Do we have an oil bubble?

[Supercilious]

Re: We have an oil bubble : the proof

Hold on to your seats. The crude price shot up $7 in 4 hours... I guess the global supply and demand equation changes very fast or someone is just unloading a lot of longs ;)

[marsien59]

Re: We have an oil bubble : the proof

[quote=FRED;39930]Oil is not a bubble. See: Peak Cheap Oil Diaries: Anatomy of a collapsing government sponsored oil anti-bubble

http://www.peakoilblues.com/blog/?p=65
diary of a Professional Geologist who prepares for Peak Oil and others across the globe

[Supercilious]

Re: We have an oil bubble : the proof

Oil is not a bubble. See: Peak Cheap Oil Diaries: Anatomy of a collapsing government sponsored oil anti-bubble

http://www.peakoilblues.com/blog/?p=65
diary of a Professional Geologist who prepares for Peak Oil and others across the globe

it would be interesting If Fred (or anybody else) can post here a quick comment on what Martin Mayer said about todays oil prices, more precisely if today's prices are an accurate reflection of supply and demand or are influenced by the process of parking treasuries into commodities futures. Any reply on this issue would be appreciated.

And, by the way, an interesting quote:

http://www.insidefutures.com/article...%20Fizzle.html

Oil got into a bubble-like state that expanded more than I thought it would. Well, maybe bubble isn’t the right word. Bubble somehow suggests that the price of oil was unjustified; and that oil went up just because speculators had this magic power to drive up oil for no reason. Some might think that the term "bubble" suggests that the rise in price had nothing to do with the fundamentals. Well, let me state clearly, and unequivocally, that is not the case. The rise in the price of oil was always about the fundamentals. Of course you have to make sure you are looking at the right fundamentals though! Remember that speculators do not drive markets but they are driven to the market by strong fundamentals. And the fundamentals more than explain why oil prices surged to a record high and why they, more than likely, will fall in the future. That is why I don’t like the term bubble when describing the run up in oil this year. Bubble is a hard word to define because I believe that whatever the price that trades for oil is a fair price. In commodities for every buyer there is a seller and for every seller a buyer. If speculators drive the price too high then no one should buy it.
In the last few years those fundamentals, to me anyway, were pretty clear as demand was growing year in and year out gaining on supply. Oh sure there were some geo-political tensions and some weather related issues, but at the end of the day the run up in prices was mainly about strong economic growth and a race to keep up with supply.
This year things were different. Oil ran up not so much because of strong economic growth but because people were buying oil as a hedge against risk in the economy - not strong demand vs. supply fundamentals. Instead of a bubble, the better way to distinguish this run up in price from previous years is by categorizing a sharp rise in the price of oil not backed by normal supply vs. demand fundamentals as an “Oil Crisis” and a rise in the price of oil backed by strong fundamentals and strong economic growth as an “Oil Boom”.
How do you differentiate a rise in oil from an oil crisis rise or an oil boom rise? It is not easy. But what you have to do is determine what is driving up the price of oil. In the past years as I have stated, the predominate cause in the price of oil rising was strong growth. This year though strong growth globally was supportive but it did not explain the meteoric rise that we have seen over the majority of this year.
This year oil soared mainly as investors went to seek safe haven away from the credit crisis that gripped the US economy. Oil soared as demand fell. I don’t know if you caught it but demand for gasoline fell by a record 3.7% from a year ago in the month of May. That is the equivalent of 40.5 billion miles of the road less traveled. Because of this, we have a year of an oil crisis, not an oil boom. Oil is rising for the wrong reasons. Oil has not risen because of strong growth, but it has risen as it tried to adjust to the US subprime crisis. Investors around the world and oil traders used oil as a hedge against uncertainty. They used oil as a hedge against risk. Like I have said oil was used as the perfect hedge against any occasion.
In fact look when oil really started its meteoric rise. It was when Ben Bernanke surprised the market with a 50 basis point interest rate cut. That is when we knew we had a problem. Oil has risen as demand had fallen. Oil was being bought because many lost faith in the dollar. Around the globe people were buying oil because they lost confidence in the US banking system. They bought oil as a currency of last resort as our US dollar sank in value.
Now don’t call this speculation. This is a real fundamental. If the dollar gets weak and an oil producer wants more oil that is a fundamental. If traders think that the banks are going to fail then oil has more value. Not the normal supply and demand fundamentals we normally watch but a real fundamental that fundamentally changes the value of a commodity.

[jtabeb]

Re: We have an oil bubble : the proof

and since it's mostly supply/demand, the recession should bring demand and prices down, at least somewhat and for a while.

"Pretty Big Downside" for Oil, Energy Stocks as Demand Falls, Garnick Says

Posted Jul 25, 2008 12:55pm EDT by Aaron Task

Following a rapid, 15% drop from their recent peak, oil prices stabilized around $125 per barrel for a few days but were declining again on Friday.
Numerous reports of oil's demise have proven premature in the recent years. But "as global GDP slows down," Diane Garnick, investment strategist at Invesco, sees "energy continuing to come down" with "pretty big downside" still ahead.

Garnick didn't put a number on it today, but predicted a 25% decline for crude within six months during an appearance on Tech Ticker in late June.
While speculation plays a role, Garnick essentially endorsed my view that supply and demand fundamentals have been the primary driver of crude prices, both up and, more recently, down.

Given her outlook for more downside in energy prices, Garnick recommends investors reduce their exposure to energy stocks where she sees "a lot more downside risk" than in other growth industries, most notably tech.

Umm, there is not a bubble in energy, it's a supply constrained natural phenomenon, right guys?

[FRED]

Re: We have an oil bubble : the proof

Umm, there is not a bubble in energy, it's a supply constrained natural phenomenon, right guys?

That is correct. Note platinum prices are also declining along with auto demand.

[Roughneck]

Re: We have an oil bubble : the proof

As someone who's been in the oil field for 30 years we call it boom and bust cycles not bubbles Oil production is very capital intensive when prices are low no wants to invest so supply falls and demand goes up because oil is cheap.As prices rise so does investment which eventually brings more supply and less demand so prices fall.We are paying now for excessively low oil prices in the past decade(s).Now this go round there are a few extra twists.Most of the easy cheap oil has been found or is controlled by foreign governments.Big oil is reluctant to invest in very expensive deepwater projects like Thunderhorse because if prices fall they won't recoup there investments.

depending on who's numbers you believe the weak dollar accounts for 30-40% of todays prices. that would put oil in the 70-90$ range.Not to far of what the saudis say oil should be ~60$. In the terms of cost of production plus a modest profit margin your talking closer to 60.


Now I'm oil field trash not an economist.But I have studied the speculation theory a lot. If you look at the dollar adjusted oil price the numbers don't look that far out of line.Unless the basics of spot and futures prices have changed I find it hard to believe that futures prices are driving the spot price. However, some economists are suggesting just that because of the sheer amount of money involved and the creation of ETF's and markets like ICE.I'm a little skeptical.

I think you'll find as the feds raise rates to fight the coming inflation the dollar will rebound and oil prices will fall.Also look for todays high prices to bring more oil to market and demand to fall with the coming recession.Even India and china are slowing down.Hopefully though once prices pull back we will have the fore sight to still develop an entergy policy,but I'm not hopefull.

Nice site BTW

Regards
Boudreaux

[metalman]

Re: We have an oil bubble : the proof

As someone who's been in the oil field for 30 years we call it boom and bust cycles not bubbles Oil production is very capital intensive when prices are low no wants to invest so supply falls and demand goes up because oil is cheap.As prices rise so does investment which eventually brings more supply and less demand so prices fall.We are paying now for excessively low oil prices in the past decade(s).Now this go round there are a few extra twists.Most of the easy cheap oil has been found or is controlled by foreign governments.Big oil is reluctant to invest in very expensive deepwater projects like Thunderhorse because if prices fall they won't recoup there investments.

depending on who's numbers you believe the weak dollar accounts for 30-40% of todays prices. that would put oil in the 70-90$ range.Not to far of what the saudis say oil should be ~60$. In the terms of cost of production plus a modest profit margin your talking closer to 60.


Now I'm oil field trash not an economist.But I have studied the speculation theory a lot. If you look at the dollar adjusted oil price the numbers don't look that far out of line.Unless the basics of spot and futures prices have changed I find it hard to believe that futures prices are driving the spot price. However, some economists are suggesting just that because of the sheer amount of money involved and the creation of ETF's and markets like ICE.I'm a little skeptical.

I think you'll find as the feds raise rates to fight the coming inflation the dollar will rebound and oil prices will fall.Also look for todays high prices to bring more oil to market and demand to fall with the coming recession.Even India and china are slowing down.Hopefully though once prices pull back we will have the fore sight to still develop an entergy policy,but I'm not hopefull.

Nice site BTW

Regards
Boudreaux

welcome. your words make good sense. looks like a oil boom/bust cycle alright. not sure about fed rate hikes anytime soon. the japanese tried that during the first year their bubble econ crashed in 1990 and it didn't work out for them... sent them into a depression. ben's promised he won't make that mistake!

[Supercilious]

Re: We have an oil bubble : the proof

your words make good sense. looks like a oil boom/bust cycle alright.

We flogged this topic to a conclusion long ago. Oil is not a bubble just as gold and commodities are not a bubble. Rapid price increases since 2004 are a factor of decreasing supply of commodities relative to rising demand, and of the diminishing value of the money that they are priced in.

[Guest]

Re: We have an oil bubble : the proof

We flogged this topic to a conclusion long ago. Oil is not a bubble just as gold and commodities are not a bubble. Rapid price increases since 2004 are a factor of decreasing supply of commodities relative to rising demand, and of the diminishing value of the money that they are priced in.

$#* -

It's a matter of distinguishing the noise in the secular trend, from the larger trend itself. You are caught up with the mere noise, which seems to command an endless stream of your analysis. Lots of intelligent analysis there on your part $#*, only it might be put to more fruitful use aligning itself with a macro trend. Even in investing terms, any bets aligned to the macro trend tend to be much safer. The Aden Forecast is an excellent investment letter which employs very long term charting to discern the trends suitable for decade long investment positions. As you have very much a trader's outlook, it might be interesting to get a short 3 month trial subscription to that and see what it is they do with that approach. Richard Russell wrote of them "I give them four stars for quality, and would give five stars if I could".

When it comes to investing as opposed to trading, long term trend investors as typified by the Aden Forecast are the ones making some serious money. Of course the options and futures traders can make a lot of money too, but this field tends to be divided unequally into A) a few seasoned and experienced pros who have burned their fingers enough times to keep position sizes on these short term bets strictly delimited, and B) the nitro-and-caffeine boosted, testosterone enhanced (often younger) traders who think waiting for an investment to mature is a flat-footed strategy and that the people making really big money know how to dance nimbly (lots of those around).

The brain twister idea in 2008 is that petroleum is in a "final bull market" this time. Population is in a runaway trend that will overshoot the global production numbers, which will go into decline concurrently. If you call the current sharp deflation of the oil price a popping bubble that's fine, but it's a small event, within a much, much bigger event. Your "is it or isn't it a bubble" preoccupation is either myopic, or merely chooses to ignore the larger trend. That's OK as a pasttime, but less useful for people that are not engrossed in trading techniques and really are only interested in the larger long term financial return. For those people, it's clear that petroleum will not ever again go into a secular glut as it did in the 1980's / 1990's. Not with 7-8 billion energy consumers coming online within 30 years.

[Roughneck]

Re: We have an oil bubble : the proof

For those people, it's clear that petroleum will not ever again go into a secular glut as it did in the 1980's / 1990's. Not with 7-8 billion energy consumers coming online within 30 years.

I think this analysis is correct. However I don't think we have reached peak oil production, yet.

The last frontier for oil

http://news.nationalgeographic.com/n...ssia-pole.html

Proof positive that there is always a silver lining in every dark cloud,even global temperature increases

Boudreaux

[Supercilious]

Re: We have an oil bubble : the proof

I have nothing against those who don't think that what's happening now is an oil bubble and prefer to call it: major correction, necessary price adjustment, oil bust etc,... hey, they can call it Matilda if that's making them feel better.

About "distinguishing the noise in the secular trend, from the larger trend itself" I would like to make just one comment. For those who are really interested in the faith trends on iTulip I would like to recommend a very serious economic analysis made by WS Jevons, which actually deals with the same subject as the Peak Cheap Oil theory. One can identify some very interesting parallels.

I'll post here just a few quotes:

The Coal Question: An Inquiry Concerning the Progress of the Nation, and the Probable Exhaustion of Our Coal-Mines (first published in 1865)

DAY by day it becomes more evident that the Coal we happily possess in excellent quality and abundance is the mainspring of modern material civilization. As the source of fire, it is the source at once of mechanical motion and of chemical change. Accordingly it is the chief agent in almost every improvement or discovery in the arts which the present age brings forth. It is to us indispensable for domestic purposes, and it has of late years been found to yield a series of organic substances, which puzzle us by their complexity, please us by their beautiful colours, and serve us by their various utility.
[...]
Attention is then drawn to the rapid and constant rate of multiplication displayed by the iron, cotton, shipping, and other great branches of our industry, the progress of which is in general quite unchecked up to the present time. The consumption of coal, there is every reason to suppose, has similarly been multiplying itself at a growing rate. The present rate of increase of our coal consumption is then ascertained, and it is shown that, should the consumption multiply for rather more than a century at the same rate, the average depth of our coal-mines would be 4,000 feet, and the average price of coal much higher than the highest price now paid for the finest kinds of coal.
[...]
In his "Natural History of the Mineral Kingdom," first published in 1789, he gave a chapter to the consideration of "The Limited Quantity of Coal of Britain." His remarks are highly intelligent, and prove him to be one of the first to appreciate the value of coal, and to foresee the consequences which must some time result from its failure. This event he rather prematurely apprehended; but in those days, when no statistics had been collected, and a geological map was unthought of, accurate notions were not to be expected. Still, his views on this subject may be read with profit, even at the present day.

Sir John Sinclair, in his great Statistical Account of Scotland,*5 took a most enlightened view of the importance of coal; and, in noticing the Fifeshire coal-field, expressed considerable fears as to a future exhaustion of our mines. He correctly contrasted the fixed extent of a coalfield with the ever-growing nature of the consumption of coal.

In 1812 Robert Bald, another Scotch writer, in his very intelligent "General View of the Coal Trade of Scotland," showed most clearly how surely and rapidly a consumption, growing in a "quick, increasing series,"*6 must overcome a fixed store, however large. Even if the Grampian mountains, he said,*7 were composed of coal, we would ultimately bring down their summits, and make them level with the vales.

It is thence simply inferred that we cannot long continue our present rate of progress. The first check to our growing prosperity, however, must render our population excessive.
[...]
All things considered, it is not reasonable to suppose or expect that the power of coal will ever be superseded by anything better. It is the naturally best source of power, as air and water and gold and iron are, each for its own purposes, the most useful of substances, and such as will never be superseded.
[...]
Of course I do not deny that if our coal were gone, or nearly so, and of high price, we might find wind, water, or tidal mills, a profitable substitute for coal. But this would only be on the principle that half a loaf is better than no bread. It would not enable us to keep up our old efficiency, nor to compete with nations enjoying yet undiminished stores of fuel. And there is little doubt, too, that a century hence the steam-engine will be two or three-fold as efficient as at present, turning the balance of economy so far the more in favour of those who then possess coal, and against those who have to resort to water or wind.

Mr. Babbage has applied his rare genius to this question, and what he has once said is incapable of improvement. Passing over the period which this work considers, when coal will be scarce here and plentiful elsewhere, he has thrown his thoughts forward to the time when coal will be scarce everywhere. Heat, he thinks, may then be got from the hot springs of Ischia. "In Iceland," he continues,*39 "the sources of heat are still more plentiful; and their proximity to large masses of ice seems almost to point out the future destiny of that island.... In a future age power may become the staple commodity of the Icelanders."
[...]
Among the residual possibilities of unforeseen events, it is just possible that some day the sunbeams may be collected, or that some source of force now unknown may be detected.
[...]
I draw the conclusion that I think any one would draw, that we cannot long maintain our present rate of increase of consumption; that we can never advance to the higher amounts of consumption supposed. But this only means that the check to our progress must become perceptible within a century from the present time; that the cost of fuel must rise, perhaps within a lifetime, to a rate injurious to our commercial and manufacturing supremacy; and the conclusion is inevitable, that our present happy progressive condition is a thing of limited duration.

This time isn't different ... it is always the same

[Guest]

Re: We have an oil bubble : the proof

This time isn't different ... it is always the same

$#* -

You may have the impression this discussion leaves plenty to be explored. But in fact it was a novel discussion going on two years ago, and it was extensively explored and it's all in the archives here for ready reading. Admittedly it's not as much fun to read that stuff on one's own, rather than be able to discuss it all over again with live people today and have all the pizzazz and excitement of a new debate.

Arguably, an excess of posts here at iTulip spanning many months, were dedicated precisely to discussing the merits of this topic. You seem to have the impression today that you've encountered a "wall of complacent consensus" on the iTulip public pages, all complacently in agreement that Peak Cheap Oil is real, and your arguments are incorrect. You are frustrated that people have not sufficiently "re-examined" their ideas here. But what you are not aware of is that 18 months ago, most of the opinion around here was actually in agreement with you.

It is only subsequent to some long, excruciatingly laborious hashing out of this same topic that the "consensus" today is contrary to your thesis. You have to excuse people but they want to move on to other stuff and don't want to hash out all those arguments a second time around. The references are many, and they are all in the archives. So you can read through all that stuff like a scholar, and maybe then post a detailed point by point rebuttal of all that material.

That would then be a lot of work on your part, and more "entertaining" on everyone else's part.

BOTTOM LINE: There is no "buddy system" around here, no "clubby consensus", or anything like that against which you are waging a lonely crusade. There is only a general informed agreement after having read and painstakingly hashed through innumerable threads on "Peak Cheap Oil - Is It Real?". So the best way to gauge the robustness of your thesis is simply to look around and see how many people sound convinced by your argument. If you've been arguing the point a while and not a lot of people are, then either they are stupid and you are smart, or they had these discussions before and became convinced otherwise.

You can estimate how compelling any of your points are by how many people you've convinced. That's about it.

[EJ]

Re: We have an oil bubble : the proof

To say there is a gold bubble is to say that oil producers are the political and military leaders of the world. This is an absurd notion. Just as Europe and Asia have the more sophisticated wireless networks than the US, because US wireline communications are well developed, so lack of oil has honed America's latent technological energy advantages over oil producers.

America will use its technological (logistical), political, and military advantages to get as much oil as cheaply as possible from oil producers, then use its technological (energy intensity reduction), political, and military advantages to develop its economy and culture to the next stage.

[Supercilious]

Re: We have an oil bubble : the proof

$#* -

You may have the impression this discussion leaves plenty to be explored.

Lukester, there is always plenty to explore especially when there is something (something like an oil bubble for example in progress )

But in fact it was a novel discussion going on two years ago, and it was extensively explored and it's all in the archives here for ready reading.

Should I understand that all has been so extensively explored that Fred has already calculated a mean price for oil? Can you please provide a link for that?

You seem to have the impression today that you've encountered a "wall of complacent consensus" on the iTulip public pages, all complacently in agreement that Peak Cheap Oil is real, and your arguments are incorrect.

Nope I don't have that impression. How could I believe that when at the moment I'm writing these words, the thread has 223 posts and 8500 reads. I believe it is still a very interesting debate.

You are frustrated that people have not sufficiently "re-examined" their ideas here.

Why should I be frustrated if other people refuse to "sufficiently re-examine" their ideas? That's not my problem .... it's theirs ...

But what you are not aware of is that 18 months ago, most of the opinion around here was actually in agreement with you.

That's a good sign in debate dynamics. Until no definite proof is presented or reality doesn't shatter a theory, reasonable minds should continue to examine facts, ideas and concepts. I though iTulip is an internet forum dedicated to debates about bubbles and other tulip manias.

It is only subsequent to some long, excruciatingly laborious hashing out of this same topic that the "consensus" today is contrary to your thesis.

So should i understand that there is nothing else left to say on this subject? Are you sure that the prices of oil will continue to increase from $135 on June 11 to $147 on July 11th and to $160 on August 11 ?

You have to excuse people but they want to move on to other stuff and don't want to hash out all those arguments a second time around.

Lukester, it is not a good idea to post messages on a thread that is boring ... a boring and nonsensical thread usually dies by lack of interest.

The references are many, and they are all in the archives.

I bet i can add a new reference to those archives ... it's a fresh one and I completely agree with the three conclusions of this paper :

http://arxiv.org/pdf/0806.1170v3

The 2006-2008 Oil Bubble and Beyond

Authors: D. Sornette (ETH Zurich), R. Woodard (ETH Zurich), W.-X. Zhou (ECUST, China)
(Submitted on 6 Jun 2008 (v1), last revised 22 Jul 2008 (this version, v3))
[...]

It seems to us that one message is that the
discrepancy between the EIA and IEA provides in fact a
measure of the estimation errors. In other words, these
numbers are not to be believed at face value given the
uncertainties.
Given these uncertainties, one feature seems to emerge
with a certain degree of certainty: until the end of 2005,
both agencies were in line and supply was systematically
exceeding demand. Since 2006, this deterministic fact
has broken down with the ushering into an epoch of un-
certainty. In our opinion, one should not conclude that
demand has exceeded supply or vice-versa since 2006,
but rather that the oil market has entered an opaque
regime. Rather than a clear transition to a supply re-
stricted regime, we interpret the discrepancy between
the IEA and EIA as a signature of uncertainty. Here,
we should immediately stress that there is no better fuel
than uncertainty to promote speculation!

In conclusion, the present study supports the hypoth-
esis that the recent oil price run-up, when expressed in
any of the major currencies, has been amplified by spec-
ulative behavior of the type found during a bubble-like
expansion. The underlying positive feedbacks, nucleated
by rumors of rising scarcity, may result from one or sev-
eral of the following factors acting together: (1) pro-
tective hedging against future oil price increases and a
weakening dollar whose anticipations amplify hedging in
a positive self-reinforcing loop; (2) search for a new high-
return investment, following the collapse of real-estate,
the securitization disaster and poor yields of equities,
whose expectations endorsed by a growing pool of hedge,
pension and sovereign funds will transform it in a self-
fulfilling prophecy; (3) the recent development since 2006
of deregulated oil future trading, allowing spot oil price
to be actually more and more determined by speculative
future markets [19] and thus more and more decoupled
from genuine supply-demand equilibrium.

[Supercilious]

Re: We have an oil bubble : the proof

To say there is a gold bubble is to say that oil producers are the political and military leaders of the world. This is an absurd notion.

I think you wanted to write "To say there is a gold bubble"....
I think that is a misleading conjecture ... for example let's change the context a little bit:

"To say there is a housing bubble is to say that real estate agents are the political and military leaders of the world. This is an absurd notion."

One cannot build an logical argument based on the absurdity of a non sequitur conclusion...

http://en.wikipedia.org/wiki/Non_sequitur_(logic)#Non_sequitur_in_normal_speech