A backseat economist’s view on how the Oil Bubble will burst June 23, 2008
Posted by geoffwolfe in : Off Topic , trackback
I’ve been thinking a lot about oil lately, not surprisingly. I’m convinced its price is approaching bubble status but based on the reasons for its rise, it may not have quite reached the point of popping. Some analysis has almost 50% of oil’s price increase solely based on the depreciation of the dollar, so this among other reasons, there are fundamental reasons for a price rise independent of speculation. This said, bubbles are believed to be psychological creations and a seminal event typically causes it to burst with consumer and investment sentiment turning on a dime. I’m looking for this event now.
I remember the moment the Internet Bubble of the late 90’s burst. It started with an unlikely player — Microsoft. When a finding-of-fact came against them in their anti-trust case, it sparked a sell-off in the NASDAQ that didn’t stop for a couple of years. Microsoft wasn’t a high-flying dot-com, but being tied to technology in general, investors ran for the hills when it appeared that technology stocks may take a hit from a wounded Microsoft. In the weeks following, the NASDAQ dropped 50% and my friends in the VC and investment community told me the party was over. They were leaving San Francisco and going home to New York. One nice effect was rent in SF dropped with all of these NY ex-pats packing up and going home.
So what will be “the event” to cause the Oil Bubble to burst? As seen with the dot-com bubble, it won’t necessarily be something directly tied to the oil industry (or its supply and demand) but will be something on the periphery that will cause sentiment to change. Some possible candidates:
- an Enron / Bear Stearns style collapse of an energy trading company due to oil futures bought on credit (can happen with just a modest decrease in oil prices as futures can be bought with only 5% down)
- a report showing a major consumer sentiment shift in willingness to change their lifestyles to avoid oil (this doesn’t have to be an actual drop in demand, just a willingness to)
- impending political change in US that will result in an obvious shift in the current energy policies (read: no more Bush / Cheney cronies in charge)
- Chinese currency revaluation / signs of a slowing economy / oil subsidies reduced (hard to see it happen on a large enough scale but if the Chinese have to pay more for oil, their demand may appear to be decreased — again an actual decrease in demand doesn’t have to happen, just an appearance to let markets be bound by market forces, not the government)
My sentiment about oil has already changed, as I sold my meager investment in energy stocks. It will be very interesting to see how oil prices change over the next 6-12 months and what may cause the bottom to fall out. As with all bubbles, you don’t know for sure you’re in one until it bursts. And then with 20-20 hindsight, you wonder how it got so big in the first-place.
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