« previous | TPM CAFÉ READER POSTS HOME | next »
Is there an oil price bubble forming?
I've been too busy lately to more deeply analyze this yet. But something smells like a flat skunk on a Texas highway here. Last year, oil was about $70 per barrel. This year it's closing quickly on $140.
Is there a bubble building up in the oil commodities markets?
I'm asking this question, because based on anecdotal evidence, demand for oil hasn't doubled in a year. We were in India last January, my wife was in China, and we've been on their roads (worse than any US jam I've ever seen!). Although they are growing fast, that's not enough. Despite the evidence of world peak production, it doesn't seem likely that world oil production has fallen in half. There has certainly been instability in key oil producing nations - Iraq, Nigeria, and Venezuela to cite a few. But that's nothing new - it happened in the 90's too.
There is often a "flight to safety" when the economy, stock market or bond market is doing badly, and there can also be a flight to commodities, as investors put their money in investments that hold more value - like gold and oil. And when speculators pile on...
So what is the remaining explanation for the spike in oil prices? I think there may be a bubble brewing here as well. That's usually very, very bad. But this one might not just be a lemon we can turn to lemonade. Could be a gateway to something truly progressive.
Don't misunderstand me - this is no excuse for us to continue public policies running in the opposite direction of energy independence. Quite the opposite, so as Obama told his own staff, we've got some work to do. Don't forget about the house and senate races in your home states - that's where Federal public policy legislation starts.
While the MSM is doing stories on the velocity of the falling sky, the rest of us can be buying more locally produced whole foods and goods, reducing our own energy use, requesting where possible to telecommute, riding bikes, walking, taking care of ourselves and our immediate environment.
Change seems like a small thing for those who have millions. Want to see what will happen when millions of people make some changes?
Comments (51)
Here is an idea, change the way that futures contracts on oil are handled, make it so every contract sold must be held to the contract date and delivered, no trading.
Watch as the price of oil drops to $40/bbl in a month.
This is all bubble.
Oil is where all the saftey money is going now that the bond market is tanking.
June 9, 2008 1:08 AM | Reply | Permalink
1) As always, the notion of energy independence is simply wrong headed and doesn't grasp the larger problem that we can't have enough cheap energy available to continue our lifestyle.
2) The price of oil is now determined by speculators. There are no swing producers left; the US was a swing producer until 1972, then the Saudis -- who just abandoned that role in 2005.
Therefore, there is no one capable of removing enough oil from the group to meet demand.
Believe me, if a country, any country could, they would step up as they would be in a commanding situation in the world.
As for growing demand, look at:
http://www.gatsby.ucl.ac.uk/~pel/environment/population_pt04.html#ref
Our ability to keep up with the growing population happened 30 years ago.
While the price of oil will fluctuate, it will fluctuate around a growing exponential. Peak discover happened in the mid-60's -- so don't expect reverse the trend of the past 40 years in terms of discovery.
June 9, 2008 2:51 AM | Reply | Permalink
Um, supply and demand isn't usually linear. A relatively modest increase in demand can double the price without any speculation being involved.
I recommend Econ 101. Take a good look at inelastic goods.
June 9, 2008 4:30 AM | Reply | Permalink
And then take a look at the real numbers. There is no shortage, there is no excess demand even worldwide - in other words, the market is being manipulated.
June 9, 2008 8:19 AM | Reply | Permalink
Inelasticity of demand doesn't require hard numbers. It has to do with how steep the demand curve is. For an inelastic good like gasoline it means that people will keep buying it because they have no choice. Sure, we'll see a modest reduction in miles driven in the near term, but by and large people will keep purchasing gasoline no matter how high the price goes unless they just plain can't afford it anymore.
Now that we have that straight: What numbers are you talking about? What exactly does "excess demand" mean to you in this context? Do you mean to imply that prices would be no cheaper if there were greater supply? Here's an experiment: If I could release three billion barrels onto the market this week would it affect the price?
June 9, 2008 2:50 PM | Reply | Permalink
Look, gasoline and oil are short term inelastic goods. Over a longer period choices for the consumer become available. So while the consumer in the short term is forced to pay more, in the long term, choices such as more fuel efficient cars, better transportation systems, alternative fuels and reduced consumption will lower the demand.
In this case, gasoline has hit record supply levels, refineries are at their capacity and demand for gasoline is down and continuing to trend down. These are the real numbers that I am referring to. So if demand is down and supply is high, doesn't that tell you that something else is in play here other than classic supply/demand theory? It tells me that along with market speculation, the falling dollar and hedging, something else is at work here and it is probably market manipulation. There is no reason for gasoline to spike that high even if it's the second quarter when traditionally prices rise. And yes, I am aware that there are more factors than the ones I mentioned but inelasticity isn't one of them - there is plenty of gasoline.
What really gets me about this is that the public is told again and again by the media that this is all about supply/demand because they're either to lazy to research the real numbers, or because they continually feed off each others' stories about this assuming that the other guy actually knows what he is talking about.
June 9, 2008 7:08 PM | Reply | Permalink
I recomend the 400 level econ courses. That is where you get beyond the cliche and learn how things work.
Or get a series 3 or series 7
This is all speculation driven, if you make so futures contracts in oil and gas cannot be sold and have to be delivered, the price will plummet.
June 9, 2008 8:17 AM | Reply | Permalink
Who's doing it then? Follow the money...
June 9, 2008 9:57 AM | Reply | Permalink
I do not think that this is a oil bubble. Many people, including the government are beginning to get prepared for oil up to $225. I was reading this article called $225 Per Barrel - The New Gov't Standard for Oil that explains what the government is up to for Navy and how they are going to deal with these rising oil prices. As nice as it would be to have cheap gas again I really think those days are over. Maybe I'm being pessimistic, but I just want to prepare myself for high gas prices so I don't get my hopes up.
June 9, 2008 9:52 AM | Reply | Permalink
You people who think oil prices are going to go down are delusional. Do you think the oil producers are a charity? Or idiots? Why should they charge less when you are quite willing to pay the current price?
Stop buying oil and see the price go down.
June 9, 2008 10:00 AM | Reply | Permalink
The oil producers are not a charity, but if you take the speculation market out of the equation, and only have the transactions between the producers and end users, you will see a large pool of money in the middle dry up and move elsewhere. Supply and demand works, but right now there is false demand being created by the speculation, in other words, consumption does not equal demand.
There will be a riot at the NY mercantile and CBOT but if you make those make the trading of futures contracts illegal, or even a portion of them, prices will drop.
June 9, 2008 10:24 AM | Reply | Permalink
You can't simply buy gas from producers. Besides the gas stations, there are shipping and storage firms. There are refiners like Valero, Sunoco or Frontier. There are crude oil suppliers like BP, Chevron, ExxonMobil, Petroleos Mexicanos, Petróleos de Venezuela and Saudi Aramco. All of them buy and sell for the best price they can negotiate.
And there are traders, particularly in a volatile market with no swing producer. Some traders profit by correctly predicting the change in prices, but others guess wrong and lose money.
If you're going to scrap the stock market, what will take its place? A planned economy?
June 9, 2008 10:47 AM | Reply | Permalink
by end user I mean the refiners, or in refined gas the end user would be either a company such as an airline, or a gas distributer like bp, raceway... etc.
This is far from scrapping the stock market, but it is recognizing the vital importance of oil and gas to the economy and safegaarding these commodities from speculative price increase.
Free market aint free, it costs you dearly. I have no problem with being protectionist, why shouldn't you protect your citizens.
June 9, 2008 12:22 PM | Reply | Permalink
China, India and Indonesia currently buy fuel and sell it to their citizens for a steep subsidized discount, but are finding the policy quickly leads to large budget deficits - kind of like our war. http://www.bloomberg.com/apps/news?pid=20601091&sid=abEUZoMX6SvY&refer=india
June 9, 2008 1:11 PM | Reply | Permalink
Free market will cost you dearly, but protectionism will cost you an arm and a leg.
I assume you know what the real problem is, right? Oil prices have never been determined by free market. Oil has always been a "national interest" and its price didn't reflect the true cost. It was always kept artificially cheap, which increased its consumption and suppressed the development of alternatives. That's exactly why we're now in the hole we are in. And you want to continue screwing with the oil prices because it's worked so brilliantly in the past?
June 9, 2008 1:19 PM | Reply | Permalink
It hasn't "always been kept artificially low". Americans paid less for oil because like most commodities bought in huge bulk, we were discounted the list price. It's the same principle as selling a gallon of milk at a lesser price per ounce than a quart of milk. Oil companies can afford now to wean American customers off the discount because they're making it up in volume sales worldwide. If Americans don't buy it someone else will. Combine that with the speculation in crude oil prices and Americans are going to be in for a wild ride.
June 9, 2008 2:09 PM | Reply | Permalink
The price of oil has been kept artificially low because the government was working quite hard to secure an oil supply - and this was not reflected in the price. (Neither is environmental damage, but that's a separate problem.)
Americans are in for a wild ride, and not just Americans. That's something we can agree on.
June 9, 2008 2:24 PM | Reply | Permalink
The price of oil was not kept artificially low. We paid less because we used more.
June 9, 2008 6:33 PM | Reply | Permalink
There may be. I can't locate the data at the moment, but last week I was looking at crude oil versus gasoline. Typically these two track each other pretty closely, but recently crude oil has increased disproportionately above unleaded at the pump. If we look at this as a bubble then perhaps we should expect it to burst. On the other hand, we may see gasoline prices rise to meet crude.
June 9, 2008 10:50 AM | Reply | Permalink
Gee, I thought that was electrolyte talk. All that "inelastic supply/demand stuff that made gasoline go so high. And now to find out that the justice department has been investigating market manipulation in oil commodities trading.
I told you a month ago the numbers didn't jibe.
June 9, 2008 1:59 PM | Reply | Permalink
What you said then is as vague as what you're saying now. "The market is being manipulated." By whom? To what end? What evidence is there for what you are describing?
June 9, 2008 2:29 PM | Reply | Permalink
How would I know who is manipulating the market? And no, I wasn't "vague", I clearly pointed out that demand had dropped in the U.S. while the supply of gasoline was at an all time high. I gave you the numbers. Unfortunately, you and others were intent on proving that the .18 (cent) tax rebate would increase the price of gasoline at the pump by .18 (cent) per gallon because the problem was "inelastic supply/demand".
There are theories and there are real numbers - always look at the real numbers.
June 9, 2008 2:56 PM | Reply | Permalink
Logic says that if you can't answer that question, your thesis is probably not valid.
This is the great problem with conspiracy theorists: "they" are out there screwing with us... "they" are manipulating prices... "they" are killing energy efficient forms of transportation...
...and on and on.
It works the other way too:
"they" are close to making us energy independent...
If you can't name the "they" ... maybe you mean "we"....
June 9, 2008 3:52 PM | Reply | Permalink
It isn't my theory, it's the Justice Dept.'s theory.
June 9, 2008 8:30 PM | Reply | Permalink
Ah, so your assertion is just that someone, who knows who, is manipulating the market, who knows how? Wow. That's impressive.
Yes, gasoline is an inelastic good. What does that to do with the price of gas in Fresno? A lot, it turns out.
I never said any such thing about the rebate as you've chosen to call it. What I said is that the price of gas will be what the market will yield. Why is gas cheaper in Wyoming than it is in California? Because the market in Wyoming won't yield what it will in California or they would charge it there, too. What this means for the elimination of the federal gas tax is that there is now a window that the supplier can play with. If I am paying $4/gal. this week why won't I pay it next week? I'll pay it. They know I will. So why would they charge $3.82/gal. if they know I'll pay four? Especially under threats of increased future taxes on profits? This is really basic stuff and you haven't given me any reason to buy anything that you've said. You also give me no reason to think that you understand this stuff whatsoever.
I know the difference between theory and data very well. Do you?
I welcome your data. Show me the money.
June 9, 2008 4:07 PM | Reply | Permalink
State taxes also contribute, of course. States with flat gas tax rates are now rethinking that policy... so many states will see a rise in prices when they go to a proportional system.
DF: I'd rather someone show me the oil than the money!
June 9, 2008 4:28 PM | Reply | Permalink
That is absolutely not what you said. You said that the .18 would be passed on to the consumer by the oil companies. Secondly I said that the .18 would have no effect on the price of a gallon of gasoline, because the price of a gallon of gasoline is market driven. The .18 cent tax cut to the consumer would lower the price of gasoline by .18 at the pumps no matter how much the price of gasoline was - which of course it would - if the price of a gallon of gas was 10.00 and the excise tax of .18 was eliminated, then the price of gasoline at the pump would be reduced by .18 no matter how high the price of gasoline went. The tax rebate of .18 would have not made any difference in the price of a gallon of gasoline except at the pump. (And rebate means to diminish, strike down or stop, it doesn't necessarily mean to give back in the form of a tax rebate.) Your claim that the .18 (cent) rebate would give the oil companies a "window" of opportunity is belied by the fact that the .18 (cent) excise tax collected now hasn't given them any pause in hiking gas prices. It was your contention that the tax elimination would cause the price of gasoline to increase per gallon, it was my contention that it wouldn't make any difference whatsoever except to provide the consumer the immediate relief of .18 (cent) per gallon.
Now this is really basic stuff.
June 9, 2008 8:48 PM | Reply | Permalink
DF,
Gas prices will rise to meet crude more than the other way around, no doubt.
As Malcolm X said, "The chickens have come home to roost." Welcome to the fun and games that some of us have been writing about on this board for months now.
I'm sure all those who want to "safeguard" the oil -- especially those on the left -- are happy to know that they are in complete agreement with Dick Cheney who famously said: "The American Way of Life is not negotiable."
Presently our top suppliers are:
1) Canada
2) Mexico
3) Saudi Arabia
4) Venezuela
In reverse order:
4) Venezuela sells the US oil because we have the refineries to deal with their heavy, sour stuff. The Chinese, who have cut a side deal with them, are in the process of building just those types of refineries.
3) Saudi Arabia keeps telling us they "won't" pump more out, when in fact, the issue is they can't pump more out. We can't really force their hand considering the amount of US debt they currently hold -- our economy and it's debt are hostage to them. More smart planning. (And again, this is not just the GOP to blame. It's the Dems and everyone in the public with private debt as well.)
2) Mexico is exporting less faster than would be predicted by the physics of peak oil. Reason? They are needing their oil to run their own economy.
1) Canada: my Canada. May end up winning the technological wars: a) have enough oil to get by b) only country predicted by UN in 2025 to have enough fresh water c) global warming may make agriculture more feasible. Obamawon may just have something.
As a final thought: I just heard today that there are a number of Arizonians crossing into Mexico -- because gas is cheaper there.
June 9, 2008 1:59 PM | Reply | Permalink
I'd say the speculators in oil and other commodities are the big Wall St banks through their surrogates who will be out of business and are desperate to raise money to offset their losses in the credit market due to the mortgage meltdown.
I don't see anything else that makes sense.
June 9, 2008 11:55 AM | Reply | Permalink
Lets end this. Invade Canada!
June 9, 2008 1:37 PM | Reply | Permalink
Speaking of which - Sleeping with the Devil: How Washington Sold Our Soul for Saudi Crude by Robert Baer is a worthwhile read.
June 9, 2008 2:22 PM | Reply | Permalink
I read this years ago... and it was eye opening then. I wish more people were aware of this fantastic book, thanks for bringing it up!
June 9, 2008 2:34 PM | Reply | Permalink
His See No Evil is also a great read.
June 9, 2008 2:51 PM | Reply | Permalink
Nobody has mentioned pumping more of our own. We have the 3rd largest reserves in the world, and opening up 5% of that for production would make a huge impact. All the solar, wind, and ethanol solutions out there are not going replace oil short-term, despite the Al Gores of hte world saying otherwise.
June 9, 2008 2:46 PM | Reply | Permalink
Unless we can pump enough to BOTH offset steadily rising demand from both China and India (about 15% growth per year)and create a significant global surplus, pumping our own won't do much of any good at all. For example, drilling in ANWR may add 1 million barrels a day to the oil supply, but this will take roughly 10 to 15 years to bring online. By the time it does, rising demand in both China and India will have FAR offset any gains from ANWR. We simply can't drill ourselves out of this mess.
June 9, 2008 3:04 PM | Reply | Permalink
For the US to have the third largest reserves, you must be including unconventional reserves of kerogen (AKA oil shale). As I understand it, you have to mine the shale, remove the kerogen and either burn it like coal, or cook it into something resembling oil. And if conventional oil costs less than $75 - 100 bbl, it just isn't competitive.
June 9, 2008 4:45 PM | Reply | Permalink
A few comments to both Codegen and clearthinker, who I enjoy reading here at TPM.
"As always, the notion of energy independence is simply wrong headed and doesn't grasp the larger problem that we can't have enough cheap energy available to continue our lifestyle"
That is a fair point - perhaps I should have said reducing our dependence on oil, which is a must for many reasons, and why the changes I suggested are lifestyle changes - (eating locally grown organic food and walking, for example, may not just reduce oil dependence, but make us healthier as well as our climate).
Codegen, you point out that demand for oil is inelastic - but just as it's true that supply and demand in economics are not really lines, products are not pure elastic or inelastic. At some point, even with oil and gas, people reduce their consumption. Which is what is happening now - the MSM has reported, for example, that for the first time in more than 20 years drivers reduced the overall number of miles they drove this March - by billions.
Finally, here is an article that examines my thesis:
http://www.bi-me.com/main.php?id=20916&t=1&c=34&cg=4&mset=1011
Enjoy!
June 9, 2008 2:57 PM | Reply | Permalink
AlaskaSense:
Walking isn't a practical option in the way that most of the US is laid out. Neither is cycling. This is something we must really grasp and why we have to rethink our most basic ideas about infrastructure.
Oil isn't just about fuel. It's about inputs into the Ag industry, for example. The tremendous yields per acre are because of "modern" farming -- requiring lots of oil-based fertilizers.
While oil prices may dip a bit, expect to see a zig and zag around an increasing average. I was tickled today to hear that oil prices "pulled back"... as if they have pulled back far enough to even get where we were a few weeks ago!
I do like your idea about lifestyle changes -- but I fear they will be very dramatic and painful.
June 9, 2008 3:56 PM | Reply | Permalink
I wonder if we'll get another pre-election dip?
June 9, 2008 4:07 PM | Reply | Permalink
Locally, maybe. But that would amount of $4.25/gal instead of $4.55/gal. But we are really in new territory here: this is the first presidential election where we can't go to the Saudis and ask for a favor...
In CA, it's trivial to see $4.45/gal for 87 Octane. That is a decent price.
States will also be playing a big role in prices:
http://www.wcsh6.com/news/article.aspx?storyid=88908
June 9, 2008 4:26 PM | Reply | Permalink
Sure, long-term demand for nearly all goods is elastic. Except for air, water and maybe a few other things, everything else we can either replace or do without.
The trouble is that in the case of oil, long-term means decades. There's simply nothing to replace oil with either now or within a few years.
June 9, 2008 4:38 PM | Reply | Permalink
The Idea that a doubling of price indicates a doubling tof demand is a falicy. If you have a comodity for which demand outstrips suply by even a modest ammount the price will increase until demand drops to the level of suply. If there is a surpluss then the price will be as low as the product can be brough to market. A ten percent increase in demand if it is the difference between 95% of capacity and 105% capacity will cause a large spike in prices to as much as it takes for the extra 5% to not be able to afford it.
June 9, 2008 5:44 PM | Reply | Permalink
Clearthinker - we definitely need to rethink our infrastructure; oil and fertilizers are also deeply rooted in the "modern" agriculture system as well.
People are changing their behavior, and when 300 million of us do it at the same time, we have a tremendous effect. The good news is millions of people are asking the question - how can I reduce my use of gas? There are a variety of answers depending on the situation, but what I've found the data supports so far is people are driving less.
That's why I'm not so worried. Gore's main point is that no single solution gets us there for climate change. Codegen is right on that there's no replacement yet, but now the fire under our fannies has collectively been lit.
Donal - I wonder if you're correct as well and we'll see a dip before the election. Might be worth it to check gas and oil prices in September/October/November 02,04, and 06...
June 9, 2008 6:20 PM | Reply | Permalink
It funny this was posted today because I just ran across this article at counterpunch today(A Ripe Time for Inflation by Kenneth Couesbouc):
http://www.counterpunch.org/couesbouc06092008.html
(I'm sorry I don't know HTML)
It long but it outlines the relationship between the stock, housing, and commodities markets. Given the current instability in the stock and housing markets, the safe investments right now are in the commodities market, and oil is a safe bet (for now).
The take home message. The three biggest spikes in inflation occured when our country was at war (WWI, WWII, and Vietnam) and cost of fossil fuels were high because of regional instability. If you look at this chart:
http://www.gocurrency.com/articles/stories-inflation.htm
these were huge spikes in inflation by American standards. There aren't any other times in the 20th century where inflation spiked so much.
June 9, 2008 6:22 PM | Reply | Permalink
Someone asked upthread about the mysterious "they" who are manipulating the market. Not a mystery, ther "They" would be hedgefunds, soverign funds, retirement plan managers, commercial banks, etc. Basically all the people who control lots of cash.
They are not some evil consortium looking to hurt people, or manipulate the market unfairly. They are looking for predictable steady yield. All the money that was tied into mortgage backed securities (which were stable high yield performers right up until about 18 months ago) is now looking for a new home. They have to keep yield above inflation, and are dumping funds into commodities. This is part of the reason for the spike in oil, gas, and metals, although the devaluation of US currency is also a big factor.
June 9, 2008 6:47 PM | Reply | Permalink
8 years of George W. Bush is also a big factor - killing folks so your supporters can get cheap oil for their gas guzzling SUV's and Hummers doesn't work - the country needs real long term energy and transportation policies.
June 9, 2008 11:41 PM | Reply | Permalink
RE, that's my whole flight to safety case. And what's next when the oil bubble pops? (Still not 100% convinced it's a bubble as there have been some compelling arguments above).
Next is the treasuries - which soar when the Fed has to act to contain inflation. As in the late 70s/early 80s.
Sound like history repeating itself?
June 9, 2008 6:57 PM | Reply | Permalink
Alaska,
The treasuries should have taken off a while ago, the current admin would rather keep them artificially low percentagewise or the budget for the treasury dept (the ones who service the national debt) would explode. When oil starts to pop there will be another place to dump cash, who knows where, could be another commodity or foriegn bonds... who knows. If I knew I would be a rich man, but I can see what is happening and it will continue for a while longer, but will bust within 18 months or so.
Also I do not think the fed wants to contain inflation, a little hyper inflation will help the banks, the problem is the lag between prices and wages. The banks are in the hole deep on mortgages and exposed to huge losses if people decide to walk away. As a government, you cannot make homes more valuable but you can make money less valuable so that the number come back into line.
Just my theory, but it seems accurate.
June 9, 2008 7:08 PM | Reply | Permalink
A new oil bubble is forming on the surface of John McCain's bath water.
June 9, 2008 7:53 PM | Reply | Permalink
His bottled, hot bath water.
June 9, 2008 8:00 PM | Reply | Permalink
It is major speculation. I suspect we will see oil drop in the next few months now that that the CFTC is investigating its own maarkets and margin requirements. The full two articles from Financial Sense should be read to understand the full implications of what is happening here. Also this is effecting food prices as we speak and having major implications on several fronts.
A conservative calculation is that at least 60% of today’s $128 per barrel price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny. US margin rules of the government’s Commodity Futures Trading Commission (CFTC) allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At today's price of $128 per barrel, that means a futures trader only has to put up about $8 for every barrel. He borrows the other $120. This extreme “leverage” of 16 to 1 helps drive prices to wildly unrealistic levels and offset bank losses in sub-prime and other disasters at the expense of the overall population.
http://www.financialsense.com/editorials/engdahl/2008/0521.html
Current Investigation by CFTC
Lawmakers approved a measure this month to strengthen CFTC oversight of electronic energy trading, and others have called for increasing margin requirements to reduce speculation in the markets.
Higher margin requirements could lead traders to switch to other markets, Lukken said today in an interview.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_nzZz4ep_2k&refer=home
June 9, 2008 11:18 PM | Reply | Permalink
Post a Comment