Signs point to the next Oil Bubble, and the economy will suffer

[Brian4Liberty]

Oil Bubbles (or what Alan Greenspan would call "froth") and the economy...


Signs point to the next Oil Bubble, and the economy will suffer (http://www.ronpaulforums.com/entry.php?141-Signs-point-to-the-next-Oil-Bubble-and-the-economy-will-suffer)

by Brian4Liberty
01-12-2011 at 12:56 PM

In 1998, crude oil reached a relative low of approximately $10 a barrel. Ten years later, in 2008, oil was peaking at the $145 per barrel mark. What a nice ride it was for oil investors. But from 2006 to 2008, it showed all the signs of a relative peak, caused by a speculative bubble.

At the macro level, everything is rising in price compared to the US Dollar. We all know this. It's due to monetary inflation by the Federal Reserve and US Treasury, commonly referred to as "printing money". But this monetary inflation tends to jump from bubble to bubble, rather than evenly flowing through the economy. When the Housing Bubble started popping in 2006, it was time for the "smart" money to move to the Oil Bubble (with the Housing Bubble being preceded by the Dot Com Bubble). It's always a search for the next commodity, asset or investment to use as both a speculative vehicle and an alternative currency.

The last time that oil entered a major speculative bubble in 2006, there were signs that the bubble was going to occur (other than a slowly rising price). Those same signs are present again. It starts with analysts from the biggest financial firms predicting higher prices in the near future. It also goes without saying that if these big firms are positioning themselves in the given investment vehicle, there is an element of self-fulfilling prophesy and conflict of interest in those predictions.

The second sign of the Oil Bubble was news reports indicating a general consensus that the price was going to rise. There is always a myriad of reasoning that goes along with this consensus, suffice it to say that the idea that the price of oil is going to rise, and rise soon, is in agreement. This usually coincides with an actual rise in the price of gasoline, and media publicity about the current and future price. It is worth noting that the price of gasoline often rises before crude oil rises in price. By coincidence or intention, it serves to increase awareness in the general public.

The third sign is media reports highlighting "failures" in the oil industry: a pipeline shut down for maintenance, a few oil rigs out of service, an oil field in the Middle East facing production problems. This serves to intensify the urgency to get in while there is still time.

All of these factors are now in play, and we can expect the price of oil to rise dramatically, according to prediction, with the biggest winners being the early adapters in the bubble. Would it be a coincidence if the biggest winners are the same people that started the ball rolling? That remains to be seen.

Relatively speaking, this bubble will once again burst, as speculative bubbles always do. This will not change the fact that in a macro sense, continued monetary inflation will result in continued price inflation, but it will make for some profitable "froth" on the way up.

But how long will an Oil Bubble last? Unlike many other bubbles, an Oil Bubble is extremely damaging to the entire economy. It effects nearly every aspect of our personal and business lives. The actions of a bubble in oil are analogous to a huge tax being levied at all levels on the economy. Unlike the subtle and hidden damage of monetary inflation, an Oil Bubble will be obvious and brutal in it's destructive force. Pressure will mount quickly and strongly for a solution. How long it takes for pricing to return to normal will depend upon the political agendas at work. History teaches us that the bursting of the bubble will begin when the biggest and longest players in the bubble suddenly take their profits and run. Like a huge pyramid scheme, the initial players will be the winners, with many more being the losers. In the case of an Oil Bubble, the entire economy loses.

On the bright side, like real estate and gold, the price of oil will never reach zero, but it may feel like it for the people who lose out and can not wait long enough for the given commodity to return to it's long term trend, if it returns within their lifetimes. Many losers in the Housing Bubble are still wondering when the bottom will be reached. That wait may be very long indeed.

[oyarde]

I think it is underway , started several weeks ago . Hope I am wrong .

[EndDaFed]

It's not a bubble.


http://www.youtube.com/watch?v=XnXZzx9pAmQ

[oyarde]

It's not a bubble.


http://www.youtube.com/watch?v=XnXZzx9pAmQ

Quite possible . It will go high and just stay ? Do to devalued dollar ?

[Brian4Liberty]

It's not a bubble.


Deja vu all over again. The more things change, the more they stay the same... ;)

[college4life]

Oil is not in a bubble, the USD is in a bubble.

Not to be a dick, but I don't think you have a firm grasp of economics to even talk about this.

Why would somebody sell gold and park their assets in the USD when we have negative real interest rates?

Gold, Oil, Silver, and many other commodities will much move higher as the dollar dies.

[Brian4Liberty]

Oil is not in a bubble, the USD is in a bubble.

Not to be a dick, but I don't think you have a firm grasp of economics to even talk about this.

Why would somebody sell gold and park their assets in the USD when we have negative real interest rates?

Gold, Oil, Silver, and many other commodities will much move higher as the dollar dies.

Did you even read the post, or just the title?

It was very clear about monetary inflation and the destruction of the US Dollar. Within the bigger framework of an secular upward trend, bubbles can and do occur. Did you miss oil going from $145/barrel to $60/barrel? And who suggested selling gold other than you?

[college4life]

There is no sign oil is in a temporary bubble, crude supplies are not that large and once the debt ceiling is raised in 6 weeks and QE3 is being discussed in April-June Oil will move much higher.

[Brian4Liberty]

Original post edited for brevity and clarity. Extraneous paragraph about gold removed.

[EndDaFed]

The only bubble is demand. Oil is scarce and will continue to become more scarce in the coming years. Now it could get to the point where the price of oil goes too high to the point the economy can no longer sustain its current level of production. At that point demand destruction will happen again and prices will fall. When the economy picks up more steam the prices will rise again. So what we will have is a roller coaster in prices until the bottom really falls away and we have total system collapse.

http://en.wikipedia.org/wiki/Peak_oil

[paulitics]

The only bubble is demand. Oil is scarce and will continue to become more scarce in the coming years. Now it could get to the point where the price of oil goes too high to the point the economy can no longer sustain its current level of production. At that point demand destruction will happen again and prices will fall. When the economy picks up more steam the prices will rise again. So what we will have is a roller coaster in prices until the bottom really falls away and we have total system collapse.

http://en.wikipedia.org/wiki/Peak_oil

Rubbish. The cost of oil is tied to the value of the US dollar. As the dollar's worth goes down, the price of oil and any other commodity goes up.

The fed has printed trillions of dollars which have been sitting on the sidelines since the bailouts, and this money is finally now flooding the market which is rising up the prices for oil, food, and just about anything else worth value. Why? It's because this is where investors are parking their money. This effect is independent of the the supply of oil.

There is plenty of supply, and this peak oil crap has been proliferated since at least the Carter years.

Don't believe me? Pick up a national Geographic propaganda publication from the 70s and and you would think it was written today, not 30 years ago. It's propaganda designed for the masses to blame their gluttonous ways, instead of the elite who have rigged the whole game. Yeah, it has some effect, but it is neglible comapared to the dollar's value because we are not talking about a free market. If their was a free market, the supply of oil would drastically increase and the prices would plummet.

The only scarcity is perceived scarcity. It is an illusion. Do you believe diamonds are priced according to supply as well?

[hazek]

The fed has printed trillions of dollars which have been sitting on the sidelines since the bailouts, and this money is finally now flooding the market which is rising up the prices for oil, food, and just about anything else worth value. Why? It's because this is where investors are parking their money. This effect is independent of the the supply of oil.

Please go read this thread: http://www.ronpaulforums.com/showthread.php?275513-How-long-after-the-banks-get-their-money-does-inflation-start-to-take-hold

And learn, because I don't think you grasp how it all actually works.

[paulitics]

Please go read this thread: http://www.ronpaulforums.com/showthread.php?275513-How-long-after-the-banks-get-their-money-does-inflation-start-to-take-hold

And learn, because I don't think you grasp how it all actually works.

Or you could just concisely explain what I am not getting. The thread you pointed to me to is about hyperinflation, and the delay in price increases from the rise in money supply. I don't disagree with that, but it is a little outside the scope of this and off topic, since I am not talking about hyperinflation but inflation. The point I was making had to do with the price of oil vs the value of the US dollar, which common sense dictates is by far the stronger variable in this whole thing. Do you disagree?

[EndDaFed]

Rubbish. The cost of oil is tied to the value of the US dollar. As the dollar's worth goes down, the price of oil and any other commodity goes up.

The fed has printed trillions of dollars which have been sitting on the sidelines since the bailouts, and this money is finally now flooding the market which is rising up the prices for oil, food, and just about anything else worth value. Why? It's because this is where investors are parking their money. This effect is independent of the the supply of oil.

There is plenty of supply, and this peak oil crap has been proliferated since at least the Carter years.

Don't believe me? Pick up a national Geographic propaganda publication from the 70s and and you would think it was written today, not 30 years ago. It's propaganda designed for the masses to blame their gluttonous ways, instead of the elite who have rigged the whole game. Yeah, it has some effect, but it is neglible comapared to the dollar's value because we are not talking about a free market. If their was a free market, the supply of oil would drastically increase and the prices would plummet.

The only scarcity is perceived scarcity. It is an illusion. Do you believe diamonds are priced according to supply as well?

Oh I believe you. They predicted that AMERICAN oil production would peak in the 70's and it has.

http://img341.imageshack.us/img341/4703/usoilproductionandimpor.png



America has the freest market in the world when it comes to oil production and we still can't get back to the record oil production of the 70's when the U.S was pulling 9 million barrels a day out of the ground. This time it's WORLD production of oil that has peaked in may of 2005. No amount of data manipulation is going to change that fact. Show me an oil market anywhere in the world that has the same number of small and big producers like the U.S. There isn't. Most oil markets the world over are run by governments. So if the freest market in terms of oil can't get back to peak production that says everything. I don't care if no government regulations existed tomorrow. That will not change the amount of sweet crude that is in the ground.

[Brian4Liberty]

There is always a myriad of reasoning that goes along with this consensus, suffice it to say that the idea that the price of oil is going to rise, and rise soon, is in agreement.

So let's ignore the macro reasons for a second. Imagine a stable US Dollar, and no effect from peak oil.

Begin with a big financial company, we'll call them JP Sachs. They invest in a commodity. They have analysts who predict that said commodity will go up. They invest more in the commodity. The media jumps on the bandwagon and focuses on negative issues related to this commodity. The price skyrockets, and many speculators jump in. The big company sells their holdings reaping billions in profits. That sale causes the bubble to pop.

If that commodity is Oil, that price bubble adversely effects the entire economy. What is the difference between extracting billions of dollars from the economy, without producing anything or adding value, and a huge new Federal tax?

And when Ron Paul talks about the main beneficiaries of new money creation being the people who first receive the money, is he talking about this type of situation?


On Money, Inflation and Government by Ron Paul
...
You see, the Fed creates new money and uses it to purchase securities from banks. Flush with funds, these banks seek to put this money to use.
...
http://www.lewrockwell.com/paul/paul447.html

[Brian4Liberty]

Unlike the subtle and hidden damage of monetary inflation, an Oil Bubble will be obvious and brutal in it's destructive force. Pressure will mount quickly and strongly for a solution. How long it takes for pricing to return to normal will depend upon the political agendas at work.

It looks like OPEC is already laying their cards on the table...a little preventative medicine...they have talked about a price of $100, and that is a maximum for them, not a minimum. JP Sachs and OPECs interests diverge when economic disaster threatens. Especially when OPEC knows that it will be them who takes the heat, not JP Sachs...



The Organization of the Petroleum Exporting Countries it is not likely to call an emergency meeting, unless oil trading prices rise above USD 100 per barrel and stay there.
...
Libya’s chairman of the National Oil Corporation said in a statement that he is convinced that a price at USD 100 per barrel will not harm the world economy and there is no reason to worry.
...
An OPEC Gulf delegate stated that the price strength is not likely to last and there is no excess demand in the market.
...
Oil producing countries have no signs of supply shortages and they say that as soon as the weather gets warmer the prices will depreciate to levels between USD 70 and USD 90 per barrel.

http://news.markets247.com/opec-will-take-actions-only-if-oil-price-will-rally-further-1657

[AFPVet]

We are in for a hell of a ride!

[Brian4Liberty]

Ron Paul is on the case...



http://www.ronpaulforums.com/showthread.php?275831-Walter-Jones-letter-to-Ron-Paul

Congressman Walter Jones is asking for an investigation into whether the Federal Reserve's money printing is driving up prices for commodities, including crude oil and gasoline.

The Farmville Republican has sent a letter to U.S. Rep. Ron Paul of Texas, the incoming chairman of the House Domestic Monetary Policy Subcommittee, asking him to look at the connection between the printing of money and rising prices.

[Brian4Liberty]

We are in for a hell of a ride!

More of a ride than anticipated! The Egypt unrest is the perfect news story to ramp up the hype...

[torchbearer]

Quite possible . It will go high and just stay ? Do to devalued dollar ?

that is why i say you'll never see "cheap" oil again. devalued dollar.
the bubble is in the dollar moreso than in oil. oil is being consumed, dollars are being accumulated around the world.

[Zippyjuan]

Are we in a bubble- or in a trend? Oil prices since the year 2000: Aside from the speculative bubble in 2007, it has been a fairly steady rise in oil prices- mostly due to supply and demand.

http://www.mongabay.com/images/commodities/charts/crude_oil.html
http://chart.apis.google.com/chart?chtt=Crude+oil,+avg,+spot++price+chart&chts=000000,12&chs=700x420&chf=bg,s,ffffff|c,s,ffffff&chxt=x,y&chxl=0:||2000|2001|2002|2003|2004|2005|2006|2007|2 008|2009|2010|1:||1:|14.8|18.5|47.1|75.7|104.2|132 .8&cht=lc&chd=t:19,20,21,18,20,22,21,22,24,24,24,19,20,21,19 ,19,21,20,19,19,19,16,14,14,14,15,18,19,19,18,19,2 0,21,21,18,21,23,25,23,19,20,21,22,22,20,22,22,23, 24,24,25,25,28,27,29,32,31,35,32,29,32,34,38,38,36 ,41,42,47,46,44,41,42,47,45,46,51,52,51,55,54,47,4 4,44,46,40,43,46,49,49,51,55,53,58,62,69,67,68,70, 77,82,92,99,100,86,75,55,41,31,33,32,35,38,44,52,4 9,54,51,56,58,56,58,56,60,63,57,56,56,57,57,62,64, 68&chdl=($/bbl)&chco=000099&chls=3,1,0

World supply, demand for Oil- hmm prices seem to be following rising demand:
http://perotcharts.com/images/energy/energy10-640.png
http://perotcharts.com/2008/07/world-oil-demand-vs-supply-1970-2007/

[Brian4Liberty]

Are we in a bubble- or in a trend? Oil prices since the year 2000: Aside from the speculative bubble in 2007, it has been a fairly steady rise in oil prices- mostly due to supply and demand.

There is no doubt we are in an upward trend, due to a variety of factors (peak oil, devalued currency, increased demand, etc.). I was predicting another 2007 style speculative bubble. We'll see if it happens.

[Zippyjuan]

Certainly not impossible. The rises in prices this past week were based on fears of potential disruptions in supplies from the Middle East- those disruptions in supplies of petroleum have so far not happened.

[Brian4Liberty]

that is why i say you'll never see "cheap" oil again. devalued dollar.
the bubble is in the dollar moreso than in oil. oil is being consumed, dollars are being accumulated around the world.

Donald Trump is running around saying it should $30/bl. He is basing that on his wish to strong arm and negotiate a better deal with OPEC, and thinking that price is what a real "fair market" price would be. Unfortunately, we have nothing close to a free and competitive market in Oil and gasoline. We have cartels and big oil/gasoline companies with a corporate/government/regulatory partnership. No telling what the price of oil and gasoline would be in a true free and competitive market. You would have extraction, processing and general overhead costs, plus some profit. How low could a company go for a barrel of oil or a gallon of gasoline?

[HOLLYWOOD]

Oh I believe you. They predicted that AMERICAN oil production would peak in the 70's and it has.

http://img341.imageshack.us/img341/4703/usoilproductionandimpor.png



The imports is a misleading indicator as well as the production... it's no secret, the longterm national security and energy policies of the US, is to use up everyone else's petroleum products/reserves, before tapping our main US reserves. If you're not exploring/tapping US reserves, of course production numbers are down. Let's not forget the anti-trust monopoly price fixing of US petro... just in the past 18 months the petroleum companies have taken 2+ million barrels of refinery capacity offline or shutdown.

The NAFTA treaty states that Canada our 51st bitchy state, must provide petro/gases to America first before any other nation, no matter what... same goes for Mexico. Both are huge exporters of energy to the US. Canada is #1.

[Zippyjuan]

Donald Trump is running around saying it should $30/bl. He is basing that on his wish to strong arm and negotiate a better deal with OPEC, and thinking that price is what a real "fair market" price would be. Unfortunately, we have nothing close to a free and competitive market in Oil and gasoline. We have cartels and big oil/gasoline companies with a corporate/government/regulatory partnership. No telling what the price of oil and gasoline would be in a true free and competitive market. You would have extraction, processing and general overhead costs, plus some profit. How low could a company go for a barrel of oil or a gallon of gasoline?

Newer oil sources are definately more expensive than older ones (which is why they haven't been developed so far). It can cost a billion dollars to drill a deep well offshore- that does not include the costs of exploration, infrastructure including platforms and distribution (ships or pipeline) or the extraction of any oil found. At $30 a barrel, that is not feasable.

Break Even prices for some OPEC countries (as of 2006- could be different today)
http://seekingalpha.com/article/58322-oil-price-predictions-and-break-even-prices
http://static.seekingalpha.com/uploads/2007/12/25/gcc_oil_breakeven.jpg

More recent numbers: http://www.certified-easy.com/ac_Crude_Oil_Price/Crude_Oil_Breack_Even_Price_By_Country.html
First line in this copy is their 2008 break even price, second line is their 2009 break even price.


To get a profit below countries have to sell their crude oil barrel at least to below mentioned prices.


Country
2008($)
2009($)

Bahrain
75
84

Kuwait
33
34

Oman
77
78

Qatar
24
24

Saudi Arabia
48
54

UAE
23
24

Algeria
56
60

Azerbaijan
40
35

Iran
90
90

Iraq
111
94

Kazakhstan
59
67

Libya
47
53

[torchbearer]

Donald Trump is running around saying it should $30/bl. He is basing that on his wish to strong arm and negotiate a better deal with OPEC, and thinking that price is what a real "fair market" price would be. Unfortunately, we have nothing close to a free and competitive market in Oil and gasoline. We have cartels and big oil/gasoline companies with a corporate/government/regulatory partnership. No telling what the price of oil and gasoline would be in a true free and competitive market. You would have extraction, processing and general overhead costs, plus some profit. How low could a company go for a barrel of oil or a gallon of gasoline?

cost of production really is the determining factor.
if you have to drill 2 miles deep in tundra, the oil is going to cost more than scooping it off the sand in arabia.
less oil comes from sand drilling, the higher the price will get. that will be a natural funtion as oil is first consumed totally from the cheapest sources.

[torchbearer]

we may see a time in the future where people once again have derricks in their back yard.
http://popartmachine.com/artwork/LOC+1319759/0/Oil-well-derrick-in-farmer%27s-backyard.-Goodrich-field-of-Continental...-painting-artwork-print.jpg

[Fox McCloud]

I recall the charts that were made by Dr. 3D and someone else who I can't recall at the moment (was it you, Hollywood?) That showed the price of oil when compared to gold--it was quite revealing; with pre 1913 dollars, the price of oil has increased, but it's not as dramatic as with our current dollar trend.

[Brian4Liberty]

Break Even prices for some OPEC countries (as of 2006- could be different today)
http://seekingalpha.com/article/58322-oil-price-predictions-and-break-even-prices
http://static.seekingalpha.com/uploads/2007/12/25/gcc_oil_breakeven.jpg

No wonder we rushed in to "save" Kuwait... ;)

And it appears that the Donald thinks he can negotiate Saudi Arabia down to the break even point. :rolleyes:

[Brian4Liberty]

it's no secret, the longterm national security and energy policies of the US, is to use up everyone else's petroleum products/reserves, before tapping our main US reserves.

Shhhhh... ;)

[AFPVet]

I have an idea... audit the fed, stop shipping our Alaskan oil to China and vote in real Constitutionalists.

[Brian4Liberty]

Oil, oil everywhere, but not a drop to refine...

Another "problem" that will no doubt result in record profits for big oil and others. The only solution proposed is new pipelines to pump oil across the country to refineries on the coast. God forbid anyone consider breaking the big oil/government created oligopoly on refineries and build some new ones closer to the sources of crude oil.


This gap is caused by oil traders' growing realization that inventories at the small Oklahoma town of Cushing -- the delivery point for the NYMEX contract -- will likely be awash with crude for months to come due to booming production from Canada and shale oil producing states such as North Dakota.

Because the U.S. pipeline system was designed to import oil from the coast to the interior, not vice versa, there's no way to move the extra northern crude to the southern refiners, in places such as Houston and Port Arthur, Texas, which are paying much higher rates for crude from far abroad.

...there aren't enough railcars, road tankers or barges to get around the bottleneck today, and a permanent solution depends on building new high-capacity pipelines.

http://news.yahoo.com/s/nm/20110309/lf_nm_life/us_usa_oil

[Soggy Cereal]

I don't believe 2008 was a "pop" of the oil bubble. Bubbles, once popped, take years to recover. Look at NASDAQ and how it's half of what it was valued at over a decade ago. Look at Japan's stock market. Now, everything except the Dollar and bonds went down in value in mid-to-late 2008. Oil was at $150 and dropped to $33, it has since recovered to $100. The Dow Jones dropped from 14,000 to 6,600, and is now back to 12,000. Housing, on the other hand, has not "popped" back up like everything else because it WAS a bubble.

The case of oil dropping, and most other asset classes in 2008 was due to what Jim Rogers calls "forced liquidation". Heavy margin was in place, particularly in the commodities realm as there is much less required for margin requirements compared to equities. People were forced out of their positions, but not because it was a bubble.

So there's a difference in the analysis about the next "oil bubble". A bubble doesn't occur until the tail-end of a bull market where most of the price action takes place. Housing prices escalated the most in 2004-2007, at the end of the bull market in housing which equated the peak of the bubble. If housing was like oil and stocks where forced liquidation forced people to sell real estate (however, real estate operates differently than securities or commodities), housing prices would have recovered much of what they lost in value. They haven't.

In my opinion, oil has not been in a bubble since the 1980's. There, when oil prices collapsed, it was years of floundering in low oil prices, just as housing now will be very depressed for years to come. The most recent bubble burst is, as Peter Schiff mentions, the last asset class to go up in value.

Oil will be in a bubble, but that's likely to be half a decade or so away...but I can assure you that 2008 was NOT a bubble in the oil markets.

[Brian4Liberty]

I don't believe 2008 was a "pop" of the oil bubble. Bubbles, once popped, take years to recover.

I was talking about "relative" speculative bubbles within a larger secular upward trend. I did not claim that oil would languish for long, quite the opposite in fact. The original post in this article was from two months ago, predicting the re-inflation. Of course the real unrest in the Middle East was not anticipated, but it may play out as being nothing more than another oil "scare" that results in damage to the overall economy, and record profits for Wall St. speculators and big oil.

Obviously housing is quite a different animal. It's not liquid, it's severely manipulated, and it has not been allowed to truly reach it's bottom. That is the recipe for a very long bottom.

A nearly exponential rise occurring before a major correction can be called a "speculative bubble". We can certainly disagree about the details, duration, severity and causes, but that is more about semantics. Obviously inflation and demand will make oil go up, but even when adjusted for inflation, the speculative peaks are there. Oil is volatile, there's no doubt about that.

http://www.inflationdata.com/inflation/images/charts/Oil/Inflation_Adj_Oil_Prices_Chart.jpg

[Brian4Liberty]

Update for the (relative) Oil Bubble pop of the past three months. Gold goes up, oil goes down.


Oil plunged 5% today, crashing below technical support levels as the reduction of the top-tier US credit rating hammered markets and stoked concerns of an economic slowdown.
...
US crude traded down $US5.57 to settle at $US81.31 a barrel, the lowest close since November 23. It then dropped as low as $US80.17 a barrel in post settlement activity.
...
"We believe that WTI crude oil prices could briefly drop to $US50 under a recession scenario," Merrill Lynch said
...

http://tvnz.co.nz/business-news/oil-prices-fall-dramatically-4343745