Oil Bubble?

[Jeff Matthews]

Are oil prices just the new "dot-com," the new "real estate?" Just another frenzy, resulting in a bubble waiting to be popped?

See this article:

http://money.cnn.com/2008/06/06/news/economy/tully_oil_bust.fortune/index.htm

[Guest " "]

I did not know that in NY, gas tax is 31 cents on top of the Feds 18 cents. It's not clear if it's flat rate or a percent of gas costs. If it's a percent of gas costs, that would explain much of the non opossition.

http://www.gaspricewatch.com/usgastaxes.asp

[Jeff Matthews]

Nice link. It's cents per gallon.

[billybob]

Yessir, don't get caught holding when it pops, and drops like a rock. Of course there are options.

[Jeff Matthews]

Mark, the analogy is not that far off. Sure, local matters affect r/e values - perhaps much more so than oil. But global (national) matters also affect r/e values, such as mortgage rates, the interest deduction, etc. Sure, the article is a guess, but if history is a lesson, then I look forward to the oil bubble deflating.

[oldtimer]

Mark, you sound like a prime candidate as an advocate for the "random walk" theory, at least in the weak form, if not stronger. Good man! You see there is a theory which makes sense regarding the day to day movement of stocks, which basically states that you cannot predict them. You may know this, but if not and are interested in some light reading which I think is also entertaining, try "A Random Walk Down Wall Street" by Yale professor Burton Malkiel.

[Jeff Matthews]

One more thought. Every single day you will hear something like this on the news:

"The Dow was down 32 points today on news of inflation fears."

"The Dow was up 112 points today on good news from the auto sector."

"The Dow was down 212 points today on fears of a weaker dollar."

Etc.

Q: What do those comments have in common?

A: They are all made up rationalizations about something which has ALREADY happened. You may have well as said, "The Dow was up 12 points today because the sun was shining in NYC." Same quality of analysis. This sort of "analysis" occurs a thousand times a day on every news channel in the country. It shows NOTHING, proves NOTHING, and means even less. It is intended to convey to the public the idea that economists "know" something about the movement of stock prices. But isn't it obvious, that if they DID know something, they would say the following:

"The Dow will rise 56 points tomorrow because unemployment is up."

"The Dow will fall 125 points next month because inflation is rising."

Etc.

Nope. You won't hear that, because there are NO useful economic theories about stock pricing. Or oil pricing. Or house pricing, or the price of socks. But after 40 years of hearing that stuff on TV one might think that economists have such knowledge or theory. Actually, if economists knew anything about any of these topics they wouldn't talk about it, they'd be buying and selling stocks!

Oil will bounce around. That much I am confident in. Whether it ever goes back to $50/bbl I have no idea. It might. It might not. But if it does or doesn't, it isn't related to buying stocks or houses.

Absolutely, I agree. Those quotes you gave are humorous truths as the the line of BS involved in stock market analysis. Once you get down to individual stocks, a lot more begins to make sense. This is also true of particular industries.

Nowhere have we heard any real suggestion that supplies are drying out. Certainly not to the extent to drive prices to double over such a short period. The world has not changed that much. The only thing that happened over the last two years is R/E is "out" and energy is "in." The new fad.

[pauln]

I

have been very suspicious of what has been going on in the oil business for a

while now. What has had me bothered about it is the justification of price and

supply concerns on the one hand, and a public policy encouraging over

consumption on the other. Even "following the money" to find clues to

whom receive the spoils seems counterintuitive in so far as the present path

and impacts leads to "killing the golden goose".

The

only line of thinking that seems to make sense is to wonder if there is a piece

of the puzzle that has been closely held by those "in the know". Ask

yourself under what circumstances would the present course make sense for the

producers? What situation would drive them and their proxies in government to

encourage such over consumption in the face of supply constraints and at the

risk of a consumer rebellion resulting in the potential collapse of the

industry? Why no movement to build refineries in the last 30 years? Why tax

breaks for the purchase of Hummers? How can those who make decisions be so

cavalier and fearless in the face of current perceived reality?

Under

what scenario does this path makes sense?

Scenario

A: It makes sense if there has been a discovery in the energy industry that

will make oil based energy obsolete - some kind of new technology that will run

our cars and truck, fusion that works, zero point energy, something unknown.

This discovery is being held in secret until the current folks running this

business have squeezed out all the profit they can from the exiting situation.

Sort of a use or lose it approach - sell and consume now full tilt before the

secret is out.

Scenario

B: It makes sense if secret knowledge about the supply of oil has changed on

the increase side. This would be like discovering that the Earth's mantle is

comprised mostly of oil (Bondi's and Gold's theory). This would mean a

virtually infinite supply of oil drillable from any place on Earth by pushing a

pipe through the Mohorovic Discontinuity. This would be millions of times more

oil than the oceans have water.

There

are other possible scenarios to explain the current actions in this way - they

all either find a larger supply of oil held in secret, or an alternative energy

source discovery held in secret; in either case the idea is to soak the

consuming world until the new thing is disclosed.

I guess my point is that the public policy and

the private producers are both acting as if there is no problem... maybe that

is the true answer, the problem has been solved, so now it's just a matter of

unloading the current stock of oil at the highest possible price before the

secret gets out that there is no future energy source problem.

[Jeff Matthews]

It's no hidden structure. WYSIWYG. People bidding up prices they will pay because they can pass on the increase to the next guy. That's what business is all about. Nothing negative. Nothing positive. No evil. No charity.

If you think prices will go up next week, you'll pay a bit more today. If you paid a bit more today, that becomes the new price. An increase in supply or a reduction in demand are the only factors that will bring prices down. There is no conspiracy to dismantle.

[pauln]

"Move along citizen, there's nothing to see here."

[mungkiman]

If I owned the oil, the price would double. Sure, costs could be passed on to the next guy, but some might construe my actions as evil. $50 billion profit seems like a lot, but I'm not a shareholder.

If you have three people, and 8 slices of pizza, some people will eat faster! Most will not conserve oil, or pizza, if it means that someone else gets it instead.

[billybob]

No prophetic or market analyticals needed. If indeed a bubble, it shall eventually burst. Care should be taken, and DD is the word, and care. It may appear that a stock will rise forever however....there exists other factors....to consider.

[Brac]

Can we really blame them for profits being so high, if we (the government) would let them build a refinery or drill in Alaska, then they would be spending alot of that money to do these things. Since they aren't allowed to grow, they just get bigger pockets. And exxon makes less on a gallon of gas then Uncle Sam does. Now lets give Uncle Sam a "profits tax" and put the money back in our hands.

Has anyone considered that the countries selling the oil, just feel like bleeding us dry, you know cause we are the "great satan" (chavez) at least he says were Great.....

The is no other country in the world that does'nt allow it's people to use it's natural resources..

Congress isn't the the opposite of progress, I'm just sayin

[Colin]

I was an Assistant Energy Trader and Office Manager at Merrill Lynch and Infinity Trading Group in the nineties. I personally made over 1,300% annual ROI shorting Japanese yen and oil down to $10 a barrel.

One of the first things Hugo Chavez did as the new leader of Venezuela was to go to Mexico and get them to agree to follow OPEC production guidelines, this stopped Venezuela and Mexico from being two of the biggest OPEC cheaters and it immediately firmed up the price of oil

Second, global oil production has not dramatically increased in the last year

Third, Iraq was pumping 2-million barrels per day under the UN Oil for Food program

Fourth, 10 years after the Gulf War to protect Saudi Arabia from Saddam Hussein, the program was soon to expire (only the U.S. wanted to keep it in place)

Fifth, the U.S. invasion of Iraq effectively stopped, and then reduced, Iraqi oil production, now about 1.5 million barrels per day

Sixth, Chinese and Indian demand is up almost 10% per year or more, for the last several years

Seventh, U.S. demand is much greater than both China and India combined

Eighth, U.S. demand dropped 2% recently as Americans finally cut back

Ninth, Russian oil is not flooding the market, Russia abides by OPEC production guidelines

11) At the current growth rate, Chinese import demand will catch up to U.S. next decade

12) The supply and demand picture has not changed fundamentally since last year when oil prices were ½ lower

13) High commodity prices will stall U.S., Chinese and Indian growth

14) The Chinese Yuan links to the USD; lower USD means the Chinese are also paying more for their oil and getting less value for their U.S. exports

15) High oil prices will bring new production - such as coal and Brazil, and new easy-to-burn fossil fuel supply, such as E85 gasoline with 15% ethanol - to market

http://money.cnn.com/2008/06/06/news/economy/tully_oil_bust.fortune/index.htm

16) High oil prices will bring new fuels to market

17) The history of nature, weather, crops, commodities, human activities and markets is one of boom and bust cycles

18) Demand will falter, production will increase, prices will fall; it always does

19) After a final blow-off spike higher, possibly much higher, look for a crash, in the next few months, possibly years, below $100 a WTI barrel!

20) Then prices may drop possibly as low as the 60s again in a few more years or the next decade

Mark, there are useful valuation theories for those markets. The Fed used a classic bond to stock yield ratio to explain that the Tech bubble was “irrational exuberance.” Media doesn’t explain such mathematical models to the sixth grade public.

A random walk is macro picture. All I care is my micro picture; not how well will 500 stocks do, but which one or two do I buy and hold now.

Actually, if economists did know anything about any of these topics - they wouldn't talk about it, they'd be buying and selling stocks. Then they would quiet or be traders or money managers, not economists.

CA electrical debacle was a classic example of government price controls: they don’t work in the long run!

Oil companies have more than enough leases to drill more oil. There is a shortage of offshore oil drilling platforms. The U.S. cannot drill enough to provide all its oil needs.

[billybob]

Haven't looked but would expect shorts are growing on the various oil stocks. Just a fact of life in the day of a long.

[Brac]

So who can explain how I can get in on the oil speculation and make some money?

[billybob]

If new to stock trading, be very careful. It requires attention, and not just to detail. Investools is a learning online platform that is OK, but requires some loot to get started.

And, or, open an account with say Scottrade or others and research and buy oil stock(s), and related, unless you have time to watch the stock throughout the market day, and aftermarket, quickly learn how to place stop, sell, orders into the system that is not guaranteed to work, especially in heavy volume/trading. Last I knew, you can open an account for only $500, although $5,000 or more may be more realistic, to realize profit.

Seriously though, if interested, do some "Due Diligence" and be very astute in the advice you receive, as brokers are in it for themselves, irregardless of what they may tell you.

There are other stocks to look at, and it does require some time. If oil does go to say $170 per barrel, well it is already at $140, so dependent upon the stock you choose, you would not make the profit you may have wanted, if for example, you had gotten in an oil stock at say $100 per barrel.

Best I can say is proceed with caution! This is just 1 person's take, as much more to it.

[Fish]

Oil companies have more than enough leases to drill more oil. There is a shortage of offshore oil drilling platforms. The U.S. cannot drill enough to provide all its oil needs.

I don't think we have to drill enough to supply ALL of our needs,just suppliment.Is there some oil company(not politician/news anchor) you can point me to that said they have more than enough leases? The people that drill the oil,not the oil company say they can bring oil up in 18 months from many places and six years from anyplace,if allowed.

[Brac]

If new to stock trading, be very careful

Thanks but I was hoping for speculation info, you know like buying contracts....

[Jeff Matthews]

Don't know for sure where to point you to, but be careful. I bet you will see those folks go the way of the mortgage originators.