A post by Maynard
I wouldn’t want to defend the arch-fiend George Soros, who devotes much of his considerable resources to financing the worst of the Left. But he’s a hugely successful hedge fund investor, and I think he’s right in observing that today’s high oil prices are a bubble. That is, oil has pushed up far higher than straightforward economics would have it.
Speculators are largely responsible for driving crude prices to their peaks in recent weeks and the record oil price now looks like a bubble, George Soros has warned. “The price has this parabolic shape which is characteristic of bubbles.”
This makes more sense than the media talking heads we hear extrapolating current trends out to ever-higher oil prices. Two years down the road, oil will likely be lower, not higher.
However, Soros goes on to say:
“You can also anticipate that [the bubble] will eventually correct but that is unlikely to happen before the recession actually reduces the demand.”
Economic overreactions are normal. Oil goes too high and the economy stumbles and demand for oil drops. So the short- and mid-term may not bring easy days, and things may get worse before they get better. This is not a prediction of doom; it’s just one of life’s cycles.
The possible wild card would be a new Middle East war. Iran is playing a dangerous game, and an outbreak of hostilities would threaten to disrupt regional oil production and transport. The locally-deployed American military is ready to jump into a defensive (and potentially offensive) role if the situation threatens to spill out of Iran. Nobody can say exactly how this would play out, but I’m sure our people are contemplating possible contingencies. Let’s hope it doesn’t happen, but the best safety lies in being prepared for the worst.
Maynard, I wouldn’t be so quick to praise Soros on this. A New York Times profile of Soros from a couple of months ago pointed out that he’s been wrong about quite a few of his economic predictions. (I know, it shocked me, too!) Whether he’s right about this is still in question.
But there’s another factor to consider. Soros is notorious for manipulating currencies and economies to make money for himself. (Read “The Shadow Party” by David Horowitz for additional information on just how much of a lowlife snake Soros is.) It wouldn’t surprise me in the least if Soros is playing with both the dollar and oil prices to hurt America, the country that made him into a billionaire.
So, I hope you’ll excuse my pessimism regarding Soros. I simply don’t think he’s an economic Nostradamus so much as he’s an economic snake oil salesman.
Oil is in no bubble. The output of oil has peaked, with high demand. Reserves are being stressed to the max as the producers want to take advantage of this price run-up. The Russians are seeing fields decline, and the Saudis are now getting about 20% water out with their oil, due to the injection of water or steam to drive the oil up from deep source rock. Experts generally call a field as “peaked” at that level of water extraction. At 25% water the field is in decline.
Domestic sources are held off the market by the lack of political will to go and get them. Unconventional oils like shale and tar sands are energy intensive to produce, water intensive, highly polluting and have poor yields. They will always be around, but will be supplements at best.
I believe we will see a steady decline in oil production, with demand dropping for a while as is the case in all conservation efforts, followed by a slower steady climb in demand. There will be shocks and price spikes along the way.
1973 caused a lot of shock when there were ample supplies, but a political embargo causing gas lines and high prices (inflation adjusted to about $6.00 per gallon of gas today). That shock happened when we were 15% dependent on foriegn oil. We are now over 60% dependent on foriegn oil. Consolidation has concentrated refining into small areas vulnerable to disruption. Shocks and spikes will be severe when they occur.
The political pendulum cuts a wide swath, and always goes too far before changing direction. I predict that we are not far from a situation where a new canditate will sweep into office by running on the platform of repealing the endagered species act, and repealing the environmental protection act, to replace them with common sense reforms.
It’s easy for politicians and advocate groups to grandstand and pontificate about green solutions, and conservation. When you seriously can’t heat your home, and have to walk or bike everywhere to save gas for getting to work, the political wind will shift. Think about the reception the thermostat police will get when they come to your house to enforce the new 55 degree winter limit they decided you must abide by.
Mrfixit, if oil had actually peaked, you’d see a slow and steady increase over time, not the sudden explosive spike we’ve seen in the past two years. Even assuming the peak oil scenario doesn’t preclude a bubble on top of that, either. This IS speculation at its most typical extreme: when everyone starts saying prices will go up forever, that’s when you know have to sell pretty damn soon. See generally, real estate three years ago, tech stocks in the late 90’s, tulips in 17th-century Holland, etc. ad nauseam. As someone far wiser than me once said, the four most dangerous words in investing are “this time it’s different.”
It would not surprise me one bit if Mr. Soros was the driving force creating and profiting from the oil bubble.
Then after his buddy Hussein Obama is elected he would then take a pin to that bubble.
Prez. Obama could than say “Look what a good boy am I. I dropped your oil prices! Have no fear for I am here to watch over you”….
Dave J:
Oil has been dominant for 50 years. It is in a peaking process that will take a few years. Alternative sources like oil sands and shale will increase, and demand will fall somewhat as prices march upward with some shocks and spikes along the way.
The problem is that oil is limited, like gold, and wood, and grain. We can shift supply, we can goose the output somewhat, but it amounts to using a bigger straw to draw from the same glass faster. Don’t forget that the recent bubbles were financial paper in nature. The stock bubble occured as companies and anylists hyped a stock, and the company was just printing up stock certificates like mad. Amazon.com was losing $100M each quarter, advertizing like crazy and increased it’s authorization of stock by 200%. It crashed, partly because you didn’t need their stock before you bought it, or after you owned it.
The housing bubble is another financial bubble. Even though the product was tangible, the financial institutions turned mortgages into securities, and then accumulated those securities into AAA rated investments. It was initially fueled by the FED printing up money from thin air, and then took on a life of its own. People who had no hope of paying a loan got loans, and big loans. The brokers signed them up, got their fee money and shoved the securitzed loan off on some other institution, like your retirement bond portfolio. The housing bubble created minibooms as copper and lumber soared, concrete was hard to find, etc. Now the idiots in congress are talking about patches and bailouts at taxpayer expence. It will only prolong the pain and recovery in housing.
Oil after 1975 eased. Supply increased, but Carter’s wndfall profit tax kept domestic prices high. Inflation adjusted prices peaked in 1985. Reagan got the windfall tax repealed, and by 1989 oil fell to $8 per barrel, because domestic supplies soared.
Could it happen again? You bet! If the shackles were taken off, we could jump supply within 5 years and in 10 years oil would fall, but due to inflation, it would probably crash back to $40 or $50 per barrel. This peak is somewhat artificial based on political will. That’s my point.