Oil Price is a Bubble Waiting to Pop
German newsweekly Der Spiegel is known for its exemplary investigative journalism, but doesn't have a rep for incisive economic analysis. With this caveat, we find it notable that its English-language online edition says today's sky-high oil prices are not based on "real" factors like supply and demand. Apparently, speculators are behind the recent price spike; the "bubble" will pop just like the "new economy," Internet and housing bubbles. Fadel Gheit of Oppenheimer & Co. says oil is presently the victim of "excessive speculation." Trading on the New York Mercantile Exchange (NYMEX) would seem to support his contention,. World consumption totals around 86m barrels a day, yet trading volume based on price speculation is 15 times that amount. So when will it end? Gheit doesn't know but he's confident it will. "This is a bubble, and it will burst."
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In 1972 Nixon took the dollar off the gold standard to be able to print money to goose the economy prior to the 1972 elections. What could go wrong? Well, gold shot from $35 to about $140 per ounce. Oil quickly followed from about $3 to $12 a barrel. Today, Ben Bernanke and the federal reserve is printing money again. The dollar's real value is plummeting. Gold closed yesterday at $972 per ounce! In other words, that 1972 $3 barrel of oil should cost about $83 dollars. I expect these price increases to spread to cars in the next five to ten year too. Imagine an entry level Hyundai or Kia in 2018 with an MSRP over $24,000.
"It's a floor wax *and* a dessert topping." Oil production is leveling into a bumpy plateau and fulfilling the demand drives up prices. Energy investors and geopolitical instability drive prices up even more. A very few years ago, the Bushes could ask their dear friend Prince Bandar to have the Saudis produce a bit more crude and calm the market. But Bandar's gone home now, and the Saudis say they are producing more than they can sell. To some extent that's true because the Saudis are producing lots of heavy, sour crude that can't be refined in refineries built for light, sweet crude. But Peak Oilers suspect the Saudis are already producing flat out and simply can't increase production.
I just read a story that said that gasoline inventories are at a 14 year high. Gas and oil prices are high because no anti-trust regulators have the cojones to look into the price-fixing going on by the oil companies....
And then there's the facts, as reported by the San Francisco Chronicle: The Federal Trade Commission also determined in a longer-range finding that during the past 20 years refiners didn't seek to manipulate prices by cutting the number of operating refineries or limiting increases in capacity. and The commission said that even though the number of big companies involved in refining has fallen, the market is so fractured that no single company could unilaterally influence prices. It specifically said this is true in California, where the state's biggest refiner, Chevron, controls 25.1 percent of capacity, with the remainder split among six competitors. Ah well, why let the facts get in the way of a good story?