Oil Bubble Spin

by: Mike Steinhardt June 01, 2008 | about stocks: OIL / USO    

Mike Steinhardt

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Friday's oil price decline was impressive given the inventory report. However, this one-day oddity was made out to be some evidence of the bursting of the “oil bubble.” The stock market bulls and their spin of the oil bubble is quite a farce.

What do we mean by “bubble” anyway? One way to define a bubble is to call it a surge in prices beyond what supply and demand would predict. The problem is that we do a pretty poor job of predicting supply and demand.

First of all, I have no idea whether oil is a bubble or not or whether commodities as a group are a bubble. I don’t waste much time on pursuits like that. More importantly, I have no real idea what good it does to either define it as a bubble or to quantify what percentage of the bubble we should blame on specific groups. None of this “analysis” will result in lower prices.

But the bubble talk certainly is a fun tool for the permabulls. Somehow, they have become experts on what constitutes a bubble despite their failures to recognize it in the 1999-2000 tech stock bubble. Oh yeah - most of them didn’t believe the housing market from 200-2006 was a bubble either. But now, they know a bubble when they see one as it relates to oil. Okay - I got it.

The Nasdaq Tech Bubble of 1999-2000 ran up about 150% in less than two years and then declined about 75% from peak to trough. And yet, most permabulls kept denying that anything was bursting until the fall of 2000 despite losing 20% from the top.

The housing bubbles in certain metropolitan areas like Phoenix, Miami, San Diego et al saw prices run up a few hundred percent from 2000-2006 and there were quite a few people saying it was pure supply and demand - not a bubble. Since the stock market benefited from the housing bubbles, you didn’t hear too many of the bubble experts we have today opining on the size of the bubble or what would happen to the economy or stocks if it burst or what percentage decline signified the beginning of a bubble bursting. Yet, now many of these same morons proclaim that a 25% decline in some of these markets is a bottom. I am not sure how they know that.

And neither do I know how they are so certain that oil is a bubble. Consider their past performance.

Somehow, Friday became evidence that the bubble in oil was bursting. It’s funny really. We don’t know even know if there is a bubble. I know we want to believe it’s a bubble because that means it’s not our fault and its only temporary. But none of that makes it true. And if we concede that oil prices are totally out of whack, then what evidence do we have to know that it won’t get bigger? Optimism is not fact.

Regardless, the permabulls and the media love this bubble spin. And what it really comes down to is that if they convince everyone that it is a bubble, that is good for stocks. If it’s not a bubble, then the economy is going to tank even worse than it already will. And we cannot let that appear to be a possibility. So spin away. Keep telling everyone that it’s just a bubble because bubbles burst and then we get lower prices and then the economy and the stock market will be back to La La Land - and hopefully rebuilding its own bubble that everyone seems to love. They suggest that all the fast money speculating in oil will have to find its way to stocks and voila - you get an asset allocation rally. So yesterday’s decline in oil prices was just perfect for the permabulls. To them and anyone else desperate for lower oil and stock market rallies, a 3% decline was proof that the bubble was beginning to burst. After all, if we claim that it is bursting, then it must have been a bubble, ipso facto.

So it’s all spin. If you just look at the facts, oil declined to a point where it was one week ago. That’s it. Maybe oil prices will come down a bit. Let’s say its down 25%, and we get to $100 per barrel. Is that the size of the bubble? We lost 75% of the tech stock bubble. Are we going to lose 75% of current oil prices? That would put us back to about $32. But what if this oil bubble is only as big as the housing bubbles that people want to limit to 25%?

We have multiple standards for bubbles. We fail to recognize bubbles that benefit us (housing and stocks) and we are quick to identify bubbles that hurt us (oil). We underestimate the size of the bubbles that benefit us and we exaggerate the size of bubbles that hurt us. We find it really easy to say a decline in a bubble that benefits us is only a temporary and healthy pullback, while we are quick to suggest that a decline in a bubble that hurts us is the start of a massive bursting and return to “normality.”

Stop reading my negativity - go back to the regular media and all that bubble spin.

Related Articles

This article has 12 comments:

  •  
    Jun 01 01:34 PM
    This information would be true and correct if this was 1970 and China was not buying cars like American kids want iPods? Asians are buying cars like crazy... Where they use to ride the bus to work, they now drive a car. Factories have fewer and fewer bused employees and more and more cars in their parking lots. I see it everytime I go there... not only are they building factories, there are building huge parking lots and expanding parking lots too... So if every one of the cars that are parked there are half full of gas, the increase in demand is apparent. The USA does not determine the price of oil anymore. Asia does. We will see $200/barrel before we see sub $100/barrel oil. Sorry America, no bubble in oil... Gas will be $10/gallon in a few years...
    Reply | Link to Comment
  •  
    Jun 01 02:17 PM
    Oil is not a bubble. It is basically the source of all things in our economy and most likely peaking at this point. We have been able to do without most things in the past, so bubbles burst. Houses got to expensive to buy, so we rented, now rents are getting high enough to consider buying again. The economy has had many fashions and bubbles, but now it has a chronic energy disease that is quantitatively different. We need used to need sun, water, air, and earth to live, now we invariably need oil.
    Reply | Link to Comment
  •  
    Jun 01 03:26 PM
    We live in a new era:
    gas2.org/2008/03/19/el.../
    Reply | Link to Comment
  •  
    Jun 01 03:48 PM
    Like the author, I don't know if oil is a bubble or not.

    I do know that the dot com bubble was based on get rich quick speculation over intangible un-necessary assets with no base.

    I do know that the housing bubble was based on tangible but optional assets bid up on low interest borrowed money.

    I do know that oil is a tangible asset that is not optional in an modern industrailized growing world.

    I do know there is wide disagreement about peaking and world capacity and the political and geological effects on price.

    I do know there would be no debate over depletion or peaking if there was abundant over supply.

    I do know that the world is using 30 billion barrels of oil a year and that there are major obstacles to overcome to sustain or grow that amount over the long haul.

    I do know that supply/demand whether structural or political is effecting price.

    I do know that the cost of replacing depleted fields is increasing.

    I do know that modern transportation is based on liquid fuel and that the global infrastructure supports liquid fuel for the transportation system.

    I do know that there is no economically available substitue for the liquid fuel that we use or have infrastructure to support the fleet.

    My conclusion from what I do know is that the price of oil will continue to increase following the laws of supply and demand until the cost forces a reduction in demand, but thereafter will remain at a high price for those that still afford to buy it.
    Reply | Link to Comment
  •  
    Jun 01 03:59 PM
    To paraphrase Mr. Steinhardt, no one knows where oil is going. No one foresaw the financial crisis that brought the housing market to it's knees. As he pointed out, the common wisdom of five years ago was "there are more and more people that need housing and a limited amount of land-there's not place for housing prices to go but up" and, like oil, it was a commodity that people "needed". I consider by oil, gas and coal stocks as "trades' not long term investments-if they turn out to be a long term investment fine but I am always ready to sell.
    Reply | Link to Comment
  •  
    Jun 01 06:02 PM
    There is some basic reasoning missing in this article:

    1) If you use the Masters report information from the Homeland Security Department, you can easily calculate that as a point estimation the price of crude oil is bubbled up by 37.2%
    (Regardless of the price, world oil production is 85 million barrels a day so you simply withdraw those index speculators from it..)

    2) Since there are only two oil markets these prices are up on a global scale, I still have not given orders to OPEC to deliver to more markets. I have only asked to craft better contracts for poor countries.

    __________

    Let me quote from the article from Mike:

    Since the stock market benefited from the housing bubbles, you didn’t hear too many of the bubble experts we have today opining on the size of the bubble or what would happen to the economy or stocks if it burst or what percentage decline signified the beginning of a bubble bursting.

    Comment: Elementary calculations from the period 1996 - 2006 relating median family income to median house prices indicate we could see a 50% decline.
    That is over ten trillion US$ of US family housing equity wiped away...

    And then we have:

    4) The policies of Alan Greenspan gave rise to the 'cash is trash' policies of for example pension funds. So pension funds got into commodities and oil and stuff like that, after their future obligations are to feed the already obese Americans and not those skinny third world people.

    And what about this:

    5) When you study the scale of a lot of metals, on a worldwide scale those markets as a whole are nothing but an average Nasdaq listing. You only need a few billions to pump such markets up.

    Conclusion: The biggest bubble of all still is the US dollar...

    Lets leave it with that.

    Reply | Link to Comment
  •  
    Jun 01 06:08 PM
    Barnburner...

    ""As he pointed out, the common wisdom of five years ago was "there are more and more people that need housing and a limited amount of land-there's not place for housing prices to go but up" and, like oil, it was a commodity that people "needed". ""

    Farmers said the same thing in the 1970's, farmland, they don't make anymore... but you got to pay the bill for it someday.

    Americans today are "Ilfunctional literates":

    Individuals who are educated, yet fail to apply basic mathematics, reading and logic to simple everyday contracts.

    I saw the housing thing coming because it looked just like the farming mess of the 70's... It will take years for this to correct. In the mean time, banks will fail just like the S&L's did....
    Reply | Link to Comment
  •  
    Jun 01 11:14 PM
    Any parabolic chart is a bubble. The only question is how much is it going to correct. And how OPEC is going to react. When in the beginning of 2007 oil dropped below $60, OPEC cut production. US government decided that it's OK. Are they going to decide the same in the election year? Then, mister Obama, welcome to the Oval Office. Republicans need not to apply.
    I'm not writing about politics, usually. But everything about oil is about politics anyway.
    In the long run, oil is going down. Long term, if you look at 100 year chart, oil matches gold.
    Reply | Link to Comment
  •  
    Jun 02 03:26 AM
    I have yet to hear a reason for oil to go down. I guess by going down oil bears mean 40-60$ range. Okay, global recession will do the job no doubt.

    But where is that recession?

    Unless there is some giant sea monster out there, which developed an appetite for dry bulk carriers, the Baltic Dry Index signals a strong world economy.

    Cheap oil is consumed!

    Unless you discover a Ghawar and Cantarel field, you are not going to see cheap oil again. I don't think oil companies will keep fields online, where the per barrel cost is higher than the price. If i have costs of 60$ per barrel and the barrel costs 59.90$, i shut the valve and open it up again when oil is at 75$. Simple. Low prices will kill low prices!

    NEW FIELDS ARE BEING DISCOVERED, BECAUSE OIL IS EXPENSIVE, OIL IS NOT UP IN SPITE OF NEW DISCOVERIES!
    Reply | Link to Comment
  •  
    Jun 02 07:33 AM
    Looks like your "one-day oddity" will last more than one day.
    Reply | Link to Comment
  •  
    Jun 02 08:21 PM
    No bubble... just make money... buy SWN (Southwestern Energy just announced today to be in S&P 500 replacing Trane Co., blow out earnings) PBR (Petrobras) NE (Noble) and STR (Questar)... read about them... you will be amazed, you will do well, and will be glad you read this, earnings next quarter at today's prices (April and May) will be huge, buy now as earnings announcements expected shortly... warm regards... The Stockaccumulator...
    Reply | Link to Comment
  •  
    Jun 02 10:12 PM
    Simply put, with true market fundamentals for this spring, and the given the drop in the dollar, translating into $25 as of MAY - (the IMF)...and the worldwide average by producers of oil 'out of the ground' at about $45-50....OIL should be, jsut as teh Saudis have maintainded to bush and cheney all year- $&% - NOW, you can to the math to see just how much 'bubble' the speculators and the CIFs have inflated the price...and how where it hopefully will fall to...if they get burned enough, they want be back for good while...adn if yo uhave been keeping up wiht the news...there has been quite a bit of new oil found or being drilled and announced in teh last couple fo months....(now that's the facts, jack!) G
    Reply | Link to Comment
More Comments on USO »
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Mike Steinhardt

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Oil Price
Alternative Energy
Coal
Ethanol