Posted by
Duane Truitt on Thursday, May 22, 2008 10:59:25 AM
Here's an interesting analysis of the mid-term price outlook for crude oil
in the Telegraph. The author's take (and that of several experts
quoted in the story) is that we appear to be in the late stages of a
speculative crude oil market "bubble" that will likely burst in the
coming months as new supplies come online.
One factor in this analysis is that non-OPEC crude oil production seems
to be ramping up considerably this year. Another factor seems to be
that some countries like China and several Middle Eastern nations have
been pushing the demand for oil by insulating their citizens from the
rising cost of oil through subsidized gas pricing ... and that these
nations sooner or later are going to be forced to let their gas prices
rise to meet the costs (apparently Egypt did just that, raising gas prices 40% this week). When that happens, world oil demand will peak
and begin to drop. The world-wide economy has also slowed this year,
which always tends to reduce oil demand. And of course, as soon as
world energy demand is seen to flatten or drop while the supply is
growing, the oil futures speculators will suddenly abandon the oil
tanker like rats from a flaming ship ... and thusly the oil bubble
bursts.
This analysis seems entirely plausible to me. Markets may seem
mysterious, but they generally obey the supply and demand equation,
even if governments sometimes induce synthetic distortions that
temporarily cause markets to appear to defy gravity. Similarly, the
markets will eventually achieve rationality even if speculators drive
up the market price of certain products (like tech stocks, or US real
estate, or crude oil), such that prices get unhinged from the value of
the underlying assets. Sooner or later a market correction occurs.
While a significant price cut for gasoline would be greatly appreciated
by most American consumers, I hope that the bursting bubble does not
result in the same outcome we had in the mid-80s. For those who
remember, that was the time when the Saudis purposely flooded the world
oil markets with product, plunging world crude oil prices back down to
under $10 a barrel. As a result of that bubble burst, virtually
overnight our alternative energy industry in America died ... and
stayed dead for decades.
Could
it be that we're being set up for just exactly that intended outcome
just as alternative energy is making great technological strides? Or
is this just the natural functioning of random undirected market behavior?
Hmmmm.