Economics

Oil Price Bubble?

Supply is up, demand is down, yet the price is soaring. Here's why.

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Oil prices climbed to their highest level ever, reaching over $108 per barrel this week. And Americans are feeling this price spike at the pump, with gasoline averaging $3.22 per gallon. An analysis released by the investment firm Goldman Sachs suggested that oil prices might soar to $200 per barrel. Does this make sense?

Not really. Although U.S. crude oil inventories have fallen, gasoline inventories are at their highest since March, 1993, notes Tim Evans, an energy futures analyst at Citigroup's Futures Perspective. World oil production was up 2.5 percent in the first quarter of 2008 over the same period in 2007 while world oil consumption rose by just 2 percent. In fact, world production is projected to be 3.3 percent higher in the second quarter and 4.1 percent higher in the third quarter than the same periods a year ago. On the other hand, world demand is projected to rise by just 1.6 percent over the next six months.

In fact, demand is falling in some countries. According to economist John Kemp at the commodities firm Sempra Metals, the U.S. consumed 4 percent less petroleum in January 2008 than it did the year before. Evans agrees, noting that the U.S. demand for petroleum products began falling off last July. Interestingly, this drop in U.S. oil consumption began before crude prices turned vertical and before we began to see weakness in the broader economy. Even China's thirst for oil is abating somewhat. Its demand for oil, which once rose at 10 percent per year, has now dropped to 6 percent per year. In addition, world surplus oil production capacity has gone from a very tight 1.5 million barrels per day a couple of years ago to more than 3 million barrels today, says petroleum economist Michael Lynch.

So supply is up; relative demand is down and yet, the price of oil is soaring. What's going on? Last week, Exxon Mobil CEO Rex Tillerson blamed a third of the recent run up in oil prices on the weak dollar, another third on geopolitical uncertainty, and the rest on market speculation.

Let's start with geopolitical uncertainties. Last year, oil consumers watched warily as unrest in Nigeria's oil fields, the possibility of war between the U.S. and Iran, and the antics of Venezuela's Hugo Chavez threatened to disrupt oil supplies. That analysis may have once made sense, but most of those tensions have abated in recent months. Nevertheless, it remains true that most of the world's oil is produced in volatile regions and by erratic governments, so the price of crude must still include some kind of political risk premium.

What effect does the falling dollar have on the price of crude? Most oil price contracts are denominated in dollars. The dollar has fallen in value by more than 30 percent against a Federal Reserve index of major currencies since 2002. This means that the price of imports, including oil, have gone up. To some extent, the chief of the Organization of Petroleum Exporting Countries (OPEC) Chakib Khelil was correct when he said earlier this week, "What's happening in the oil market is due to the mismanagement of the U.S. economy." Continuing U.S. trade and fiscal deficits along with lower interest rates are stoking inflationary fears.

That brings us to speculation. Evans observes that since September 2003, the total number of open crude oil futures and options contracts rose by 364 percent. Meanwhile the global demand for petroleum rose by just 8.2 percent. "So the futures and options market has become more important than the physical supplies in driving the price," concludes Evans. "We are seeing investment flows into the oil market that don't have anything to do with the demand and supply of oil."

Investors are treating oil as a hedge against inflation and a falling dollar. Oil markets are part of a negative positive feedback loop in which higher oil prices contribute to higher inflation, which in turn lowers the value of the dollar, which boosts oil prices, and so forth. In other words, the oil market is coming to resemble the gold market (which has also been soaring). Evans notes that most gold traders don't even ask the question of how much gold was mined last year or how much spare gold mining capacity there is.

In the short run, oil prices are very inelastic: A large change in price produces only a small change in demand. If the price of gas goes up a dollar per gallon overnight, you still have to fill your tank to get to work. However, over the long run, consumers and producers respond to higher oil prices. For example, Americans are driving less and have switched to buying more fuel efficient cars.

Higher prices also encourage innovation. Economist Richard Rahn from the Institute for Global Economic Growth believes battery technologies are improving so rapidly that the majority of cars sold in 10 years will be all-electric. This would certainly help drive down the price of oil. Supply is also inelastic—it takes a long time to do the exploration, drilling, and refining necessary to boost production in response to higher prices. This inelasticity of demand and supply means that petroleum prices are very sensitive to relatively small changes in either. This means that prices can fall as steeply has they rose.

Whenever you begin to hear market gurus decree that "this time it's different," as we did during the dot-com bubble and the housing bubble, that's a sure sign of danger in the market. Naturally, proponents of the peak oil theory claim that the recent run up in prices is evidence that the end is nigh. Evans responds, "Fears of peak oil are what this market has in common with the 1980s, not what is different." Recall that during the "oil crisis" of the 1970s when oil prices were as high as they are today, U.S. oil consumption declined by 13 percent between 1973 and 1983. The higher prices of the 1970s led eventually to an oil glut and prices fell to about $10 a barrel by 1986.

So what will happen to oil prices over the next few years? No one is predicting $10 per barrel oil. However, once the current bubble bursts, both Evans and Lynch believe that the price of crude will settle at around $60 to $70 per barrel in the next couple of years. "It's very hard to pinpoint just how long a bubble can expand before it breaks. Getting the timing right is not an easy matter," says Evans. But he adds, "I think that this is the riskiest time to be long in crude oil since 1980."

Ronald Bailey is reason's science correspondent. His most recent book, Liberation Biology: The Scientific and Moral Case for the Biotech Revolution, is available from Prometheus Books.

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  1. I’ve been thinking for a few weeks now that oil prices sure look like a bubble – just look at the price graph.

    I just wish I had the stones to short oil right now. Somebody’s gonna make a damn fortune shorting oil in the near future, but it won’t be me.

  2. Wait. Isn’t Ron Bailey supposed to be pumping the price of oil, not talking it down? Doesn’t he own like 10 shares of Exxon stock or something?
    If you won’t think of your own interests, Ron, think of mine. I’ve got 100 shares, and the difference between my drinking McDonald’s coffee or Starbucks in retirement may lie in the balance…

  3. It’s OK, citizen. He’ll change his mind about this just like he did with global warming. Right, Ron?

    WRT oil prices, do they look the same when priced in other currencies? I was under the impression that oil is not necessarily costing more but the dollar is worth less. Or something.

  4. Where you said “Oil markets are part of a negative feedback loop in which higher oil prices contribute to higher inflation, which in turn lowers the value of the dollar, which boosts oil prices, and so forth.”, I think you meant positive feedback loop.

  5. Bailey, I love you but you are wrong about the oil situation.

    Oil is going higher in price unless we come up with an energy substitute, which seems extremely unlikely to me. The price might fluctuate a bit, and it might make a quick trip to $80 per barrel but five years from now, maybe sooner, oil will be fetching at least $200 per barrel.

    RCDean, your instincts are correct. Do not short oil.

    A BIG part of the reason, but certainly not the only reason, for the soaring oil price is the plunging dollar. Oil is a dollar hedge. With the Fed counterfeiting $200B to bail out the bankrupt banks, that plunge ain’t stopping any time soon.

  6. Short term, Bailey’s probably right. No immediate indicators suggest we’ll be peaking this year or the next, but what about reserve replacement Ron. BP and Conocophillips were the only supermajors to suggest that their reserve replacement was positive last year. Shell, Exxon, and Chevron, were all negative, meaning they sucked up more than they found new. Nobody has any idea what OPEC reserve replacements are, but the massive drilling program they’ve launched in Saudi Arabia combined with the increasing tightening of output from OPEC in general suggest that the massive fields are dying and new wells haven’t been exactly barn burners, suggesting that they’re not replacing their reserves either. This is bound to drive a speculative market, regardless of what actual supply and demand are doing.

  7. I just wanted to mention that it was nice to see an article on the markets. Not ‘free markets’ or whatever libertarian ideology but just some analysis on world markets. I find that Reason definetely lacks in that area.

  8. >WRT oil prices, do they look the same when priced in other currencies?

    Oil doesn’t look nearly so bad when you price it in Euros. But even pricing in the weak dollar of the last few years, you’ve still got oil in the $75 which is still fairly high by historical standards. Also, given the inelastic demand for oil, a hard price crash is unlikely, and even if you were going to short oil, the timing on that would tend to be very tricky. After all, the real estate bubble lasted about 2 years longer than I thought it would and I know a lot more about real estate than I do oil. 🙂 Then again, if you take your investing advice from anonymous internet forums, you’re probably dumber than my dog.

  9. The last time I read someone write “the majority of cars sold in 10 years will be all-electric,” the year was 1999.

    Build the electric SUV and town car, and gas will be a distant memory. Keep building womanish golf-carts and watch the status quo stretch into our grandchildren’s day.

  10. Hey, val. There’s this magazine called The Economist that might really float your boat. I subscribe to that, too. But I come to Reason precisely because of its ” “free markets” or whatever libertarian ideology.”

  11. Fred,

    The last time you read about electric cars, oil was $10/bbl. The writer of the article either thought the oil runup would be incredibly fast, battery efficiency would be doubling every 6 months, a complete, intact distribution network of electricty would pop up over night or he was an idiot.

  12. Citizen Nothing,

    As I recall, The Economist is about “free markets” also. They just like killing Iraqis on the side.

  13. So as long as I’m pimping The Economist and jacking the thread, here’s a great chart posted today showing individual tax burdens by country.
    http://www.economist.com/daily/chartgallery/displaystory.cfm?story_id=10835581

  14. What’s happening in the oil market is due to the mismanagement of the U.S. economy.” Continuing U.S. trade and fiscal deficits along with lower interest rates are stoking inflationary fears.

    Bingo. I’m still looking to craig venter and the venter institute to develope a cell that produces hydrogen

    Among the organization’s goals is creating artificial DNA sequences to build functioning synthetic genomes, which can then be inserted into cells. Basically, they are trying to build whole new life forms. The goal would be to give this human-made organism specific genes which would allow it to perform particular environmental tasks, like consuming carbon dioxide from the atmosphere, or even making hydrogen for fuel cells.

  15. LIT – I always thought the Economist was remarkably skeptical about the war.
    And just to continue the jacking, here’s a great line from an Economist McCain profile:
    “Though he is the only candidate who has dropped bombs on foreigners, Mr McCain is also the only one who embraces globalisation.”

  16. The price oil is going to crash to after the bubble inevitably pops keeps creeping up. So now it’s $60 or $70. It was $30 in 2005.

    People have been calling commodities including oil a bubble for most of this decade. I dunno if you can have a bubble when everyone is calling it a bubble.

    Compare it to real estate – the actual bubble going on during that time frame – or even more importantly the debt bubble behind the real estate bubble. I don’t recall anyone talking about CDOs SIVs etc.

    One thing for the oil bears: I saw Kudlow on the tube and he seems to have capitulated. He was one of those $30 oil is around the corner guys for years. Since he’s always wrong about everything maybe it is going down.

  17. Aaagh, the market is roaring along and folks will be jumping back in from oil. I predict that oil will be down at least 20 dollars by this time next week.

  18. Oil is going higher in price unless we come up with an energy substitute, which seems extremely unlikely to me.

    We are using an energy substitute right now, wayne, but prudes like you won’t let go back to whale hunting so we are stuck with what is left!

  19. Citizen Nothing,

    The Economist has been like McCain, skeptical on the handling of the war, but in general felt it was necessary to overthrow Saddam, regardless of whether he was or wasn’t a threat to the USA. They’re very much interventionalists. They also fawn over McCain like a teenage girl at a boy band concert.

  20. It will go down. It has to. Supply and inventories are up and demand is down. There is no way around that. The other thing that happened during the last bust is Paul Volker did the right thing and jacked interest rates up until there was not an once of inflation left in the system and that revalued the dollar. Sadly, I don’t think that is going to happen this time, but the dollar should start to come back some. I bet oil is between 50 and 60 a barrell by this time next year.

  21. Does this mean Exxon is going to get a bailout in a few years when the oil bubble bursts?

  22. John,

    Bet you $50 that oil will still be above $80 by this time next year and that it won’t have fallen below that amount anywhere in the interim.

  23. What is with the bubbles recently? There was the tech bubble 8 years ago, the housing bubble 3 years ago, now there is an oil bubble. My memory may be faulty, but I don’t remember many bubbles between ’80 and ’95.

    Does it have to do with the boomers needing a place to invest their retirement money? Maybe I should look for an article in The Economist (I too subscribe to both magazines).

  24. Travis,

    Exxon still does its economics based on $30-$50 oil. I doubt you’ll be able to crush them that easily.

  25. Stuart,

    There was the oil bubble of ’83, the commercial real estate bubble of the early ’90’s and many more. We live in an era of cycles. We’re just more aware of them now that the swings are increasing.

  26. Hey, val. There’s this magazine called The Economist that might really float your boat. I subscribe to that, too. But I come to Reason precisely because of its ” “free markets” or whatever libertarian ideology.”

    Okeedoke. I didnt imply INSTEAD of ideolgy but IN ADDITION to. You know add an extra page or something. I take it you would cancel your subscription if they were to include MORE content?

  27. LIT,

    Cycles are normal, but it seems that the swings are larger and moving out of normal supply and demand and into bubbles. Or as I move closer to retirement I am paying more attention.

  28. “Oil markets are part of a negative feedback loop in which higher oil prices contribute to higher inflation, which in turn lowers the value of the dollar, which boosts oil prices, and so forth.”

    Bailey: Oil prices don’t contribute to inflation in any causal way. The same factor that causes inflation, growth in the money supply, also causes the price of oil to increase. If oil prices rise relative to other prices in the economy, then the price of other goods must be falling relative to oil – this has no affect on inflation.

    I makes no sense to talk of increasing prices contributing to inflation – increasing prices ARE inflation. And if all prices are increasing, then the cause is always the same – money growth.

  29. “John,

    Bet you $50 that oil will still be above $80 by this time next year and that it won’t have fallen below that amount anywhere in the interim.”

    I will take that bet. Seriously, mark it down. I should still be posting on here next year and if you are right, feel free to gloat and I will even send you the money. Promise.

  30. John,

    So I don’t violate the online gambling ban and have the feds come haul me off, I’ll be paying in Zimbabwe dollars and expect the same from you, 🙂

    Still, I’m fairly confident and would definitely buy you a beer or six if you ever came to Houston.

  31. John, can I get some of that action too?

    GuyM, me, a prude? I doubt anybody could be much farther from prudishness.

  32. Oil bubble? Sorry, I thought this was the toil bubbling thread.

  33. There was a crackpot at the gas pumps this morning at 7 a.m., engaged in a loud harangue about how President Bush only cares about the rich people and how oil prices are directly related to the Emancipation Proclamation, or maybe Reconstruction. I dunno. We all remained silent and hoped our tanks would fill quickly. I think the $3.50/gallon gas made him snap. It would have been funny if it wasn’t so damn early.

  34. …this could be a large bar tab…

  35. Poor stewardship of the dollar is our ailment. The price of oil is but a symptom.
    So long as the Fed seeks to manipulate the economy by throwing good money after bad (bad money after worse?), we’ll continue to see ramping price inflation.

    The Fed releases 200 billion fiat dollars into play, gets a 400 point surge on the DJIA, but the value of oil is derided as bubbly?

  36. I’ve got an idea; let’s kill Amtrak, defund public transportation, and build more toll roads. It’s the doctrinaire libertarian solution and I’m pretty sure it will help lower oil prices too!

  37. Yea, CCS, we need to bring back the salt standard to save us from the federal government. That’s the ticket.

  38. Great idea, e! Wait, you were being sarcastic? Great idea anyway!!!

  39. Looking at a long term oil/gold price chart and based on no good idea of how to do this right (in other words, dont follow my advice), the right investment is to be long on gold and short on oil. The gold/oil price ratio is too low, either oil will plummet in price (to 60-70) or gold will shoot up to 1500.

    It looks like the long term (40 years) ratio is 15:1. However, it never is 15:1 (for long). It is always either in the 6-10 range or the 20-25 range. It is about 9:1 right now, so the ratio should be widening over the next 2 years.

    If I had some money available to test this out, buying a mix of oil puts and gold calls might be interesting to try.

  40. I suspect the definition of “bubble” has gone down a lot.

    I used to associate bubbles with gigantic economic crisis, like the Dutch and their tulips, France and that one thing, the Great Depression. Stuff like that. When those popped, whole countries went to hell, people throwing themselves off buildings, dogs and cats living together, etc.

    Now something is a bubble if it is above what the author thinks is the valid market price.

  41. e,

    How about defund Amtrak and public transportation, then SELL the public roads to the highest bidders?

  42. robc,

    You are bringing back fond memories of 200 and 300 series Markets classes from college 🙂

    Much nicer than the annoying bar manager last Friday, who brought back memories of how silly people sound talking about bonds after they read a hysterical newspaper article written by a comma-placement major.

  43. Pedro Bento wrote:

    Bailey: Oil prices don’t contribute to inflation in any causal way. The same factor that causes inflation, growth in the money supply, also causes the price of oil to increase. If oil prices rise relative to other prices in the economy, then the price of other goods must be falling relative to oil – this has no affect on inflation.

    But if oil prices rise at a faster rate than the average rate of other products, due to other factors in addition to an increase money supply, then the rising oil price will contribute by increasing the rate of inflation on those products, correct?

    as a side note, I don’t like the wording on the trade deficit/inflation comment Bailey made. It seems to imply that trade deficits are a cause inflation, rather than simply the weak dollar causing our imported products prices to be inflated.

  44. Fools ~ Fools ~ damned Fools!

    Bush danced like a rummy twice in two months time for the Saudi’s begging them to pump more oil. Why? Because demand is down? Because Bush is a humble guy who likes to ask for things?

    The Saudi’s reserve claims are verifiable by….who? …no one. Thats’ who.
    They say they have plenty. Yet they can’t pump any more than 12 mbd?

    The good stuff that just flows through a tube has all been found. How do I know? They are throwing huge dollars at Alberta, CA to dig up those oil sands. Nobody in there right mind would tap that source if there was any low hanging fruit left.

    Gas refineries have lowered their capacity. It was expected to rise .02 it went down .09. That guarantees $5.00 gas this summer.

    Sure world wide demand is going down. Right.

    Oil to $300 sooner than you think.

  45. Oh yeah…Bush is sending Cheney to do some of his own dancing next week. Because demand is expected to be lower…right?

    Couple of weeks ago Greenspan advised the OPEC nations to de peg form the dollar.

    Look out below!!!!

  46. Reason defends the literally marxist idea that we need a Federal Reserve….calling any ideas to the contrary “kooky”. Reason says they are for free markets yet they write articles blaming irrational human investors for high oil prices instead of the tragically crappy outlook for the crumbling US dollar. I get the feeling that Reason will still be backing a federal reserve system when the dollar is valued at 50% of current values.

    Serioursly….”oil prices are fueling inflation”????!….it has nothing to do with a two party system where each party is a completely marxist, buliding up trillions in debt and the economic leaders of teh coutnry claimt hat all crisis can be prevented if we simply print more money!…market participants do read about ideas of the actors in our system you know! people are getting scared and commodities are a safer store of value…simple as that.

  47. Political factors x new demand x OPEC cartel x inflation/deficit = $150 plus this year.

    Senator Kohl introduced a BIPARTISAN bill dubbed NOPEC that would have removed OPEC’s worldwide cartel immunity they currently enjoy – forcing national oil companies out of the collusion business. Even the Heritage Foundation supported it.

    Bush/Cheney killed it – citing the need for “stability” in crude prices……

    Going up!

    (Interestingly, the EU killed the GE/Honeywell merger. Anyone who thinks markets are “free” is kidding themself.)

  48. When Bailey and those analysts say oil is “overvalued,” they’re saying the market is “wrong” or “irrational.” I’m not so sure. Markets look forward. I think oil markets are discounting future scarcity rather than today’s glut and incentivising conservation and production.

  49. How about defund Amtrak and public transportation, then SELL the public roads to the highest bidders?

    Sounds great to me Guy! And I can’t think of a better time to scrap trains than now; no one rides the darn things anyway except hoboes..

    Caltrain ridership booms to record high

  50. Nice picture–The Wages of Fear?

  51. Freeranger,

    Usually the term “overvalued” or “undervalued” is used when some “irrational” factor drives the price of an item, in addition to the supply/demand and other regular factors.

    I do not recall how far out oil futures are written, but I don’t remember them going out years or decades, but perhaps you did not imply that horizon in your post.

    The market for oil that far out would be controlling the miniral rights for suspected deposits, not a trading floor.

    Oh, for the OPEC hysterians (not you Freeranger), that is the leakiest cartel ever created and bothering to try to “regulate it out of existance” is a waste of time at worst and eye-wash at best.

  52. They also fawn over McCain like a teenage girl at a boy band concert.

    I like this little gem from 1/26/08: “The risk for the eventual nominee, whether Mrs Clinton or Mr Obama, is that an alienated group might tend to stay at home in November–or worse, send a bundle of votes to a centrist Republican xenophile like John McCain. If that happens, the White House could be lost.”

    So was that sarcastic? I’m not sure if you can call McCain a xenophile just because he wants amnesty for IIs, but still, I’m not sure where the Economist was coming from on that one.

  53. it has nothing to do with a two party system where each party is a completely marxist

    GH, when you misuse a term badly you make it, and the thoughts you are expressing, meaningless.

    When Bailey and those analysts say oil is “overvalued,” they’re saying the market is “wrong” or “irrational.” I’m not so sure. Markets look forward. I think oil markets are discounting future scarcity rather than today’s glut and incentivising conservation and production.

    “Is the market being irrational now?” is the question. Come on up, place your bets. In Ron’s next oil post will he disclose that he bought puts on oil?

  54. A BIG part of the reason, but certainly not the only reason, for the soaring oil price is the plunging dollar.

    I’m under strict instructions to not talk about the dollar.

  55. “Though he is the only candidate who has dropped bombs on foreigners, Mr McCain is also the only one who embraces globalisation.”

    In reality, all three of the remaining candidates are dyed-in-the-wool globalists. You know it, and I know it.

    It’s merely that Clinton and Obama are compelled to lie about it because so much of their core base is poorly educated, and they’re still locked in mortal combat for the nomination.

  56. So was that sarcastic? I’m not sure if you can call McCain a xenophile just because he wants amnesty for IIs, but still, I’m not sure where the Economist was coming from on that one.

    The economist likes to project their desire for totally free movement onto those they like, much like a tweenage girl projecting images of the perfect boyfriend on the non threatening smile of a media controlled merchandise revenue generator (spelled T-I-M-B-E-R-L-A-K-E)

  57. Society of Petroleum Engineers 2004 debate
    Q&A Session
    (Michael Lynch predicted oil to fall to $25 range while Simmons predicted above $50)
    http://interface.audiovideoweb.com/lnk/nj45win9664/SPE/qahi.wmv/play.asx

    WSJ (Wall Street Journal) on CERA “Study Shows Oil Production Down”
    http://www.marketwatch.com/tvradio/bcPlayer.asp?bcpid=203719194&bclid=86272812&bctid=1379245336

    The Sad Record of Daniel Yergin and Cambridge Energy Research Associates
    http://home.entouch.net/dmd/cera.h2.jpg

    Dr Sadad Al-Husseini
    Brown University PhD, former head of Saudi Armco’s production & exploration
    November 1, 2007 interview
    Page down to: Listen to the interview with Sadad al-Huseini.
    http://www.davidstrahan.com/blog/?p=67
    http://www.energybulletin.net/36510.html

    OPEC’s Growing Call on Itself
    http://research.cibcwm.com/economic_public/download/occrept62.pdf

    World Oil Discovery Trend; graphs
    BP: http://www.theoildrum.com/uploads/44/oil_discovery_trend.gif
    Exxon: http://www.daveseslbiofuel.com/pix/gap.jpg

  58. Now Ron’s a shill for Mr. Bubble?

  59. Oil up $1.3 on what was supposed to be great news today about reserves.

    This is NOT speculation. Demand is up. Supplies are on a permanent downward slide. Simple as that.

    Gold and silver are the dollar hedge. Gold doesn’t disappear. Looks pretty around your wife’s finger. Oil turns into a deadly gas once you use it.

    China will use all those near worthless dollars it holds to fill it’s SPR.

  60. But if oil prices rise at a faster rate than the average rate of other products, due to other factors in addition to an increase money supply, then the rising oil price will contribute by increasing the rate of inflation on those products, correct?

    Increase in some prices does not equal inflation.

    “Inflation” is shorthand for inflation of the money supply, not rising prices. Rising prices may be a symptom/result of inflation, but it is not a cause of inflation.

  61. Wayne:

    I didn’t read much of an argument in your theory. Whether Bailey is wrong or not, his article has plenty of reasons why– exactly– he (and others) think that oil is in an artificial bubble state right now. Most of the argument relates to the price not reflecting the reality of supply and demand.

    Why– exactly– do you think it’s not? Do you simply believe that the supply and demand figures are flat-out wrong?

  62. When Bailey and those analysts say oil is “overvalued,” they’re saying the market is “wrong” or “irrational.” I’m not so sure. Markets look forward. I think oil markets are discounting future scarcity rather than today’s glut and incentivising conservation and production.

    No, the market is never wrong. The market is what it is. The market is correct in that it fears future scarcity and a weak dollar. The fear is real. You might swing the irrational argument, but if the fears don’t come to fruition, then the market will more closely reflect the oil inventories vs. demand.

  63. Gas refineries have lowered their capacity. It was expected to rise .02 it went down .09. That guarantees $5.00 gas this summer.

    James, can we quote you on that? The graveyard is littered with speculators who used the word “guarantee” in the same sentence as a future price prediction. This includes Ron Bailey predicting gas would be in the $2 range by now.

  64. Oil turns into a deadly gas once you use it.?

    What deadly gas is that?

  65. @ Paul

    Yes you can quote me. If I’m wrong I’ll come back here and admit to it. As I certainly hope that I am.

    C02 is the deadly gas.

  66. Oops I C0 (carbon monoxide) not co2 carbon dioxide. Still…too much Co2

  67. Thank you James. I was getting ready to post a long missive about how co2 was NOT a deadly gas, but I caught your followup. Nice save.

    And I hope your wrong about $5 gas, too. And if you’re right, I’ll start making all investments based on your speculations. ‘Cause that’s one hell of a prediction. Had you said $4 gas, I may not have even responded. ‘Cause diesel IS $4 a gallon. Now ask how much Biodiesel is. It makes regular diesel look cheap.

  68. “you’re” wrong about $5 gas. God I hate it when other people make that mistake.

  69. This is NOT speculation. Demand is up. Supplies are on a permanent downward slide. Simple as that.

    Demand may be up, but supplies are infinite.

  70. @ Joe

    Are a believer in abiotic oil?

  71. science geek quibble

    positive feedback, not negative feedback. nfb would tend to stabilize the price.

    /science geek quibble

  72. In the 80’s US production peaked. Prices went up and it meant we sought production in other countries of the world. This time it’s different, the world is peaking and unfortunately there isn’t another world to look for oil on. Unconventional oil cannot be produced at the same rate as regular oil.. Peak is happening now, just as Hubbert predicted in 1976.

  73. Your dates are a bit off, Aceditor. US oil production in the lower 48 states peaked in the early 70s, and Hubbert made his predictions in the mid-50s. But yeah, I think if we’re not already at world peak we’re mighty close.

  74. In a given time frame, prices might undervalue or overvalue a commodity. This is also true of stocks. The exact true price is not always accurately reflected every minute of every day. There is usually an imbalance. This is due to traders emotions– fear or greed.
    It would also be naive to ignore the speculative powers in the petroleum market. It’s too easy to say it’s as simple as supply and demand of the underlying. A perfect example of speculation is when oil hit $100 in early Jan., only to pull back to the mid 80s. Did demand suddenly dry up or supply realize a surplus right at $100.05? No, traders who were long, sold, and the shorts piled on.
    As for where the price goes from here, who knows? While many say higher, legendary oil man T. Boone Pickens is short. But that’s what makes a market.
    One other theory to support the “higher prices across all commodity markets” argument is that there are too many dollars chasing too few markets.

  75. “”Inflation” is shorthand for inflation of the money supply, not rising prices. Rising prices may be a symptom/result of inflation, but it is not a cause of inflation.”

    Are you sure about that, R.C? Because that would mean Chavez has whipped inflation by introducing the “Bolivar Fuerte” – basically lopping three zeroes off the bolivar not so fuerte.

  76. How will the electric car batteries be charged in the future?

    The United States would have to burn more fossil feuls to keep up with the increased demand for electricity.

  77. PTB will get Obama elected because he will be best at securing oil interests in Sudan, Chad and the rest of central Africa.

    You heard it here first. 🙂

  78. One question we might all start asking is, when do we predict we’ll be at peak consumption? Alongside fears of peak oil (production), we create more efficient technologies, and offset some energy technologies requiring oil with some that don’t.

  79. Travis:

    If we go to they much-ballyhooed “hydrogen” economy, nuclear will figure prominently, as will coal production.

    I’m still very interested in localized hydrogen production for electricity via solar power.

  80. Dan & edna: Right you are–it’s a positive loop. Fixed now. Thanks.

  81. Oops I C0 (carbon monoxide) not co2 carbon dioxide. Still…too much Co2

    And with the emissions control systems in place on gasoline vehicles sold in the USA since the 1970s, CO2, a non-poisonous gas, is what is emitted from the exhaust system. Plus that evil dihydrogenmonoxide, a deadly greenhouse gas, if you want to get upset about something.

  82. The United States would have to burn more fossil fuels to keep up with the increased demand for electricity.

    Not if we were to embark on a 21st century Manhattan Project of building new, modern, safe nuclear power plants around the country.

    But we had better start now, because it takes quite a few years to get a nuclear reactor built and online, and we might not be able to afford to wait too much longer.

  83. Mike M. and others,

    We already have plenty of coal that is not all that expensive and the plants to burn that seem to be a lot less expensive than nuclear plants.

  84. http://www.ibdeditorials.com/IBDArticles.aspx?id=285982232964929

    The Clintons’ Coal-Gate

    By INVESTOR’S BUSINESS DAILY
    Posted Wednesday, January 23, 2008 4:20 PM PT
    Editorial

    Scandals: Hillary Clinton calls President Bush’s talks with the Saudis
    about increasing oil output “pathetic.” But it’s not as pathetic as
    her co-president husband locking up billions of tons of clean coal in
    exchange for political contributions.

    As Bush wrapped up his Middle East trip, Sen. Clinton commented:
    “President Bush is over in the Gulf now begging the Saudis and others
    to drop the price of oil. How pathetic.”

    A large part of America’s energy dependence on foreign sources can be
    traced to Sept. 18, 1996, when President Bill Clinton stood on the
    edge of the Grand Canyon on the Arizona side and signed an executive
    proclamation making 1.7 million acres of Utah a new national monument…

  85. @ Coal Gate

    I’m posting a link to a study about world wide coal supplies. I didn’t write it so, you know draw your own conclusions. I only post if to remind you that all the resources are finite.
    http://www.richardheinberg.com/museletter/179

    Also I think there are some Navajo Indians on the Arizona side of the Grand Canyon that are not too happy about the fact that President Clinton and Senator McCain played a part in breaking a treaty in order to exploit their land for coal.

    The Black Mesa region in Arizona, USA is home to the indigenous communities of the Dineh (Navajo) and Hopi peoples. This region also contains major deposits of coal which are being extracted by North America’s largest strip mining operation. The coal mines have had a major impact on families in the region. Local water sources have been poisoned, resulting in the death of livestock. Homes near the mines suffer from blasting damage. The coal dust is pervasive, as well as smoke from frequent fires in the stockpiles. Not coincidentally, the people in the area have an unusually high incidence of kidney and respiratory disease. ”
    http://www.un.org/esa/sustdev/mgroups/wedo.htm#dineh

  86. Thanks Jennifer, I knew that. I was responding to this in the article,
    ‘Evans responds, “Fears of peak oil are what this market has in common with the 1980s, not what is different.” Recall that during the “oil crisis” of the 1970s when oil prices were as high as they are today, U.S. oil consumption declined by 13 percent between 1973 and 1983. The higher prices of the 1970s led eventually to an oil glut and prices fell to about $10 a barrel by 1986.’

    Ridiculously he says it was oil consumption not production that peaked in 70s/80s.. There is a very interesting theory that the glut in oil production was due to Saudi overproduction in order to bring down the Soviet economy and this has been detailed in the book ‘Victory’ by Peter Schweizer.

    I think Hubbert’s prediction of world peak was made in 1976 though..

  87. I take that back, actually it looks like he made the prediction for the world in 1971.

  88. At 86 million bbl/day (a 1000 bbs/second) how many Olympic pools could you fill in one year?
    2,044,000 Olympic pools. If you laid those olympic pools of oil end to end how many miles long would they be? 63,488 miles long. Anyone know were they’ll can get that much corn sqeezen for fuel, plastics, and poymers?

    Here’s the math
    http://oildepletiondebate.blogspot.com/

    the energy challenge this century faces

    Prof Rick Smalley – Our Energy Challenge
    Columbia University Nanoscale Science and Engineering Center presents “Our Energy Challenge” by Nobel laureate Professor Richard Smalley of Rice University.
    http://video.google.com/videoplay?docid=-4626573768558163231
    Power point presentation Smalley is using in the above lecture
    http://smalley.rice.edu/emplibrary/columbia20030923.pdf

    Caltech
    Dr David Goodstein: Running out of Gas: The End of the Age of Oil
    http://today.caltech.edu/theater/5602_bb.ram

    But we have 100s of years worth of coal…or do we? No, we don’t, not if consumption keeps growing. For example
    “The Forgotten Fundamentals of the Energy Crises” http://www.npg.org/specialreports/bartlett_index.htm
    http://www.guba.com/watch/3000053112
    http://www.webpotential.com/ambiente/exponential_growth.htm
    “Most types of resource use are growing faster than population. Although many associate growth in resource use with population growth, growth in resource use can also be independent of population growth. Resource use can grow even without population growth, although the reverse is hard to imagine. An example of what exponential growth means in resources can be seen with US coal reserves. Coal is the US’s most abundant fossil fuel. In 1991 the US Department of Energy reported that at current rate of use US coal reserves could last almost 500 years. But the caveat here is current rate of use. Between 1971 and 1991 the use of coal grew 2.86%. With this rate of growth US coal could last about 94 years if we could use it all, but more likely 72 years of coal would be recoverable (Forgotten Fundamentals of the Energy Crisis).

    Lack of understanding of how long coal could last comes from people’s lack of knowledge of exponential growth. In 1978, Time Magazine reported that there is “enough coal to meet the country’s energy needs for centuries, no matter how much energy consumption may grow” (Forgotten Fundamentals of the Energy Crisis). This is clearly untrue. If we look just at the amount of electrical energy the country uses and its historical growth over the last 40 years, we see that coal could meet that need for just 36 years. Remember, coal is our most abundant fossil fuel. This utter lack of understanding of the results of exponential growth isn’t limited to Time — it’s pervasive in our government, media, and general public.”

  89. Past prediction for the present

    Leeb Capital Mgmt
    In 2004 predicted oil to over $100 while still at $35
    http://www.netcastdaily.com/1experts/2004/exp050804.ram
    http://www.financialsense.com/Experts/2004/Leeb.html

    In 2006 Leeb changed his prediction up to $200
    http://www.netcastdaily.com/broadcast/fsn2006-0311-2.ram
    http://www.financialsense.com/Experts/2006/Leeb.html

    OBELE Oil Corporation Oil Shock!
    This article was written in 1998 when oil was $14.50 per bbl.
    http://www.obeleoil.com/oilshock2.htm#Causes%20of%20Oil%20Shocks:%20Past%20&%20Future
    Adobe version
    http://www.obeleoil.com/OilShock.pdf

  90. The great gambling game continues. In the long run this wtll be a good thing for most but real bad for a few.

  91. I can’t believe any of you are buying into this article. Notice he doesn’t say a thing about where the new supply coming online comes from. The new supply is EXPENSIVE to extract. Sure, the weak dollar and speculation play A PART in the equation, but there are FUNDAMENTALS that are playing into this equation.

    The easy oil is used up by and large. This article came to a conclusion before the research was done and did the research merely to support its conclusion.

    Oil is a FINITE resource. No ideology will EVER change that.

  92. Quote : ” This inelasticity of demand and supply means that petroleum prices are very sensitive to relatively small changes in either. This means that prices can fall as steeply has they rose. ”
    What I do not comprehent is the fact that “Gasoline” price do jump immediately, when Oil prices jump, but Gasoline prices take usually up to ten days, when oil prices drop. What gives ?

  93. In the 1950s, Hubbert predicted U.S. production would peak in the 1970s. He was dead on. In the 1970s and beyond, Hubbert, Deffeyes and others predicted that world production would peak around 2000 to 2010. They appear to be correct. This does not mean that oil will run out overnight. The decline will be gradual, just as the decline in U.S. production has been gradual.

    Market forces play no role in the discovery of new oil fields. More oil reserves were discovered in the 1930s — during a worldwide depression when oil was worth about 10 cents a barrel — than in all other decades combined. So, economic forces cannot make oil magically appear.

    No significant amounts of new oil have been found in the U.S. lower 48 onshore since 1948, and none in Alaska since the 1971. The fact that Alaska has oil was known since 1920 or so, but they did not bother to look. The rest of the world has been prospected now, and there is little chance of major oil discoveries.

    There is essentially no more undiscovered oil in the U.S., and probably not anywhere else. Improved technology will recover more in the future, but the cost will get higher and higher, until it takes more energy to extract the oil than you get by burning it. At that point, oil will only be useful as feedstock. The overhead cost of extraction has already gone from

  94. [That message got cut off, apparently because you cannot use a “smaller than” char. To continue:

    . . . The overhead cost of extraction has already gone from less than 1% to around 20%.

    The energy overhead production cost of ethanol is about roughly 170%; it takes much more energy to produce the stuff than you get out of it. Ethanol production is a gift to OPEC and Big Agriculture. It is way of wasting hundreds of millions of barrels of oil every year, mainly in operating farm equipment and making fertilizer. One 20 gallon tank of ethanol uses up as much food as an adult eats in a year.

    For oil, see: K. Deffeyes, “Hubbert’s Peak.”

    For ethanol, see: Pimentel et al., “Food, Energy and Society.”

  95. I wrote:

    “More oil reserves were discovered in the 1930s — during a worldwide depression when oil was worth about 10 cents a barrel — than in all other decades combined.”

    I meant in the U.S. lower 48. Not sure about other parts of the world. See Deffeyes.

  96. Thanks for the post! This whole oil industry can be hard to figure out for people who are new to it.

  97. Well, that huge deposit found in the 1930’s is all dried up now. Unless we discover a new continent, our oil reserves are quickly on the way out.

  98. Well, that huge deposit found in the 1930’s is all dried up now. Unless we discover a new continent, our oil reserves are quickly on the way out.

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