Analyzing the oil bubble
Like real estate before it, the patterns around oil prices are beginning to look like a bubble. Scott Jagow examines factors contributing to the oil bubble with Fortune Magazine's Allan Sloan.
Allan Sloan is a senior editor-at-large at Fortune (APM)
TEXT OF INTERVIEW
Scott Jagow: Saudi Arabia says it will start making more oil -- 200,000 barrels a day, about 2 percent of its production. The Saudis believe the price of oil is unreasonable and unsustainable. But they just increased production last month and oil traders ignored it and kept buying.
Allan Sloan from Fortune Magazine, I'd love to hear your take on the price of oil. Or at least Wall Street's take on it.
Allan Sloan: The people I respect on Wall Street, whom I've dealt a long time, their sort of universal opinion is that the price of oil is now sort of in bubble territory caused by a variety of things. And the way people like that, and to some extent people like me think is about the time you start reading everywhere, "Oil is going to $200, plan for this, this is permanent," that's the time it's about to end and change. And I think that's what's going to happen, I just don't know when it's going to happen.
Jagow: And that's just kind of a bubble theory?
Sloan: Yeah. There's always a rational for what's happening. At the height of the real estate bubble, it was baby boomers are all retiring, everyone's gonna have a million houses. And now, at what may be the height of the oil bubble, it's China, it's India, not enough refineries. There are all these explanations for why oil really should be $140 or $150 or $170 a barrel, and they're all after the fact.
Jagow: Well if this is actually a bubble, are we assuming then that the supply/demand aspect of this isn't as strong as some people are making it out to be?
Sloan: Right. I think a lot of what's going on here is financial speculation. People have made a lot of money betting on oil, and I think that's happening with a lot of the commodities. And you can make a supply and demand case, but I don't believe it. And I can't tell you why I don't believe it, and I can't demonstrate logically that it's wrong, but I don't believe it.
Jagow: How much of this do you think is being driven by fear?
Sloan: The stock market is more fearful now than usual. I would say a lot of it. I just don't think that what's going on in many cases is rational. And if it's not rational, it's gonna come to an end. Because it always does.
Jagow: So you're kind of going with a gut feeling here, Allan?
Sloan: Yeah, and if you saw me, you'd know my gut is ample.
Jagow: Haha. All right, Allan Sloan from Fortune Magazine. Thanks.
Sloan: My pleasure, Scott.
Comments
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From Palm Harbor, FL, 06/17/2008
Demand from China and India is driven by the US and EU economies, internal demand is also linked, so if/when the recession hits the US, inflation soars in EU (as well as in the OPEC states, especially Kuwait & Iran) the natural movement is to drive the price down on falling demand.
We've been hearing that demand is increasing from India and China for some time, why is that "just now" factoring into the oil market?
Oil "should be" $80-$100/b, and demand even in the US is dropping with higher gas prices.
Eventually, oil will be gone, time for a new "Manhattan Project" or an "Energy X Prize" as we move to conserve and reduce demand. It's not all doom & gloom, despite what the Peak Oil apostles predict, it's a new path to the way to view the world, post-oil, pre-new energy.
From Sault Ste. Marie, MI, 06/16/2008
Mr. Sloan should explain why non-OPEC crude + condensate production for the first 3 months of 2008 is down about 450,000 b/d compared to 2007 based upon U.S. DOE/EIA data.
OPEC production is up ~1.7 mb/d for the first 3 months, much of that from Saudi Arabia and Angola, but OPEC production increases after 2010 will be hard to come by.
In the meantime, consumption is growing rapidly in China and many oil producing countries. That puts a squeeze on the global exportable amount of oil.
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