So it was a speculative bubble then

So says Martin Vader Weyer.

Just possibly, it means that what investors refer to in shorthand as the great "oil up" story has finally revealed itself not as the fundamental reflection of scarce supply that its adherents liked to claim, but as a simple, speculative bubble that was always going to burst.

Hmm. It\’s just a little odd that he then goes on to list a series of real (rather than purely speculative) reasons for the rise and now fall.

And meanwhile, five years of rising oil prices have provoked a wave of investment in new drilling and refinery capacity – including the opening up of inaccessible oil sources that no one wanted to tackle when prices were low. Whether it is deep under the Arctic ice-cap or soaked into the tar-sands of northern Alberta, there turns out to be quite a lot more oil waiting to be exploited before we really approach the peak-oil apocalypse. More than that, high oil prices have encouraged rapid development of such alternative energy sources as wind and solar power, and more efficient engine and heating technologies.

On the demand side, a shuddering deceleration in economic activity across the industrialised world is starting to take pressure away. Many economists think the downturn will be deep and painful, and Opec (whose predictions are naturally at the low end of the range) thinks demand for its output could be lower in the early part of the next decade than it was in 2006.

In the motor industry, the talk is of plunging sales of gas-guzzlers, as drivers on both sides of the Atlantic switch to smaller, fuel-efficient cars – or simply cut out non-essential mileage. Even in China, for all the Olympic razzamatazz, a fall-off in Western demand for cheap manufactured exports must soon lead to at least a tempering of growth in energy demand.

There is a way of combining these two of course: Old Adam pointed it out in 1776.

Speculators anticipate (at least those going long do) higher prices. By their purchasing actions they create those higher prices which then lead us to economise now (and produce more), not in the future when the shortage occurs, leading to there being less of a shortage at that future point.

That is then, that speculators perform the very task that we would wish performed: by attempting to profit from a coming shortage, they reduce that coming shortage.

Good system, innit?

11 thoughts on “So it was a speculative bubble then”

  1. But doesn’t this come up against the problem that stocks of oil didn’t seem to rise?

    Tim adds: I deliberately stayed away from the point about whether futures trading drove up the price.

  2. And he’s misunderstood Peak Oil like everyone eles seems to. Peak Oil isn’t about “it running out”, it’s about “not being able to pump it faster”. It’s about being at top speed with no more acceleration left.

    Of course we’re going to find more oil, under the Arctic, in the tar sands, etc. But this is all harder to get at, and can’t be pumped as quickly as the easy stuff we found decades ago. The easy stuff is disappearing and hence the rate at which we can pump it will fall. That’s Peak Oil.

  3. According to the International Energy Agency, over the next decade, there will be a bigger increase in demand than in supply, by quite a big margin.

    There is a fundamental problem.

  4. “there will be a bigger increase in demand than in supply”

    Since we’re at Peak Oil now, there won’t be an increase in supply.

  5. “there will be a bigger increase in demand than in supply”
    Isn’t this impossible in a free market? Demand always equals supply; only the clearing price changes.

  6. Kay Tie at 10.38: “Of course we’re going to find more oil”

    Kay Tie at 2.06: “Since we’re at Peak Oil now, there won’t be an increase in supply.”

    Now forgive me, but wouldn’t the discovery of more oil be an increase in supply?

  7. Jebus! If I cut the production of TVs in my factory from 1000 a week to 500 a week have I increased the supply of tellies? (Hint: in the oil industry oil supply is denominated in mbd, with the d meaning “per day”, whereas oil in the ground is known as “proven reserves”).

    What is it about change vs. rate of change that people don’t get? Newton is spinning in his grave.

  8. Oh, come off it.

    I agree, we should not blindly bash ‘speculators’ in any way (collectively, they lose as much as they gain and it’s quite good fun, actually),but there is no way that ‘the fundamentals’ (so beloved of dimwitted house price analysts) justify a doubling or trebling in a year, and a fall of what, 20% or so? in the past few weeks.

    Of course the recent spike in oil prices was partly bubble (I’ll tell you how much when prices bottom out again).

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