Friday, 23 May 2008
Oil Bubble Will Burst
Surely it(Oil) is driven by profound and lasting changes in global supply and demand: China's insatiable appetite for food and energy, geopolitical conflicts in the Middle East, the peaking of global oil reserves, droughts caused by global warming and so on. All these fundamental points are perfectly valid, but they tell us nothing about whether the oil price will soon jump to $200, stay at $130 or fall back to $60 next month.
To see that these “fundamentals” are all irrelevant, we have merely to ask which of them has changed in the past nine months. The answer is none. The oil markets didn't suddenly discover China's oil demand nine months ago so this cannot explain the doubling of prices since last August. In fact, China's “insatiable” demand growth has decelerated. In 2004 it was consuming an extra 0.9 million barrels a day; in 2007 it was consuming just an extra 0.3 mbd. In the same period global demand growth has slowed from 3.6 mbd to 0.7 mbd. As a result, the increase in global demand growth is now well below last year's increase of 0.8 mbd in non-Opec production, according to Mike Rothman, of ISI, a leading New York consulting group.
We are even seeing a huge build up of supply.
the Gulf, according to Mr Rothman, is crammed with supertankers chartered by oil-producing governments to hold the inventories of oil they are pumping but cannot sell.
Add to it the fact that higher prices are almost assuredly curbing consumer consumption, and a glut in supply is invevitable.
Isn't this just a plot by Big Oil to drive up prices? In reality the build up of oil is not some nefarious plot, but the result of having no one wanting to pay today's price for oil. Especially when the future price is almost assuredly going to be lower.
If supply is outstripping demand how come prices are still going upwards? This isn't the first time we have seen irrationalities in the market place. Just go back to the late 90's where Dot Com companies were trading well above their true value. There was nothing rational about it. But what happens when prices become detached from market principles? The Dot Com bubble burst and stocks fell dramatically.
The same thing is bound to happen to oil prices. The irrationality within a market can only last so long before the market forces a correction. The only question remaining is when it will occur. Hopefully it will occur before the politicians in DC start taking actions to "correct the problem" of high gas prices. A move that will only cause more problems than it will solve.
So while gas prices are painful right now, don't bitch to politicians about it or blame some conspiracy by big oil. One would be better served to show some patience and frugality. Sooner or later the market will correct and prices will plummet to more reasonable levels. That is just the way markets work. Complaining about it doesn't change they dynamics.
Hat tip to my friend Rob for sending me the article.
