I still don't think it was a bubble. The volatility of prices is expected, as I explained in my previous installment (opus 10 below);
And IMHO it won't be the last bubble in the oil market either.
The New York Review of Books: The Perilous Price of Oil (By George Soros on September 25, 2008)
The following is adapted from testimony given by George Soros before the US Senate Commerce Committee Oversight Hearing on June 3, 2008. ... While I am not myself an expert in oil, I have made a lifelong study of investment bubbles as a professional investor. My theory of investment bubbles, explained more fully in my recent book, The New Paradigm for Financial Markets, is considerably different from the conventional view. According to my theory, prices in financial markets do not necessarily tend toward equilibrium. They do not just passively reflect the fundamental conditions of demand and supply; there are several ways by which market prices affect the fundamentals they are supposed to reflect. There is a two-way, reflexive interplay between biased market perceptions and the fundamentals, and that interplay can carry markets far from equilibrium. Every sequence of boom and bust, or bubble, begins with some fundamental change, such as the spread of the Internet, and is followed by a misinterpretation of the new trend in prices that results from the change. Initially that misinterpretation reinforces both the trend and the misinterpretation itself; but eventually the gap between reality and the market's interpretation of reality becomes too wide to be sustainable.
...
While I am not myself an expert in oil, I have made a lifelong study of investment bubbles as a professional investor. My theory of investment bubbles, explained more fully in my recent book, The New Paradigm for Financial Markets, is considerably different from the conventional view. According to my theory, prices in financial markets do not necessarily tend toward equilibrium. They do not just passively reflect the fundamental conditions of demand and supply; there are several ways by which market prices affect the fundamentals they are supposed to reflect. There is a two-way, reflexive interplay between biased market perceptions and the fundamentals, and that interplay can carry markets far from equilibrium. Every sequence of boom and bust, or bubble, begins with some fundamental change, such as the spread of the Internet, and is followed by a misinterpretation of the new trend in prices that results from the change. Initially that misinterpretation reinforces both the trend and the misinterpretation itself; but eventually the gap between reality and the market's interpretation of reality becomes too wide to be sustainable.
At some point future pricing and guesses about likely returns stop being convincing and the house of cards collapses.
Bubbles are - literally - a confidence trick.
There are some excellent post dot-com bubble books doing the rounds. In one of them someone persuades an investor to 'buy the internet' and sells them a CD of content for a few million.
That's not misinterpretation, that's trying it on and getting it away with it because some investors are stupid.
The dot com bubble was very public, and the con trick was extended to most of the population. Likewise for the housing bubble.
The oil bubble has very few players and isn't public at all, so we have no idea what's going on. But when you get a price spike of 50-75% over a short time, and no one is entirely sure where some of the physical oil is, that looks very bubble-ish from the outside.
Yes, but not always and not only. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Anyway, here it goes:
The Vermin only teaze and pinch Their Foes superior by an Inch. So Nat'ralists observe, a Flea Hath smaller Fleas that on him prey, And these have smaller Fleas to bite 'em, And so proceed ad infinitum.
Great fleas have little fleas upon their backs to bite 'em, And little fleas have lesser fleas, and so ad infinitum. And the great fleas themselves, [in turn,] have greater fleas to go on; While these again have greater still, and greater still, and so on.
Big whorls have little whorls, Which feed on their velocity, And little whorls have lesser whorls, And so on to viscosity.
Big bubbles have little bubbles which feed on their liquidity and little bubbles have lesser bubbles and so on to volatility. And the greater bubbles have themselves even greater bubbles to ride on; while these again have greater still and greater still, 'till meltdown.
William McGonagall
Bubbles big from bubbles bitty Pumped up by Bank liquidity Until pump fails or switches off And all that's left is debt, and froth.
I like how you put the two graphs together. Excellent! As for the winning bet....it's going to be like a surfer riding the waves, and seeing which wave will be moving through the finish line (Dec 31), however that is done, is the key to the bet. Obviously, the May 2007 to May 2008 price wave was a big one, and now the world gets to catch its breath and adapt to this post $100/bbl reality. A lot of people have been using a little bit less each (which does add up to about a 5% consumption drop, for now) of oil products, so demand is likely to be down. But so is production in a lot of key spots, and more importantly, the volumes of Exported Oil are also likely to be less for 2008 than they were for 2007, and the same for 2006. And maybe the KSA rulers will decide after the Nov U.S. election to cut back a small bit on production, and rake in a big chunk of coin, again, and thus make money while their oil fields recover from this recent session of all-out pumping. I'm guessing that will pull up the price just in time for the holidays. Merry Xmas, sort of...
Nb41
