Tuesday, July 08, 2008

Peak Oil Punkass? Or Oil Bubblehead?

The debate between the "oil bubble crowd" and the "peak oil doom crowd" has been fast and furious, yet taking on whimsical overtones at times. A recent Physorg newsrelease adds fuel to the "bubble heads."
By analyzing oil prices over the past four years, the researchers have demonstrated more support for the hypothesis that the recent oil price run-up has less to do with supply-demand interplay and more to do with speculation.

In their analysis, the team gathered data on oil prices since 2005 in US dollars, euros, and other major currencies (to confirm that the results are not a consequence of the weakening of the US dollar). They also examined worldwide oil supply and demand data, specifically investigating the extent of increased demand from emerging markets such as China and India.

Then, the researchers analyzed this data using a method that Sornette’s group started to develop in 1996 that identifies bubbles as “transient superexponential regimes” – basically, areas of rapid growth that occur due to a source of positive feedback within the system. The scientists looked at the data in the context of three different models, and all three models revealed the existence of a “log-periodic power law,” in mathematical terms – in other words, a bubble. In economic terms, the researchers explain, a bubble refers to a situation in which expectations of future price increases cause prices to temporarily rise without justification from fundamental valuation....

A comparison of supply and demand showed that, most recently, supply has been exceeding demand by more than a half million barrels per day. Meanwhile, the price continues to increase. Since it appears that the supply-demand balance has only a small effect on the price of oil, the researchers suggest that a major effect lies elsewhere. They point out several reasons why speculation, fed on rumors of rising oil scarcity, may be the positive feedback causing high oil prices.
Read the entire article for a more thoughtful discussion of the pro-bubble argument than you will find by reading most economic analysts.

The obvious fact that oil prices are influenced by multiple factors should be understood by anyone involved in this debate. It is not an "either-or" question. The facts are that oil prices are subject to emotional over-reaction to events unrelated to current supply and demand issues. The current futures market is more complex than the straightforward commodities market that many analyst cut their teeth on, and at least some oil prices on the market are tied to futures market averages.

Beyond index fund and sovereign fund speculation, there is the larger picture of the decline of many large oil fields--which is simple geology. If one is emotionally inclined to infer a massive global "peak oil doom" scenario from the natural and inevitable decline of oil fields, one will certainly do so. On the other hand, most of the underground and undersea geology of Earth has not been carefully explored for oil resources. That is true even for Saudi Arabia. Even in North American oil fields long considered "dead", new technologies are recovering significant oil--turning a "peak" into an extended plateau for these previously written off fields.

Application of many of these new technologies of recovery and exploration would almost certainly change current concepts of global oil supply.

Part of the oil price surge is due to tight supply and demand margins. Part is due to a weak dollar. Part is due to massive demand from the emerging world. Part is due to financial markets and their influence on oil markets via various mechanisms. Part is due to poorly maintained oil infrastructure within the oil exporting dictatorships. And part of the price runup is intentional politically based manipulation by very wealthy and powerful oil kleptocrats motivated by both greed and a grudge.

Peak oil punkasses have a point about the natural decline of oil fields. But they take the reality far beyond logic and reason, into blindered paranoia. Bubbledywubbledyheads focus on the effect of speculation, sometimes to the exclusion of other factors that influence prices.

The modern disease of academic and media pundits and analysts, as well as their students and acolytes, tends to be an excessive focus on a specialty POV, and a lack of historical perspective. Add to that the complexity of modern financial and commodity markets, and the picture is too easily blurred.

We certainly are experiencing an oil bubble by many definitions, but is it the dominant factor in current economically destructive energy costs? Is it a "bubble within a larger bubble?" Probably.

Taken from original post at Al Fin

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Blogger JackofBlades said...

Oil isn't in a bubble. Did you catch that EIA and IEA report. It reported some time ago that demand was oupacing supply by 1mbd. Yet it got little to no play from anyone.

This is a supply/demnd problem. Even Bush admits that. I think he would know better of this problem than you. Wake up! Denial has not allowed you to see the truth!

12:08 PM  
Blogger al fin said...

JOB, please get Mr. Doob to leave a comment as well. One without the other just doesn't seem complete.

3:28 PM  

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