Why the oil price means bubble trouble

[Fledermaus]

All of these factors may have contributed to the upward trend in the oil price over the past six years, which has seen the cost of a barrel of crude rise from around $20 a barrel to $135 a barrel today. None of them really explain, however, why the price should have gone up by more than $5 in the past 24 hours and by a third in little more than a month. That sort of price action is the result of a speculative frenzy of the sort that was witnessed in the dotcom mania of the late 1990s. The oil market, to put it simply, is a massive bubble waiting to be popped.

Those who think the oil price is destined to go ever higher might like to consider the recent 40% drop in wheat prices, which was the centre of its own speculative whirl a couple of months ago. They should also look at non-oil commodity prices, which are showing zero year-on-year growth: only to be expected given that the US is either in recession or on the brink of one, and that the rest of the developed world is slowing down too.

But in the oil market, the fundamentals no longer matter. All the reasons for higher prices - strong emerging market demand, inadequate supply response, peak oil - have been known about for a very long time. In a rational market, they would already be in the price. But bubble markets are not remotely rational, which is why it is impossible to say how high the price will go or how long the boom will continue before the bust arrives. But make no mistake, that moment will come.
http://www.guardian.co.uk/business/2008/may/22/oil.bubble.economics

Audio

[lostnotforgotten]

1. Wishful Thinking - Peak Oil Is The Driver

eom

[liberal N proud]

2. Commodities speculation

Commodities futures is the sole driver behind the soaring oil price run up.

Not supply and demand, not peak oil. Just a bunch of market maniacs waging bets on the price of oil.

[Terry in Austin]

3. A bold claim, my friend

> Commodities futures is the sole driver behind the soaring oil price run up.

Care to back that up with, umm... facts? A little reference or two, maybe? Extraordinary claims call for extraordinary support, as they say.

This wouldn't be a case of Denial #3, or anything, would it?

[liberal N proud]

6. I am not the only one who believes it has little to do with s&d

Germany in call for ban on oil speculation
By Ambrose Evans-Pritchard
Last Updated: 10:49pm BST 26/05/2008



German leaders are to propose a worldwide ban on oil trading by speculators, blaming the latest spike in crude prices on manipulation by hedge funds.

It is the most drastic proposal to date amid escalating calls from Europe, the US and Asia for controls on market forces, underscoring the profound shift in the political climate since the credit crunch began. India has already suspended futures trading of five commodities.

<snip>
Mr Beckmeyer said the last 25pc rise in the price of oil to $135 a barrel had nothing to do with underlying supply and demand. “It’s pure speculation,” he said.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/26/cnoil126.xml

George Soros as well:
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x3326291

[Terry in Austin]

8. Links are helpful

Providing them certainly shows that others share your belief. Still, they aren't offering much to substantiate their claim. It's a belief.

I have to wonder, though, if the price rise has "nothing to do with" supply and demand, then why is oil such an attractive commodity to speculate on? Are you saying it's some kind of fad among speculators?

And more basically, if the price rise is "artificial," due to all this speculation, then what is the "legitimate" price of oil?

[madokie]

5. That should be seen as criminals if you ask me

That bunch of market maniacs waging bets on the price of oil you speak of

[TroubleMan]

4. Why does it always have to be one or the other? There are many reasons oil had gone up in price.

1. Peak oil is here. World oil production can't increase, while demand will increase.

2. The dollar has dropped like a rock.

3. Speculation has also ran up the price prematurely ahead of what peak oil and the dropping dollar would have ran it up already. The speculators know that that oil is about to become a rarer commodity, so they're driving up the price in anticipation of this.

I keep seeing arguments where one side says that it's only speculation driving up the price, and that's bullshit. I keep seeing arguments where one side says that it's only peak oil driving up the price, and that's bullshit, too. Both are causing the price to go up, along with the drop of the dollar.

If oil price is a bubble, it's only a small bubble. There should be a short drop in price when we get out of Iraq (assuming we don't invade anybody else), because Iraq will come back fully on-line (increased supply) and the US military will use a lot less oil when they are no longer deployed (decreased demand). After that short drop, though, it'll shoot right back up due to global production not being able to keep up with the historic trend of 7% demand growth. 7% growth is the average growth of oil use since it was discovered. There's always been enough production to more than keep up with it, and now we've crossed the point where it can't or just before that point.

[suziedemocrat]

7. Is the high price of oil/gasoline good for the environment though?

http://www.cnn.com/2008/US/05/26/gas.driving/index.html?eref=rss_topstories

As gas goes up, driving goes down

* Story Highlights
* March figures show steepest decline in driving since 1942
* Compared with last year, drivers have logged 11 billion fewer miles, the DOT says
* Americans planned to drive less over Memorial Day weekend, AAA reports

Let's face it, most Americans won't consider cutting back on gasoline unless they are forced to by high prices. It hurts me too, but I still kind of think it might be a good thing that prices are so high.