s avatar

    Oil was $0.36/gallon in 1971.
    Nixon closed the gold window in 1971
    The dollar has dropped 95% since then relative to real money. (Gold)
    Thus gas should cost $7.20/gallon now.
    But it doesn’t because the dollar bubble isn’t done popping yet.
    –Mike–

  4. Ralph Brorsen’s avatar

    Hey Doc, the high oil price is mostly due to the low value of the dollar. Here’s an article from Reddit today: http://www.chycho.com/?q=node/1685

  5. Billy Beck’s avatar

    I’m more interested in *how* it might pop.

    If Bush announced intent to start *talking* about permitting drilling on the ConShelf and Alaska — just intent to talk about it, without action — this thing would fall right over, over night.

  6. Prolific Programmer’s avatar

    There is a commodities bubble. It’s unsustainable and will pop, just like the real estate bubble before it, the energy bubble before that and the technology bubble before that. It’s not only limited to oil — gold, corn, maize, rice, copper are all at or near all-time highs.

  7. John Robb’s avatar

    Not sure it is a bubble. A bubble implies speculative hoarding.

    The inventories of oil and other commodities just aren’t there to imply that. Demand is outstripping supply. Sure, there is lots of speculation, but until there is either A) demand destruction or B) inventory accumulation, I don’t expect a major and prolonged decline.

  8. Chip’s avatar

    If bubble pops … resale on your Prius goes down
    (just to be snarky)

    More seriously, I would expect floor around $60 bbl
    Guessing that there is maybe $30-40 speculation in the current price, and maybe $20 of “event risk” (supply disruption risk)

    Watch for new sources – Brazil for one (new deep water fields)
    Wild card is settlement (of sorts) in Middle East (see Syria/Israel, Iran/Iraq), which would remove much of the event risk, and deflate speculation.

    Ciao
    Chip

  9. Mike Warot’s avatar

    I understand that people live in their own echo chambers, and that’s why we get people who think it’s all a vast conspiracy by the oil companies to jack up profits. The walls of the echo chamber are pretty solid and make it very difficult to consider that perhaps there are other reasons and/or perhaps it’s a much more complicated and resource intense process to suck oil out of the ground than they might believe.
    Any new oil discovery will take about 20 years to come online to peak production… not 3 months, or 3 years, like most of the Hummer driving Soccer Moms in the doomed sprawlling sub-urban neowasteland believe they will.
    It’s the Long Emergency that Howard Kunstler talks about… it’s coming soon, and it’s uh… Long.
    –Mike–

  10. John Quimby’s avatar

    All of you have outlined credible reasons to think that we might eventually face a problem that could “adjust” the value of our accumulated material wealth and leave us less real value to live on. (ask anybody old enough to remember 1932)

    What you all describe above could be the effect of mere speculation in global markets. Or it could be that newly wealthy countries know that water, energy and food are good investments when finite resources get scarce. They have the wealth to lock up what they need while we have a weak dollar that buys less and less.

    So Who’s gambling with your food, water, and energy? What happens if they win? What happens if they lose?

  11. Ben Winter’s avatar

    Of course Doc. The recent price rise is the fourth episode of sharp upward movement in the price of petroleum in the past thirty years. So far it is much smaller in terms of magnitude of the terms of trade impact than the first two episodes, but it has outpaced the third (see Annex). In terms of the magnitude of the price change, the first and second oil price shocks, in the mid and late-1970s, respectively, each entailed a more than tripling of the price of oil; and both lasted for about 5 years. This is terrible obviously….

  12. TM’s avatar

    from the WSJ today:

    Rubin stressed, though, that the spike in demand over the past month is only a footnote to the bigger story: “Even at $133, demand hasn’t been reined in, and without a real raise in supply we think it’s ultimately going to go over $200 a barrel.”

    In short, this is no bubble, and is driven by the mismatch between global demand growth and supply growth which has been evidenced for the last 7 to 8 years, and will continue

    they said the same about high tech, real estate and now…just when you think it won’t go down

  13. regeya’s avatar

    Real estate will also continue to rise. God’s making no more land, and people will want places to live…Kunstler 90% dieoff orgasm yadda yadda. Microsoft stock will never go down in price either, and Linux will never be taken seriously.

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