Thursday, September 14, 2006

The oil bubble

Disclaimer: While I think my logic has been dead on, I've been wrong every single time I've talked about oil prices. Read the following in that light.

An article in The Seattle Times is reporting the possibility that the oil bubble is bursting and that we could see a huge drop in energy costs.
The recent sharp drop in the global price of crude oil could mark the start of a massive sell-off that returns gasoline prices to lows not seen since the late 1990s — perhaps as low as $1.15 a gallon.

"All the hurricane flags are flying" in oil markets, said Philip Verleger, a noted energy consultant who was a lone voice several years ago in warning that oil prices would soar. Now, he says, they appear to be poised for a dramatic plunge.

Crude-oil prices have fallen about $14, or roughly 17 percent, from their July 14 peak of $78.40. After falling seven straight days, they rose slightly Wednesday in trading on the New York Mercantile Exchange, to $63.97, partly in reaction to a government report showing fuel inventories a bit lower than expected. But the overall price drop is expected to continue, and prices could fall much more in the weeks and months ahead.

This outlook is way too rosey, in my humble opinion, much like the $100 barrel of oil predictions were too dour. For right now, the world feels somewhat stable and that is easing some of the fear premium that was built into the price of oil. The world is not really that stable yet, though, and it won't take much for the fear premium to be built back into the price of oil. Additionally, I don't think it is possible for us to see a return to the prices of the late '90's. Remember, demand increases as prices drop, and there is probably not enough extra production capability to support a $15 barrel of oil unless there was a major contraction of the world economy. Gasoline at $1.80? Perhaps. At a $1.15? I wouldn't bet on it.

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