Oil for Dummies

[Joanne98]

Price Of Oil: Manipulation? Bubble? Supply/Demand?

What can possibly explain the behavior of the price of oil? The Senate committee has heard testimony from a variety of sources and a variety of viewpoints ranging from accusing the regulators to be tacit participants in market manipulation to “Peak Oil”.

This same sort of back and forth happens whenever we have bubbles forming. There are always those who argue that it is simply a speculative mania, and then there are the true “believers” who bring arguments and evidence why things have changed.

To show you how difficult it is to make any sense of this, consider that two very smart and very wealthy investors find themselves on opposite sides of the argument: George Soros believes there is a bubble, while his ex-partner, Jim Rogers, feels the opposite is true.

But it isn’t difficult to see why many believe that the price of oil no longer represents a true picture of the value of this commodity; after all, it has more than doubled within the span of less than two years:



Note that the chart above is using a logarithmic axis for price and even then you can see that the slope of the rise from 2007 to present is much steeper than that between 2002 - 2006. Here’s an even more long term chart of crude, this time adjusted for inflation:



Oil Shock
This chart clearly shows that the world economy is undergoing a severe “oil shock”. One that pales in comparison to ones which we’ve seen so far in either the Gulf War or the 1979 Iranian Revolution (or the 1973-4 oil embargo - not shown on chart). Which goes a long way in explaining why consumer sentiment is at multi-decade lows.

One of the defining characteristics of a mania is a parabolic chart: increasingly steep price curve within a shorter and shorter time frame. And clearly, that is what we are seeing. While there may be disagreements whether this is really a bubble, what most can not deny is that the rise we have seen so far is just unsustainable if projected into the future.

Perfect Storm
My gut feeling is that we are seeing a confluence of forces, among them, long only commodity funds, a weak dollar, negative real interest rates (which always increase commodity prices) and demand from an increasingly voracious industrial complex in China and India.

But the fact that the increase in price has come in such a short time and it has been so incredibly sharp tells me that it can not be simply explained by the usual market forces of demand and supply. Something else must be at work to drive the price of crude as high as it has done within such a short time span. But only time will reveal what exactly what that “something else” is.

If you doubt that bubbles can not form in “real assets” then you’ve probably overlooked a lot of examples from history: the Japanese real estate bubble, gold, silver, etc. And if you believe that market manipulation is impossible or the overworked imagination of conspiracy theorists, then I would remind you of the California electricity crisis in 2000.

Silver Lining
If the price of oil here truly represents real demand and supply the potential silver lining on such a cloud is that it will not only change people’s consumption habits, it will spur on the development of better alternative energy sources. This is what I don’t understand, if you are a dyed in the wool “peak oil” believer, why invest in a dying industry? why not invest in those companies which will rise up out of the ashes and propel us forward? or do the “peak oilers” believe we are going to regress technologically?

Or consider it another way, if you were to go back in time, would you try to corner the whale oil market? or invest in Texas oil fields?

http://www.tradersnarrative.com/price-of-oil-manipulation-bubble-supplydemand-1753.html

Republicans are pathological liars? Why does anybody believe anything they say anymore? Maybe we should pass a law next year requiring people who believe Republicans to get the word STUPID tattooed on their foreheads.

THIS IS A FAKE OIL CRISIS! THE REPUBLICANS ARE LYING!

[Fovea]

1. World demand increases in face of recession

and price sensitivity. Oil profits will increase faster than the marginal cost of production, particularly if demand is not destroyed.

Does your graph also adjust for the sinking value of the Dollar?

[Joanne98]

4. No. But that's another thing they've done ON PURPOSE!

Some people want to believe that Bush drove to dollar down to help exports. BUT that's not why. The BFEE is invested in oil and gold. They go UP when the dollar goes down. The BFEE is also invested in BANKS! That's why we have a banking crisis.

BFEE is buying banks with private equity funds for pennies on the dollar.

Bush has stolen so much money he may become the first trillionare.

[endarkenment]

2. inflation adjusted overstates real cost

the dollar devaluation is a major factor in dollar valued crude oil prices and is not fully accounted for by 'inflation adjusted' numbers. The graph overstates the real value increase in crude oil prices.

[Subdivisions]

3. I'm confused. Your tone indicates that you are inclined to

believe that this is not a bubble and that perhaps there is "something else" at play. I took that to mean that perhaps you may suspect real supply v. demand fundamentals at play. Perhaps I am wrong and you were alluding to a republican conspiracy. Then, at the very end, you say "THIS IS A FAKE OIL CRISIS!" So, while you seem to doubt that it's a speculative bubble, I'm confused as to your stand on what is causing the oil shock. Or, perhaps I'm just one of the Dummies =)

Anyways, IIRC from previous relevant conversations where I've seen you participate, I had formed a picture of you as someone who leaned toward the fundamentals and peak oil side of things. And, you know that's where I stand with regard to oil. In fact, I believe that, despite Pickens' Plan, it's far too late to transition to an alternatively powered economy before the fossil fuel-powered one runs out of gas, at least for anyone other than the elite, the government, and the military. We should've started when Jimmy Carter implored us to do so. As a result of starting too late, I am in the camp that believes that the decline in civilization resulting from fossil fule depletion will follow a similar parabolic route as you illustrate in your graph above, causing a complete breakdown in anything resembling continuing technological development of anything, much less a replacement energy source(s) and infrastructure.

To me, the whole oil thing is simple: There are too many people and oil is a finite resource.

[Joanne98]

5. It's an oil bubble do to organized speculation coming thru the London loophole.

We are getting the info slowly.

[merh]

6. And congress was considering legislation to close that loophole

that is when GWB and his thugs decided to push for the offshore drilling, to derail the discussion and make the drilling the focus. The bait and switch games that this administration has used are numerous and all too obvious, the sad thing is, they use so many it is hard to properly respond. They control the audience.