Do you think current oil bubble is similar to housing bubble?
Recently OPEC Presiident said that they supply nough crude and cannot be blamed for record prices. Instead traders who treat like any other commodity and option traders at investment houses are widely thought to to be driving prices upward.
Many veteran oil analysts say this is bubble and there is a similiarities to the housing bubble. They also say Oil is historically cyclical business and higer production by the OPEC, warm winter, slower U.S. Economic growth and a flattening demand in the US can effect for these lofty prices. Unnlike earlier spikes in oil prices due to war in the Middle East, this episode does not appear to be linked to any one conflict or to any physical shortage. To my surprise one time big promoter in Oil is bearish now and have decided to dispose at currnet level. Some anaylst predict lower oil market will help to prevent recession and inflation. Please give your comment
Answers
2172 points
ChaosNantuko answered one year ago …
Theres many experts on both sides. Yes, some say its too high right now, but there are other very authoritative sources that say production can't be raised much further then its current levels, and ever increasing supply will lead to supply shocks, leading to higher prices.
Heres a quote from the international energy agency...
“An abrupt escalation of oil prices after 2015 as a result of a global supply crisis cannot be ruled out.â€
“ . . . it is very uncertain whether new oil production in the period to 2015 will be enough to compensate for the natural falloff in output from existing oil fields and keep pace with the projected increase in demand.â€
“The consequences of unfettered growth in world energy demand are alarming.â€"
Heres a quote from Tony Hayward, CEO of British Petroleum
“Every geopolitical event causes a spike in the price [in oil], but these spikes only happen because the underlying market is itself tight. For the medium term, the era of cheap energy is behind us.â€
Heres a quote from the CEO of ConocoPhillips, Jim Mulva
“Oil and gas production fell at all of the largest publicly traded oil companies in the third quarter, as aging oil fields, declining access and soaring costs for drilling services took their toll on output.
“I don’t think we’re going to see the supply go over 100 million barrels a day. Where is it all going to come from?†--November 8, 2007
Admittedly, many of these people have a vested interest in higher oil prices. That being said, if these are blantant lies, they may have to deal with charges of fraud or stock market manipulation.
Theres actually a strong argument to be made for the claim that oil is still currently cheap. A single barrel of oil contains the energy equivalent of almost 25000 hours of human labor. None of the alternatives have anywhere close to this energy density. Hence, if oil was value based on how useful it is, or how easily it could be replaced, it would still be significantly more expensive then it is now.
2172 points
ChaosNantuko answered one year ago …
incidentally, that final point is why compared to oil, alternatives remain alternatives, and will have significant problems getting to a more mainstream level.
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3966 points
EthanR answered one year ago …
I don't think the oil prices are similar to the housing market bubble at all. Housing became a mania, with the average Joe watching HGTV and thinking he could buy any run down house and flip it back to someone else for $50,000 more. Loan standards dropped and there was cheap money all around to push prices higher.
Oil prices, on the other hand, are controlled by traders, and influenced by geopolitical events, freakish weather, and supply and demand laws. The average Joe has virtually no input into the prices, except to complain about rising gasoline costs. Nobody is quitting their day job to trade oil futures, as they did to day trade in 1999 and buy homes in 2005.
That is not to say the price of oil will stay that high forever. Look at how gold came way down from $800 a few decades ago. But I don't see high oil prices as being similar to the housing market.
1130 points
sundarkambam answered one year ago …
Let us see some facts :
Cost of producing oil - Around $ 3 to $ 5 per barrel.
Demand for oil - In fact there is a Reduction in usage
Supply of oil - Ample supply from Saudi and other OPEC Countries.
So why is Oil touching $100 per barrel ?
Pure Greed by OPEC Countries.
Alternative energy sources :
1. Huge gas discoveries in India which will reduce India's dependency on oil imports from OPEC Countries and drive down oil prices.
2. Increased efficiency in oil usage by China .
3. Canadian oil sands - which costs around $20 per barrel to make into a sweet crude oil. The difference between $ 100 ( oil)or even $ 70 ( oil) with $ 20 ( Oil Sands) make compelling economies.
4. Big oil reserves offshore and in the Alaska region .
We have not even considered other alternatives like Uranium and coal which are enough to take care of the Global energy needs.
Now if these factors doesnot point to a oil bubble then what else does ?
508 points
John answered one year ago …
The housing bubble was created as sub-prime lenders were able to acquire homes they would normally not be able to purchase. Sub-prime lending flooded the housing market with a fresh line of home buyers creating greater demand for homes. As demand increased, supply decreased inflating home values. As the sub-prime borrowers began to melt down and foreclosures began to occur, there were less buyers and more and more sellers who could not make their payments. The market was over-flooded causing housing prices to drop. This oversaturate the market with homes for sales while eliminating a huge buyer base (Sub-prime borrowers).
With Oil, many media outlets will argue greater supply from China and India are the cause. Yet, demand remains relatively the same. In America we have huge oil supplies and for some odd reason we are unable to get it. So we remain dependant on OPEC and Venezuela to produce the oil we need. It's funny when you hear people complaining about our dependency on oil, they are usually the same people that vote to keep us from drilling for our own oil in Alaska, California, and Florida (At least the Karaboo is safe). The instability in OPEC nations and the Middle East as a whole causes speculators to bid up the price of gas along with tight restrictions by OPEC on production. The political aspect of OIL prices is something that is uncontrollable by the US.
The housing market truly bubbled based on supply and demand even if the demand was artificially created by sub-prime borrowers. Oil prices rise based on production restrictions, instability, and political tensions.
For these reasons it is also hard to equate inflation with oil prices as you would with corn or milk prices.
The bottom line is we need to loosen the grip on US oil supplies by OPEC and began to supply fuel from other sources including domestically as we create alternative fuel source for a reasonable price. This is the only way we will have more control and say in oil production and pricing. We need to remove the fuel to our country from political turmoil the world has found itself.
John M
321 points
charlo answered one year ago …
Just a quick side note. Subprime borrowers did make an impact on the recent housing bubble, but in the macro level, the participants behind that debacle (the big banks, mortgage lenders, borrowers themselves) are not the only players. Traditional residential housing has been growing at an inflationary pace, ever since Greenspan ordered that huge rate cut. I suppose that subprime is the more "obvious" culprit, due to the recent media frenzy, but it's not the only reason for the mess right now.
In terms of oil, there is more than enough supply of proven oil to last us for a while. The US reserves are meant as reserves, where IMO, if there's a world catastrophe and everyone launched nukes at each other, US reserves, domestic and foreign-bought, will last the country for quite some time, rationed of course. In regards to alternative energy, nothing is as liquid and available right now as oil. People would much rather have what is available now than wait and invest and hope that something "better" or more efficient comes along. It is true that OPEC countries are greedy and that speculators play a big part in oil price fluctuations. But the recent bullish ride of oil shows how resilient the US economy is to high oil prices. I remember last year that if oil was to ever reach $100, recession will doom us all and rabbits will own this land or something ludicrous.
825 points
Dragonsbane answered one year ago …
Alright, originally I didn't want to respond this question due to the number of answers already posted. But after reading some posts which I'd describe as a little more than "slightly inaccurate", I thought I would add my own personal opinion.
Let's start with housing... First off, there are a number of reasons for the speculative bubble in housing in the US. But I honestly believe the housing bubble was spawned by the Federal Reserve when they lowered the Federal Funds rate to 1% and kept it there for far too long. At that rate, houses were affordable for everyone, creating demand that far outstripped supply causing the prices to rise. When interest rates rose from their unnaturally low level of 1%, housing became unaffordable for many people. However to keep growing earnings, lenders lowered lending standards allowing nearly anyone to qualify for a mortgage. After all, their risk was minimal. They could sell the risk to an investor in the form of a CDO. When that well was dry, lenders then came up with "creative financing alternatives" to allow more people to buy homes (whether they could afford them or not) to keep growing their earnings. After all, isn't that what companies are supposed to do? All of this caused the price to rise at an unsustainable pace, fueling speculation in the residential market causing prices to rise even more. Eventually, supply outstripped demand by so much that prices began to fall. When that happened, speculators no longer wanted to buy houses, they wanted to sell them, so what had once been demand for more houses became more supply adding more downward pressure on prices. I think we know the rest of this story.
As for oil, this is more a matter of opinion than fact. But I don't believe that the price of oil is in a speculative bubble the way housing was. Let's face it, a Miami condo won't go back to it's peak price any time this decade. If oil fell from it's current price, how low would it go? And for how long would it stay there? At the moment, we have sufficient oil to meet our current needs. But despite what others have posted, there have been no (maybe 1 - it's recent and hasn't been fully defined yet) large new oil discoveries in the last decade. So while demand for oil is growing faster than ever (Who would have guessed that a billion chinese and Indian people would prefer driving to riding bicycles?), supply is not growing at all.
Now I don't even know where to start on the supply side of oil. So I guess I'll just start at the top and work my way down.
Cost of producing oil - Around $ 3 to $ 5 per barrel. - Saudi Arabia, once upon a time could produce oil at $3 a barrel. Now their costs are higher (depending on how you measure it). But in any case, production is DECREASING. They have to pump enormous amounts of water into their wells to maintain pressure and they still can't get as much oil out as they could 20 years ago (despite improvements in technology) and it costs more.
Demand for oil - In fact there is a Reduction in usage
I'm not even sure I should dignify this with a response. But please provide some sort of proof that oil usage is going down. That's the first time I've heard that one.
Supply of oil - Ample supply from Saudi and other OPEC Countries
"Hubert's Peak" theorists would disagree with you. But that's just a matter of opinion, can't prove it right or wrong.
I would also like to point out that if there were "more than enough oil" in the world. The "people with the oil" would just dump it on the heads of the "speculators" that are manipulating the price.
I'm not saying that $100/barrel is the equilibrium price for oil. But what I am saying is that there is a funadamental supply/demand imbalance in oil that will keep it's price at levels higher than the historical norm. I'm also very long oil and talking my book.
196 points
TeekaTiwari answered one year ago …
Oil is not experiencing bubble valuations…yet. At some point, oil prices will go through a bubble stage but we are a long way off from that occurring. Over the next 2-5 years, we can see oil trade north of $150 a barrel. Remember that it is the explosion of China’s and India’s middle class wealth matched with years of underinvestment in new oil exploration that is propelling oil prices higher.
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