Oil Bubble --- getting bigger, when will it pop

[chinaco]

I have been hearing more about the oil bubble. As supply begins to increase, people begin to conserve (through a variety of means)... experts are beginning to predict it will pop (like the housing and tech bubbles).

The claim is that once everyone begins talking about how things have really changed fundamentally... those are early signs.

Apparently, the claim is that there is no oil shortage... world demand is being met. The weak $ and speculation is the main culprit of price increases.

Commodity prices in general will subside once it happens.


It seems that another indicator is the increase in commodity based mutual funds and ETFs... the small investor are often the last to enter the market and be left holding the bag.

 

[W2R]

I do think that there is a strong bubble component to the increases in oil prices this spring. My (uninformed) thoughts are that politics may play a part, and after the election, things could level off considerably.

But you know how THAT is - - the price of gas may stabilize while the dollar inflates, but it would surprise me if the actual dollar price of gas decreased.

 

[UncleHoney]

In my myopic view of the oil markets, oil companies are using the investors as shills to bid up the price. As long as everyone keeps the ball rolling the price will go up. Oil companies have no reason to keep prices down because they don't pay the bill for the end product, the customer does. The more the customer pays the more investors and oil companies make. Just that simple.

All it will take is one thing to redirect investment money away from oil and the bubble will go POOF, just like housing. Maybe it will come from reduced demand that has the oil companies swimming in so much black ooze they will be running out of places to put it.

Like kidney stones and constipation, the oil bubble will pass.

 

[FinanceDude]

In my myopic view of the oil markets, oil companies are using the investors as shills to bid up the price. As long as everyone keeps the ball rolling the price will go up. Oil companies have no reason to keep prices down because they don't pay the bill for the end product, the customer does. The more the customer pays the more investors and oil companies make. Just that simple.

All it will take is one thing to redirect investment money away from oil and the bubble will go POOF, just like housing. Maybe it will come from reduced demand that has the oil companies swimming in so much black ooze they will be running out of places to put it.

Like kidney stones and constipation, the oil bubble will pass.

I think you should be an economist on CNBC............

 

[tomintucson]

Having differing views from those expressed has proven extremely profitable since I began overweighting energy in 2002. Continues to be in 2008 as well.

Tom

 

[FinanceDude]

Having differing views from those expressed has proven extremely profitable since I began overweighting energy in 2002. Continues to be in 2008 as well.

Tom

Let me guess, you shorted the NASDAQ on 1/2/00, Shorted all the indexes on 9/10/01, went long on 10/10/02, etc............

 

[FUEGO]

Having differing views from those expressed has proven extremely profitable since I began overweighting energy in 2002. Continues to be in 2008 as well.

Tom

I think overweighting ANYTHING in 2002 was extemely profitable!

 

[Zathras]

The problem is supply is NOT increasing as fast as global demand.
That being said, I do believe there is a small bubble. We may see a correction back to $110 or even $100. Long term oil will continue to rise as long as we have a larger global demand than global supply.

 

[Bestwifeever]

If the automakers continue aggressively developing hybrid and alternative fuel cars (the most visible response to oil prices, imho) and wind/solar/nuclear energy sources come to the forefront politically both for energy and environmental reason, oil could become the new coal within a generation. Perhaps big oil would be smart to drop prices at least slightly in an attempt to thwart those developments. And we would be smart to ignore that ploy and continue developing the alternatives.

 

[eridanus]

Oil will drop in price when the Feds tighten the money supply.

 

[tomintucson]

Mr. FinanceDude,

I think my statement was pretty simple, with no "let me guess" about it. I said that I have been overweight energy (very significantly, via Vanguard Energy) since 2002. This position has proven extremely profitable relative to the broader markets, for six years running. I in no way meant to suggest that I am as intelligent as yourself.

Tom

 

[kcowan]

Oil as any other commodity is subject to price fluctuations. So it may retrace down to $120 or so as seasonal effects take hold. But it bears little resemblance to the housing bubble in fundamentals. There we had "free money" fueling greed and panic with agents to instill fear of losing out.

Here we have declining supply and spiking demand. Sure we can drive less and so use less but what is going to suppress demand in India and China? One effect is if these countries all drop any subsidies and that will dampen demand. On a broad enough base, a reduction in demand will reduce the price. For sure, price will eventually limit demand...

 

[laurence]

I agree, oil companies can't "foil" alternate energy research because they really don't have control over price. They will continue to discover new oil, but the locations will be more difficult and more expensive to recover from. I think $4 gas will be looked back upon fondly in the near future.

 

[TromboneAl]

One of the predictions in Amazon.com: Beyond Oil: The View from Hubbert's Peak: Kenneth S. Deffeyes: Books is that we'll see wild fluctuations in the price of oil.

 

[aenlighten]

Consider the 70s

after those huge increases, it still took many recessions and years for the price to fall which it did only as demand was eliminated, efficiency improved, and non-opec oil expanded. This is actually a good year for supply additions. The next several will only be tighter as production falls below replacement. Developing countries dropping their subsidies will help as will slower growth. Consumers are responding. It should ease off after summer and a warm winter would help, but I expect considerable fluctuations.

 

[heyyou]

In the consumer solar industry (home power), Big Oil or private equity have bought up all of the respected manufacturers in the last ten years. Big Oil is in the energy business regardless of the source, and the oligarchy is not going to fade with the demise of oil. I'm sure the oil industry is aware of how the leather industry faded out about a hundred years ago.

 

[ziggy29]

The long term trend, IMO, is up for the foreseeable future. However, I think the recent runup is way overdone relative to the fundamentals. And even when the oil bubble pops, the price will still settle at a permanent plateau which is considerably higher than where prices were 1-2 years ago.

 

[Abreutime]

In my myopic view of the oil markets, oil companies are using the investors as shills to bid up the price. As long as everyone keeps the ball rolling the price will go up. Oil companies have no reason to keep prices down because they don't pay the bill for the end product, the customer does. The more the customer pays the more investors and oil companies make. Just that simple.

All it will take is one thing to redirect investment money away from oil and the bubble will go POOF, just like housing. Maybe it will come from reduced demand that has the oil companies swimming in so much black ooze they will be running out of places to put it.

Like kidney stones and constipation, the oil bubble will pass.

I disagree with most of your points, but I agree with your last. There are elements of a bubble in the price of crude, and crude is a large factor in the price we see at the pump.

However, like any business, oil companies have incentives to keep the price down at every step of the process. And actually, the profit margins of these companies are not particularly impressive. The large absolute amount of profits they have been reaching is merely a function of the gargantuan size of their operation. I'm glad they do business, otherwise gas would be even harder to find, and more expensive!

 

[laurence]

Thanks for the chart. Throwing oil companies under the bus makes for good populist speeches by politicians, but not much sense. Their profit margin is just not that high, and taxing them more will only hurt those we are allegedly concerned about.

What we do need is an energy plan measured in decades, not quarters, that funds alternatives in the long term. BP reports that oil production declined 0.2% last year, while consumption was up 1.1%. The 1.24 Trillion barrels of proven oil reserves is enough to sustain current consumption levels for 41 years. But I bet that last billion will be a lot more expensive to extract than the first, and consumption will only continue to grow as China and India continue to modernize. My next car may be a scooter.

 

[Abreutime]

I just came across an article in the NYTimes today about speculation and its affect on prices. It sums up a lot of my general thoughts (which is why I'm posting it).

Speculators Under Scrutiny in Commodities Market Volatility - NYTimes.com

 

[Abreutime]

My next car may be a scooter.

I spent a couple hours yesterday looking into the costs, advantages and disadvantages of scooters. And I learned what lane splitting is, and that it's illegal in 49 states (legal in CA). You can get a very good scooter for a couple thousand, and the low gas cost can mean it pays for itself in maybe 5,000 miles.

 

[Gone4Good]

But it bears little resemblance to the housing bubble in fundamentals. There we had "free money" fueling greed and panic with agents to instill fear of losing out.

Sounds precisely the same. Real interest rates are once again negative in the US. So money is better then free, they're paying you to take it off their hands. Not just in the US, either. Most developing countries, China, India, most of the rest of Asia, Russia, etc all have interest rates pegged below their respective inflation rates. Free money is alive and well. And with oil up 600%+, there is plenty of fear of missing out.

But the world is starting to recognize that it has a brewing inflation problem. That, my friends, is the beginning of the end.

Besides, if one of the richest countries on earth is having trouble coping with $130 oil, do you really think India and China can cope?