The Oil Bubble

Breathless. That's the word that comes to mind on reading today's NYT coverage of the big oil story. A couple other words come to mind. Frightened and sensationalistic. Stupid is another. Here's the lead:

Worries that world oil demand will outstrip global supplies intensified on Thursday, sending ripples through the global economy as oil prices leaped above $135, a new record high.

The price spike occurred overnight, and by Thursday morning oil had fallen back slightly to $132.87, down 30 cents from its close on Wednesday.

But the leap capped a rally that has seen oil rise nearly $5 a barrel in two days, underscoring the dire implications of the current price run-up for businesses across the globe.

Let your memory range back ... way back ... to 2006 and all the stories about home prices. What one word comes to mind as you recall those stories? Was it "bubble?" It sure was for me, but I have not yet read anything about an "oil bubble."

And why not, considering this:
If I had found a chart that was a bit more current, you would have seen the current spike reversing its early 2007 downturn and heading skyward again, but that's not what's relevant. What's relevant is the very evident peaks and valleys in OPEC oil revenues since the early 197os. It tells us that when oil reaches unsustainable prices ... well, then those prices aren't sustained.

I've made the point in the past that much of the spike in oil prices is due to new demand from developing nations, and if that were wholly responsible for the price of oil today, we couldn't expect a drop. But it's not wholly responsible; speculation, lagging production and refinery undercapacity are all factors as well.

Seventeen paragraphs into the NYT story, we find this:

But [Michael Masters, a portfolio manager at Masters Capital Management] cited data showing that the increase in demand from index speculators over the past five years is almost equal to the increase in demand from China.

Speculators were also very evident in the run-up of the housing market, when it was not uncommon for the percentage of speculator buyers in new home developments to be in the double digits -- and they were mostly buying resale homes, not new ones. When they sensed the market had reached its peak, they left like rats leave a sinking ship, and they'll do it with oil, too; probably pretty soon.

Oil refinery capacity won't do anything to help the current situation because it takes too long to bring new refineries on line, but what of production? Certainly, the Middle East could increase its production by hundreds of thousands of barrels a day if it wanted to -- but why would it want to? Hard crash, soft crash, what difference does it make to them with the cash reserves they've got?

As stewards of a finite resource, the OPEC nations are always more motivated to under-produce than over-produce. Not only does it ensure a good price; it also ensures that they'll have oil to sell for longer. But OPEC isn't the only story in oil, by a long shot.

Hillbilly White Trash nails the production aspect of the story:

The United States has untapped reserves of oil in Alaska, off the West Coast, the East Coast and the Gulf Coast and we are unwilling to drill for them. We also have around 1.5 - 2.6 trillion barrels of oil in oil shale deposits. This gives the United States at least three times the oil reserves of Saudi Arabia.

In addition to this there is a process for liquefying coal and turning it into a motor fuel which is interchangeable with petroleum. The Germans developed the process during the Second World
War and South Africa continued development on the process, using it to supplement their own supplies of petroleum. We have more coal than the Saudis have oil.

If the United States had spent the money which it has wasted on impractical technologies like wind and solar power (not to mention the money we've poured down the ethanol rat-hole) on perfecting the liquefaction of coal and the extraction of oil from shale we would not only be energy independent but the world's largest exporter of of oil and oil substitutes.

As long as we're not willing to exploit our resources, he asks, why should the Saudis and their friends exploit theirs to protect us? You'll look hard for a good reason.

The current run-up in oil prices should have unlocked some of our energy resources, but with the Dems in control of Congress, it will not happen. So the bubble will burst again before we begin to once again take production seriously, and we will continue to be beholden to the world market for the oil which drives our entire economy.

Oil prices will fall, and will rise again. Maybe by the next upturn, we'll finally be willing to get serious about taking care of ourselves by utilizing the wealth of resources God gave us.