I can’t find it for the life of me, but I read an article about how energy, oil, and the like are the new bubble much like the tech stocks. What do you all think? I’m not as familiar with bubbles as I wish I was.
No chance and about the only similarity I see is that both went up a lot. First, I don’t have any particular predictions about oil prices that I am suggesting here except that if you are expecting a bubble burst like dot com in which oil plummets to $60/barrel it’s not happening. Second, the “bubble” term invites a semantic argument about what “bubble” means. For dot com, everything in Japan in the late '80’s, US stocks in the 20’s, the “Nifty Fifty” era of the 1960’s and many other “bubbles”, what it meant was that people were buying not for future earnings but because someone else would buy it for more. I’m not playing semantic argument in which someone says it’s a bubble because it went up too fast, too soon and show me why oil should cost so much. Oil is fundamentally different from stocks and non-consumable commodities in that it’s only value is when it is ultimately cracked and burned. That alone makes it hard to apply “bubble” analogies. Further, most of it is traded in short-term zero-sum agreements. If it’s a bubble, it’s a strange kind of bubble in which there is a counter bubble of everyone on the short side of all these contracts. In a stock bubble, billions and billions of dollars can be created with nobody on the losing side. A persistent theme in bubbles is the “greater fool”. Someone buys something because he can sell it to a greater fool. The greater fool is always someone more risk averse than the prior fool. As prices continue to go up, markets look ever less risky so people quit their jobs as librarians to become day traders. Ironically, bubbles always burst when the most risk averse people in society are holding the bag because there are no more risk averse people to sell to. That doesn’t seem to apply here at all. We don’t have broad “risk averse” participation in oil price increases. What we have is a class of buyers who are rationally price inelastic. The total cost of owning and driving a car is only marginally affected by oil prices. The total cost of owning a house is only marginally affected by oil prices. What’s happening is that derivatives markets are finding the market clearing price which is obnoxiously high. Unfortuantely, even if there is no greater fool there is a gigantic group of people who will pay whatever price is necessary to drive their cars and heat their houses. Oil is still cheap relative to any other alternatives. IMHO, this is a healthy stage in kicking the oil habit. If you stand on a street corner in Greenwich, every last car driving down Greenwich Ave weighs > 3500 lbs, has 1 person in it, and has > 250 hp, and is putting out an unsustainable amount of greenhouse gases. I commute on my bike many days and I’m alone and getting beeped at. If it takes oil at 400 to change that, I’m okay with that (and yes I recognize the global hurt that comes from that and I deeply feel for the rest of the world that missed the muscle car era).
Joey I should have known that about commodity futures and equities and bubbles. I’m familiar with the greater fool’s theory (aka soccer mom theory) that once you hear soccer moms yacking about a stock you know it’s time to dump/short it. However I forgot about the counter party in commodities though. It makes sense that a bubble in this aspect is more difficult than in the Amazon aspect where homemakers yacked about the stock over their morning Starbucks. Joey is the reason I can hold an intelligent conversation at cocktail parties.
JoeyDVivre Wrote: ------------------------------------------------------- > No chance and about the only similarity I see is > that both went up a lot. > > First, I don’t have any particular predictions > about oil prices that I am suggesting here except > that if you are expecting a bubble burst like dot > com in which oil plummets to $60/barrel it’s not > happening. Second, the “bubble” term invites a > semantic argument about what “bubble” means. For > dot com, everything in Japan in the late '80’s, US > stocks in the 20’s, the “Nifty Fifty” era of the > 1960’s and many other “bubbles”, what it meant was > that people were buying not for future earnings > but because someone else would buy it for more. > I’m not playing semantic argument in which someone > says it’s a bubble because it went up too fast, > too soon and show me why oil should cost so much. > > Oil is fundamentally different from stocks and > non-consumable commodities in that it’s only value > is when it is ultimately cracked and burned. That > alone makes it hard to apply “bubble” analogies. > Further, most of it is traded in short-term > zero-sum agreements. If it’s a bubble, it’s a > strange kind of bubble in which there is a counter > bubble of everyone on the short side of all these > contracts. In a stock bubble, billions and > billions of dollars can be created with nobody on > the losing side. > > A persistent theme in bubbles is the “greater > fool”. Someone buys something because he can sell > it to a greater fool. The greater fool is always > someone more risk averse than the prior fool. As > prices continue to go up, markets look ever less > risky so people quit their jobs as librarians to > become day traders. Ironically, bubbles always > burst when the most risk averse people in society > are holding the bag because there are no more risk > averse people to sell to. > > That doesn’t seem to apply here at all. We don’t > have broad “risk averse” participation in oil > price increases. What we have is a class of > buyers who are rationally price inelastic. The > total cost of owning and driving a car is only > marginally affected by oil prices. The total cost > of owning a house is only marginally affected by > oil prices. What’s happening is that derivatives > markets are finding the market clearing price > which is obnoxiously high. Unfortuantely, even if > there is no greater fool there is a gigantic group > of people who will pay whatever price is necessary > to drive their cars and heat their houses. Oil is > still cheap relative to any other alternatives. > > IMHO, this is a healthy stage in kicking the oil > habit. If you stand on a street corner in > Greenwich, every last car driving down Greenwich > Ave weighs > 3500 lbs, has 1 person in it, and has > > 250 hp, and is putting out an unsustainable > amount of greenhouse gases. I commute on my bike > many days and I’m alone and getting beeped at. If > it takes oil at 400 to change that, I’m okay with > that (and yes I recognize the global hurt that > comes from that and I deeply feel for the rest of > the world that missed the muscle car era). I love the last paragraph, where do you think Chrysler is going, they just came out with a 6.1 litre charger that runs 12’s and sucks down gas like I do pho when Im hungover. The writing is on the wall, all of the big three are going to get slayed.
I’m with you, Joey. Even though I’m getting destroyed in my wallet, if $400 oil can free America from its slavery to the Middle East, Venezuela and Russia, then, well, I guess I can live with it. The next issue to tackle is gridlock!
SeanC Wrote: > > I love the last paragraph, where do you think > Chrysler is going, they just came out with a 6.1 > litre charger that runs 12’s and sucks down gas > like I do pho when Im hungover. The writing is on > the wall, all of the big three are going to get > slayed. My thoughts exactly when I posted http://www.analystforum.com/phorums/read.php?1,780404,780880#msg-780880 (I’ll bet SeanC knows who Kowalski is). " I was reading Car and Driver in the MD’s office the other day about the 425 hp Challenger and thinking about Kowalski as a nice metaphor for the whole industry. We have new CAFE requirements, global warming, runaway oil prices, at least one Middle Eastern war and somehow we are building cars to look like 1971 and do 12 sec 1/4’s? Huh? Detroit seems to be living in a different world than the rest of us. "
JoeyDVivre Wrote: ------------------------------------------------------- > SeanC Wrote: > > > > I love the last paragraph, where do you think > > Chrysler is going, they just came out with a > 6.1 > > litre charger that runs 12’s and sucks down gas > > like I do pho when Im hungover. The writing is > on > > the wall, all of the big three are going to get > > slayed. > > > My thoughts exactly when I posted > http://www.analystforum.com/phorums/read.php?1,780 > 404,780880#msg-780880 (I’ll bet SeanC knows who > Kowalski is). > > " I was reading Car and Driver in the MD’s office > the other day about the 425 hp Challenger and > thinking about Kowalski as a nice metaphor for the > whole industry. We have new CAFE requirements, > global warming, runaway oil prices, at least one > Middle Eastern war and somehow we are building > cars to look like 1971 and do 12 sec 1/4’s? Huh? > Detroit seems to be living in a different world > than the rest of us. " you mean homeboy from street car named desire right? haha
kkent Wrote: ------------------------------------------------------- > I’m with you, Joey. Even though I’m getting > destroyed in my wallet, if $400 oil can free > America from its slavery to the Middle East, > Venezuela and Russia, then, well, I guess I can > live with it. The next issue to tackle is > gridlock! I dont think its right to call that slavery, if it is then America is beholden to them out of choice. The richest country in the world, full of the smartest people in the world should’ve figured something out by now if there was a desire. Having the USMC kill people in the middle east in order to save a few bucks when you fill up your volvo is a cowards option. Also, before you quote me shale oil and exploration in the arctic aren’t very good answers either. Its time we manned up and addressed this problem with real solutions.
I, uh, don’t know how you interpreted my acceptance of $400 oil as a call for the U.S. Marines to invade the middle east and take its oil, but, uh, I’ll, umm, accept the criticism?
Let’s say oil goes to 400 bucks a barrel. It would seem like all of us would be out of jobs? Everything is so dependent on oil I don’t see how we could grow the economy, in fact it would most likely contract as certain industries cease to exist. The stock markets would go tank, bonds would fall as defaults rose, no one would keep investing their money.
kkent Wrote: ------------------------------------------------------- > I, uh, don’t know how you interpreted my > acceptance of $400 oil as a call for the U.S. > Marines to invade the middle east and take its > oil, but, uh, I’ll, umm, accept the criticism? hmm just a few weeks ago you thought it was a good idea to ‘run roughshod over saudi arabia’
No, I was asking rhetorically why we don’t do that. I even stated it’s not the right thing to do. The question was raised in light of the whole “blood for oil” criticism in 2003 and 2004 that proved to be totally inaccurate. It was both tongue-in-cheek and rhetorical and I believe I made that abundantly clear.
blood for oil. yeah that is pretty funny those hippies don’t know anything, i mean its totally okay to engage in a war of choice. its even better to do it on dubious circumstances because there are a lot of chickenhawk cowards who will remove their brains from their heads and support you no matter what. I’am Canadian, which automatically means to someone who has never read a book that i am a communist. However in American terms I would be a rockefeller republican, shit if you guys followed your founding fathers i would emigrate in a minute. I know you jest when you talked about over running saudi arabia. but i have a family friend who is in the corps in iraq right now and when guys like you who have never seen anything in their entire life are willing to put some one else in danger, for nothing, it makes me sick. have you ever been in a fist fight or fired a firearm? I’m a sport shooter(yes you can legally own firearms in canada), and when i was younger I used to think like you, but when i was 17 I was coming back from shooting pool with my friends and i saw this crackhead shoot another guy three times and he dropped in the middle of the street. there was so much blood it was like some one opened up a milk jug and poured it in the middle of the street. I know i sound like a little antiwar b*tch, though im not antiwar…its just i can still remember how that guy screamed and how his friends tried to help him…thats what war is, trust me you don’t want to do that unless you have to. fuck this is a shit post, other then my friends who were with me that night i only told my family and my friends glenda and alim about it…i just think kkent, you need realize how ugly that is, its not something you should joke about. im sorry about getting so upset.
I don’t think kkent is a mindless warmonger like you’re making him out to be. At this very moment, I am wearing a shirt that says “I’m already against the next war” so I’m wearing my feelings about this on my sleeve. But if you’re going to go invade someone else’s country, kill hundreds of thousands of people, and spend trillions of dollars you’re already past the point of reasonable restraint and maybe you should start thinking about self-interest and making sure that everyone knows who’s in charge. I hate the war in Iraq and Afghanistan. I think I would hate it less if we got rid of some of the hypocrisy.
JoeyDVivre, With all humility, I want to offer some counter arguments to your post: http://www.schwab.com/public/schwab/research_strategies/market_insight/todays_market/recent_commentary/schwab_market_perspective.html?cmsid=P-1668818&lvl1=research_strategies&lvl2=market_insight&refid=P-1472703&refpid=P-1459738#crude_headwind http://www.schwab.com/public/schwab/research_strategies/market_insight/todays_market/recent_commentary/black_dog_is_the_mania_around_oil_set_to_wane.html * Since 2004, the total outstanding notional value of over-the-counter commodity derivatives has risen from $1 trillion to $8.4 trillion in December 2007. * Note that this is an eight-fold increase (to $8 trillion) in three years. As noted by ISI Group, if we assume that only 50% of the open position of $8 trillion currently is oil, the exposure as of the last data point equated to 58 billion barrels of oil—or more than 18 times the size of the NYMEX (NY Mercantile Exchange) market! My take is, aren’t these the same financial institutions who were supposed to be smart about mortgage backed securities and were supposed to manage the risks? Now they are writing off billions of dollars! I do not know exactly who is buying all these commodity derivatives for billions but I suspect we are again going to see a lot of bleeding when the oil bubble pops.
I like the second article, although I think that the statistics in there while meaningful are presented in a deliberately misleading way. I hope that crude oil demand responds to prices and the statistics presented in there as well as some anecdotal evidence suggests that it is. That’s what’s supposed to happen. What should make you worried is that oil prices have doubled and vehicle miles in the US maybe have shrunk from last year but there is not much indication of a demand drop from the rest of the world (and no indication at all of a drop in heating oil usage). That’s not much price elasticity. Anyway, amount demanded responding to price in some limited way is just really standard economics 101 stuff, not a sign that we have a bubble. The “open interest” = “speculative bubble” connection doesn’t work for me. Among other things, we’ve all been blowing the trumpet of diversification and hedging risk. Why is it a problem that it is happening into commodities markets? That 58 Billion barrels is about 1 years worth of oil which doesn’t seem unreasonable to me.
JoeyDVivre - this is a perfect segue into what I’ve been wondering for a while. As you noted, oil/gas are not price elastic (at least in the short term…) so the current spike in oil prices makes sense to me - if people buy the same amount when the price goes up, the price will keep going up. What I DON’T understand is - why is this happening now and not before? It would seem to me that demand is no less elastic now than it was in the last half a century, so what kept the price “low” then?
Mostly the threat of Japanese aggression. With a huge auto industry, no indigenous oil, and a history of invading other countries for natural resources the Japanese have generally kept any country from unilaterally raising the price of oil. It’s just not working well now.
Who are the parties taking the sell side on the futures contracts? I would think it would be the oil companies, but with their record profits every quarter it makes you think somebody else is on the short side.
JoeyDVivre Wrote: ------------------------------------------------------- > I don’t think kkent is a mindless warmonger like > you’re making him out to be. At this very moment, > I am wearing a shirt that says “I’m already > against the next war” so I’m wearing my feelings > about this on my sleeve. But if you’re going to > go invade someone else’s country, kill hundreds of > thousands of people, and spend trillions of > dollars you’re already past the point of > reasonable restraint and maybe you should start > thinking about self-interest and making sure that > everyone knows who’s in charge. I hate the war in > Iraq and Afghanistan. I think I would hate it > less if we got rid of some of the hypocrisy. yeah, the hypocrisy and the blatant corruption is what really gets to me. if the current government said, we’re going to invade iraq there is nothing you can say or do to stop us from doing it, were going to kill a whole bunch of people. i would respect them because they told the truth. hiding behind a lie. saying that a bunch of losers who live in f*ckin caves half way around the world, people that can’t even scrape together 12 dollars to buy a tent are an existential threat, to the most powerful country on the planet?..i dunno im just really steamed and i know with the way im feeling right now i can’t act rational, and the f*cked up thing is that thats the mentality got us in this mess. im sorry for acting like a fool, but there are street gangs from baltimore who are a bigger threat then al qaeda, its just a tremendous misallocation of resources to focus on those fools. Im not anti-american but your spending two bill a week on something that doesnt mean anything, if that money was spent on your education system, no one would be able to touch you. like i said im pretty steamed up, and seeing how this war f*cked up an entire family that is close to me and knowing that this is happening on a much wider scale…i dont know, im not happy and seeing people who think its a good idea to fight when they don’t know what it means, it makes me sick to my stomach. p.s. im sorry for being a dick, but thats just how i feel…shiieeet give me a vest, i am out of shape but ill still take my usp and ill put those fools down.