The Rising Price of Oil: How High is Up?

The price of oil continues to skyrocket with no clear end in sight:

NEW YORK ( — Oil prices touched a record high above $142 a barrel Friday, before easing a bit, prompting several analysts to predict that the market is headed for an even greater milestone: $150.

At 11;14 a.m. ET, light, sweet crude was up 70 cents to $140.34 a barrel on the New York Mercantile Exchange. The front-month contract had hit an all-time high of $142.26 in electronic trading earlier.

The jump to $142 a barrel comes amid a growing consensus in the oil patch that $150-a-barrel oil is soon to be a reality.

“We are of the opinion that if the bears cannot stem the bleeding now, then who is going to prevent this market from going to $150… and beyond,” oil industry analyst Stephen Schork wrote in his daily newsletter, The Schork Report.

The cited article goes on to attribute the rise in price to the weakness of the dollar and concern about the security of the international sources of supply e.g., the Gulf, Nigeria, Venezuela.

I’ve been holding on to the position that fundamentals, i.e. flat supply and rising demand, are the primary spurs to the increases but the higher the price of oil goes the harder that position is to maintain. It doesn’t help that more than half of all of the people in the world buy their gas at prices significantly lower than the world price, in the case of China roughly half, with the balance of the tab being picked up by their governments.

For some governments, where revenues are flat or decreasing, that’s a real disaster. For others, where their revenues are increasing right along with the price of oil, e.g. Iran, Russia, Saudi Arabia, it creates a positive feedback situation and, as we should all know, positive feedbacks are extremely dangerous.

We’ve been creating a positive feedback situation of our own. The what for lack of a better word we’ll call economic plan of the Bush Administration has been focused on propping up consumer spending. That’s what the “Bush tax cuts” early in the administration’s history did, that’s what the Fed’s policies of the last half dozen years maintained, and that’s what the recent tax rebate will do. My own plan would have been rather different and I’ve been opposed to all of the above but there’s little I can do but complain.

The more we spend, the higher the price of oil goes. The more we stimulate the more we spend and the larger the deficit grows. The larger the deficit grows the higher the price of oil goes.

Our positive feedback does have some built-in governors and when spending slows while both the dollar falls and government revenues fall we’ll learn how much more fun it is to spend what you don’t have than to husband carefully what you do have.

As an addendum to this post something has occurred to me recently. I believe that a good deal of the .com bubble and a good deal of the housing bubble was too much liquidity looking for sure things. When Internet stocks stopped looking like sure things all of that liquidity fled to housing and housing related stocks. Now that the fizz has gone out of housing and the financing of housing where is all of that liquidity going? A lot of it’s still out there. Remember all of the money we’re spending on oil? And all of the money we’re spending on Chinese-made goods?

I’m beginning to wonder whether some of that excess cash is now chasing oil futures. What do you think?

6 comments… add one
  • I think the oil markets are in a definite classic asset bubble. Now, if you know a good psychic who could accurately predict when and at what price that bubble would burst, we could buy an island in the Caribbean.

  • reader_iam Link

    I think your wondering makes sense.

    All that “positive feedback”–makes me think of medical tests, when “positive” results (with the obvious exception or two) lead to quite another place.

  • Usually when pundits begin to announce that the “sky’s the limit” when it comes to an asset’s price, or say something like “economic fundamentals have changed” you are in a bubble. The more irrational the statement e.g. ““We are of the opinion that if the bears cannot stem the bleeding now, then who is going to prevent this market from going to $150… and beyond,” – the closer to the top of the bubble you are.

    Time to short oil? Today? Tomorrow? Next month? Who knows – but bubbles always burst.

  • Nice Comment Scott!
    …but bubbles always burst.

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