June 7, 2008

The price of Oil - an interesting observation

We are so swept up in the cost of oil these days that we don't notice that it has all of the characteristics of an economic 'bubble' and its collapse will happen at some future time. From CNN/Fortune:
Why oil prices will tank
Arguments that $4-a-gallon gas (or even higher) is here to stay are dead wrong. Housing's boom-and-bust cycle tells you why.

High-flying tech stocks crashed. The roaring housing market crumbled. And oil, rest assured, will follow the same path down.

Not everyone agrees. In an echo of our most recent market frenzies, some experts pronounce that the "world has changed," and that the demand spikes, supply disruptions, and government bungling we face now will saddle us with a future of $4, $5 or even $10 a gallon gasoline.

But if you stick to basic economics, it's clear that the only question is when - not if - prices will succumb.

The oil bulls are correct in their explanations of why prices have jumped. It's indisputable that worldwide demand has surged, chiefly driven by strong growth in China, India and the Middle East. It's also true that most of the world's reserves are controlled by governments in places like Russia and Venezuela that mismanage production, thus curtailing supply growth.

But rather than forming a permanent new plateau for prices - as the bulls contend - those forces are causing a classically unstable market that's destined for a steep fall.
An interesting analysis -- check out the original article for Shawn Tully's reasons. The comments section (a separate page) is also interesting reading. Posted by DaveH at June 7, 2008 6:32 PM
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