One doesn't like to hear that oil is hitting new intraday highs even as there are reports that the Saudis are preparing for a production increase.
I'm still trying to pin down in my mind how much of this is speculative. Obviously, part of it is simply the fall in the dollar, and part of it is demand, but prices shouldn't be climbing this quickly with essentially no new information. When changes in prices last a long time--upwards or downwards--they start feeding on themselves; people begin to think of rising or falling prices as a permanent new norm. That makes bull marketers willing to pay higher prices now, on the assumption that prices will be higher still in the future. But I don't need to tell you this; you all know someone who's bought a house in the last five years.
Ultimately, of course, this is folly. It is not enough to think that prices are going to rise; you have to think that they will rise more than everyone else thinks they will. Otherwise, the future appreciation should already be fully priced into the current asset. Failure to understand this--the belief that you can actually make a profit based on a certain rise--is the root of all bubbles.
On the other hand, sometimes the speculators are right. Perhaps we've simply been underpricing oil for too long, and this is the correction. Only time will tell. Which is why you won't catch me investing in the commodity markets any time soon.
I dabble in prognostication as much as the next, but I too won't wager with this one. The question is where, in the fair market, should oil be priced? 140 seems a bit high, but at this point maybe 80 is too low also? Anyways, good call on not making a call.
I find it hard to believe prices can stay this high for long after Indonesia and China (after the Olympics) cut their domestic subsidies.
But no, I wouldn't put money on it.
Why does nobody pay attention to the drop in interest rates as a factor affiliated with the spike in commodity prices? (and why doesn't anyone pay attention to spiking nat gas, ag commodities, nickel, steel, etc.) As things like T securities, etc have lower returns, investors are more likely to turn toward commodity investing.
Just a thought.
soulless economist,
You have a point, to some extent. There is some evidence that the money is looking for a safe place to camp, and that is causing a commodity bubble. The low interest rates are surely helping spur this boom.
That said, some of these commodity prices were running up back when Greenspan was ratcheting up interest rates (nat. gas and oil have been going up for almost 8 years now). So some of the recent bullish runup for commodities, esp. oil, might be investors camping. The dramatic runup from 80 to our current levels look like a bubble.
The question is again: where should oil really be? Is 120 high? Is this really where supply and demand meet? The figures look murky at this point.
Freddiemac,
Oh of course, I just think interest rates are a factor that are often overlooked as people shout "SPECULATION! MANIPULATION!"
I'd argue that while yes, oil and nat gas have been showing an upward trend for several years, the recent drop in interest rates prompted the spike. The drop in the rates in 2004 spurred some investment that maybe just...stuck around as it appeared prices weren't going south, and that could have fed into the rise.
George Soros said something to the extent that there's a bubble superimposed over a lot of fundamentals, and it's not exclusive to the oil markets, and I tend to agree with that. So I think even if this bubble "pops," oil prices won't crash a la NASDAQ 2001.
Megan_McArdle: Let's say I had strong evidence to suggest that I am cursed with bad luck. That is, whenever I do something, rare unforseeable events cause it to turn out badly for me.
This makes me to believe that if I went long on oil, that would actually *cause* it to almost immediately fall in price.
Given all of the above, and given the good that a bubble-popping would do, am I morally obligated to go long on oil? Would it at least be praiseworthy? If my assessment of my luck is correct, would it be likely to take down oil's price?
If I did go through with it, should I announce it to the world just after I make the purchase so that I can get gold-plated thank-yous from everyone?
Drivers could go go long on oil as a hedge against gas prices. If oil goes up, you have gains from the investment to offset higher gas prices, but if oil goes down, at least you're paying less at the pump.
If it is a speculative bubble, someone is going to be left holding the proverbial Target bag. Speculators eventually sell, leaving the last ones in broke.
Nick Szabo hits the nail on the head here: http://unenumerated.blogspot.com/2008/06/commodities-currencies-and-st.html. I would not expect a drop in oil prices until either 1) interest rates go up significantly or 2) an alternative to oil is found.
If the Saudis really are increasing production to 10 million b/day at the same time as US consumption is turning down it's hard to believe prices won't respond. (That's just US consumption via autos, IIRC two-thirds of US oil consumption is industrial and I have to think those users have had a bigger response to all these price hikes).
I know this is only the US, but the law of supply and demand is supposed to apply everywhere. (How much money can the Chinese burn subsidizing both the price of oil and their exchange rate?)
BTW, does anybody remember all the way far, far back to 1999, nine whole years ago, when US-produced oil was selling for $8 a barrel?
From $8 to >$130 in nine years. Do fundamentals change that much in that short a time? Or is the main thing just that oil is a market where production changes follow changes in demand with a considerable lag, so prices whipsaw?
If I knew the answer to that I'd be a lot richer than I am.
At some point, people are going to believe that $80/bbl is a real price. They're then going to call up the South Africans and build Secunda clones — if environmental rules don't stop them.
At that point, the inflation of the effective oil supply will cause a drop in oil prices, while the price of coal goes up.
If people are even mildly sane (that is, the government doesn't ban it), the upward price pressure on coal will make nuclear plants much more attractive, and they'll start substituting for coal plants.
That will put pressure on uranium prices. If America is not still being run by idiots, that will encourage reprocessing of nuclear waste to extract the fissionables suitable for use in power plants in place of mined uranium, greatly reducing the amount and lethality of America's nuclear waste.
In the long term I have to think cash/prompt oil is overpriced by long term fundamentals.
But currently cash oil is trading at or above futures. People are actually paying $130 a barrel for the black sticky stuff. So the short run fundamentals seem to be driving higher prices. As many comodities traders know the cash market is ruled by the short run supply and demand fundametals.
Will it come down a year from now, 2-3 years from now? Maybe. These high prices will certainly drive down demand and increase supply. But that is a change in the fundamentals not a change in the activity of speculators. I have a hard time blaming this increase on speculators.
I've recently joined and wanted to introduce myself :)