The Problem With “Bubble” Rhetoric

One of the leading conspiracy theories that seems to get mainstream attention is that the rising oil prices are just pushed higher by speculation and are a bubble that will “pop”. This sort of nomenclature reflects not only an ignorance of peaking oil production, but also an ignorance of the way in which the oil futures market operates. The Economist published a story that debunks the speculation about speculation, but at the same time refuses to acknowledge the realities of peak oil. While the article may prove a good reality check for those who suspect that some evil commodity broker is secretly manipulating world markets just to make their life less convenient, it too looks at the oil crisis through rose-tinted glasses.

The article rightly states that because of their time-linked nature, oil futures are very different from internet stock. “Speculators” can’t just keep hoarding oil futures, they come due. At this point the holder must either get rid of it, or take delivery of actual, tangible barrels of oil. Ultimately, barrels of crude oil are worthless to anyone except a refinery, so that is where they all end up. If the price is artificially high, if speculators have inflated it to a price higher than what the refinery can pay and still turn a profit, then no one will buy. Any artificial price inflation will be small and short term, because the price is tested every time the futures come due and must be sold to real consumers.

The article gets this right, shooting a hole through the speculation rhetoric, however, it then puts forth its own theory of why the oil price will come down soon. Countries are starting to conserve, it explains. A graph entitled “A dwindling thirst” shows that demand has dipped in OECD countries over the past two years, although it continues to rise at a decreasing rate in the world as a whole. I guess “A more slowly growing thirst” isn’t as catchy of a title. Nowhere is it mentioned that the dip in consumption growth rate may just be a consequence of economic slowdown. Maybe we aren’t getting the same production out of fewer resources we use, but are simply doing less. This would not reflect the sort of massive efficiency gains and changes in habits that we need to lessen the shock of peak oil.

The article also suggests that supply will grow higher, that perhaps some countries are holding back, or that oil companies have been reluctant to build new refineries lest the price crash. The latter, seemingly, has some merit. It has long been suggested that there is a bottleneck in refining. Even so, getting oil to the market sooner is a shortsighted solution at best. The price may dip slightly, but only as we expand our unsustainable oil production and deplete reserves further.

This article, and the speculation theorists, do get one thing right: The price of oil may dip. It is possible that consumers and producers will take a look and realize just how expensive it has gotten, and change the way they operate. If and when that happens, the key is not to get irrationally exuberant, to borrow Greenspan’s diction. At the end of the day, oil is finite and demand, if current patterns hold, is infinite. It is inevitable that society will have to adjust to waste less energy and to use fewer hydrocarbons to produce it, and the sooner the process starts, the easier it will be.

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2 Responses

  1. […] Go to the author’s original blog: The Problem With “Bubble” Rhetoric […]

  2. […] part of the argument has already been addressed on this blog, and needs no further debunking (see here and […]

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