George Soros: rocketing oil price is a bubble

[Psephos]

Source: Telgraph UK

Speculators are largely responsible for driving crude prices to their peaks in recent weeks and the record oil price now looks like a bubble, George Soros has warned.

The billionaire investor's comments came only days after the oil price soared to a record high of $135 a barrel amid speculation that crude could soon be catapulted towards the $200 mark.

In an interview with The Daily Telegraph, Mr Soros said that although the weak dollar, ebbing Middle Eastern supply and record Chinese demand could explain some of the increase in energy prices, the crude oil market had been significantly affected by speculation.

"Speculation... is increasingly affecting the price," he said. "The price has this parabolic shape which is characteristic of bubbles," he said.

Read more: http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/05/26/cnsoros126.xml

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It's looked increasingly like a bubble since the price reached $80/bbl. Funny how we can be in the middle of a bubble meltdown in real estate, yet few people make the correlation.

Tulips, anyone?

[Pab Sungenis]

1. Whether it is or not is unimportant.

The lesson is that we need to wean ourselves off the teat of oil before the next "bubble."

[Art_from_Ark]

17. Exactly

It's long past time to seriously consider and investigate alternative, renewable and safe energy resources

[Star]

25. Put regulations back on this industry

Capitalism without regulations leads to the greed we are seeing today.

Record profits during a time of adequate supply and low demand = greed.

We need re-regulation and more government investment in alternative energy solutions.

[maxsolomon]

2. hurry up & pop it!

it ain't coming down nearly as much as we hope - demand is not decreasing globally, despite how many miles americans give up driving.

[BeyondGeography]

3. Some folks agree...traders are selling contracts to deliver oil @$140/bbl. in 2016

They still might lose their shirts, of course...

[POAS]

4. Then some fascist nuts will

scream that the oil speculators need to be bailed out.

[Gman]

5. I agree completely

probably 25% of the price is the low dollar, but at least another 25%+ is speculation.

[Zynx]

7. That is a pretty correct assessment.

That's probably as close to the mark as anything I've seen and I have no quibble with it. This is a bubble if there has ever been one. Interestingly, a retreat in oil prices would probably cause the dollar to rally which would cause a further decline.

[creeksneakers2]

6. When the bubble bursts

The speculators will look for a government bailout too. We'll be told that we won't get gasoline if those guys go out of business.

[sofa king]

15. ...the price won't come down.

It's way too easy to temporarily restrict supply and shoot those prices right back up again to protect against losses. This is a profit-driven crisis, and it won't avert until the profiteers fear prosecution--like in 2009.

[klyon]

8. If it is possible for speculators to drive prices up, what does that say

for our whole stock market, trading, economic system. Something is terribly wrong here. If I bought something for a dollar and if someone will pay 100 for the same thing then mine is now worth 100 also. Capital should not rule all. Doing the right thing should.

[JDPriestly]

9. These bubbles are caused by the imbalance in the economy

between money for investment and money for wages. GWB lowered taxes on the rich. It was no favor -- not to the rich who have lots of money to invest but nothing to invest in that is real and solid and will bring a reasonable return.

And the poor and middle class are suffering from the tax breaks to the rich because their wages and the support they need from the community working together as what we call government is absent since the government is actually broke.

The benefits of tax cuts for the rich are mostly and illusion. To the extent that they are real, they don't benefit anyone. Sooner or later, either the imbalance is returned to something close to equilibrium or the whole structure just falls down. Which it will be depends on who we elect as the next president, how many Democrats we can get into Congress and whether we can get the American people who have been fooled by the Republicans since 1968 to understand that just allowing the rich to hoard all the money they can possibly grab is of no use to anyone -- rich or poor or in-between.

[woundedkarma]

11. If my brother-in-law is any example...

these people are always for keeping tax cuts for the rich because they think soon they will become rich too and why should they pay for things for the poor people?

His wife, my sister, is in great need of medical care which they can't afford yet he is absolutely 100% against any universal health care system. My sister also needed and took advantage of many years of government money and food to live and keep her children healthy. He wouldn't have a family if not for government run programs. Still he insists that the rich shouldn't help the poor and I think the idea that he may one day have a lot of money is the basis for that belief.

[annabanana]

18. You are right. This lie (well buttressed by Madison Ave) is maybe

THE way a good bout of populism hasn't broken out across America. People watch $80K Sweet Sixteen parties on TV and think.."I could do that someday".

[NJCher]

14. The Giant Pool of Money

What JD Priestly says about people who have money to invest and no place to invest it is illustrated in the current housing crisis. It was explained in an hour-long program called "The Giant Pool of Money" on This American Life:

http://www.thisamericanlife.org/Radio_Episode.aspx?sched=1242

In a nutshell, investors were demanding higher returns and this drove the people who put these mortgage funds together to put together even more funds. There was such a demand for mortgage funds that the standards for mortgages dropped so that it would be easier to fulfill this need.

The people in the real estate business knew what they were doing was wrong and they knew how it was going to end up. What they all had to say about that is "everybody is doing it" and that is why they they thought they had to do it.

Now think about it--the investors lose. The people on the fringe getting their first mortgage lose. The banks lose. Everybody loses, all the way around.

That's what freaking Amateur Hour in the White House has done to our country: made everybody a loser, including the people they intended to benefit. Now bush has firsthand knowledge of the law of unintended consequences.



Cher

[DinahMoeHum]

10. Agreed. If I were a commodities trader, I'd seriously look at shorting

this market.

[Lucky Luciano]

16. Many commodities traders tried that already...

...and they had their faces ripped off. In fact, during the week that oil hit $135, the open interest in front month oil contract decreased by 8.7%....that means as people were buying up the oil contracts, most of the buying was note done to open the contracts - it was done to close the contracts - ie they were shorts having their faces ripped off. Short squeezes can be extremely painful!

This bubble does not end until we have a day or two where oil is up $10+. That is when the short squeeze is simply beyond crazy...then Goldman Sachs will put out an analyst piece saying that oil is overvalued...you know...right when retail starts to lever up and finally get on the bandwagon....then oil spikes down and the retail traders who have no business being involved are forced to sell - accelerating the process. By now the institutions will have finally gotten their shorts lined up correctly and they will pound it down further...oil stocks have finally stopped being correlated to the price of oil in the last couple weeks...this tells me speculators are dominating the movements in oil.

Incidentally, I have a small wager with my coworker that oil will have a $10+ up move in the next year. He says no way...and he may be right....but I got decent odds for the bet!

[bluesmail]

12. It's true, speculating on the price of oil one day (futures)

can make or break a billionaire when they go to cash in their futures.

[freedom fighter jh]

13. Even if the direct cause is speculation . . .

that can work only because the available supply is getting tight.

Peak oil is a factor.

If the bubble bursts and prices plunge, I hope the nation takes the recent surge in prices as a warning of what may come if we don't get serious about reducing our dependence on oil.

[Stuart G]

19. I know when the bubble will burst....Probably in...

Late August ...about the time of the Republican Convention..right before..you see, I believe that in September, and October, the price of gas will be about $3.00..a gallon. Timing for whoever is the Republican nominee..a nice, much lower price for two to three months..

These people will do anything to keep their sick world view going..

[Robb]

20. Interesting. Most folks here are willing to consider

a complete shift in the global economy more likely than a price correction.

I'm no Nostrodamus, of course. But Soros is pretty close.

...Wasn't gold supposed to be $2,000/oz by now, too? :shrug:

[erpowers]

21. He's Right

As far as I know the rising oil prices are the result of a bubble in that people are putting their money in oil as a place of safe keeping. In addition, Soros is right about the speculation. Speculators have been have an affect on the price of oil. I have on occasion wondered if there was a way to take speculation out of oil pricing.

[JDPriestly]

23. It's the prices on the spot market that cannot be controlled.

Here is an explanation about how petroleum is bought and sold.

****

Oil is sold under a variety of contract arrangements and in spot transactions. Oil is also traded in futures markets, a mechanism designed to distribute risk among participants on different sides (or with different expectations) of the market, but not generally to supply physical volumes of oil. Both spot markets and futures markets provide critical price information for contract markets, and so they are discussed first.

A spot transaction is an agreement to sell or buy one shipment of oil under a price agreed-upon at the time of the arrangement. In a sense, a consumer's purchase of gasoline is a kind of spot transaction -- the consumer needed supply, found the price acceptable, and made no promise to make additional purchases. More traditionally, however, the oil industry uses the spot market to balance supply and demand. When a company temporarily has too much supply for its own needs, it will offer some for sale in the spot market. Likewise, if it needs additional volumes to meet a demand spike, or because supply is unexpectedly curtailed, it will purchase oil on a cargo-by-cargo, shipment-by-shipment basis. In recent years, the growth of "merchant refiners" has depended on viable spot markets. These independent refiners manufacture products not to fill their own marketing networks, but to sell the oil in third-party transactions to the highest bidder.

Prices in spot markets send a clear signal about the supply/demand balance. Rising prices indicate that more supply is needed, and falling prices indicate that there is too much supply for the prevailing demand level. There are "spot markets" for different commodities and qualities (crude oil, for instance, as distinct from gasoline or heating oil, and low sulfur crude oil as distinct from high sulfur crude oil), and for different regions (Rotterdam/Northwest Europe, New York Harbor/U.S. Northeast, Chicago/U.S. Midwest, Singapore/South East Asia, and the U.S. Gulf Coast, for instance). The evolution of a regional market into a pricing center has its foundation in logistics. These markets have a ready supply, transportation choices, storage facilities, and many buyers and sellers.

http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/price_transactions.htm

It would be difficult to tell oil companies that they cannot sell excess oil on the open market. And it would be very difficult to put a stop to speculation on the excess oil. Even if the demand is being created by speculation, how could you stop it? There was a time when the U.S. government could flood the market with its reserve oil, but the market is just too vast and our reserves too small to do that today. We have to change patterns of consumption of energy. We have to switch to more conservation and alternative energy sources. That is how we can lower demand -- and help our environment in the process. This switch can be made with the help of government subsidies.

[Wednesdays]

22. I have long predicted oil prices would start falling about now...

And will hit bottom...oh, around early November.

And the minions will be ecstatic...voting for the incumbent party, as usual. :banghead:

[hunter]

24. Speculators don't generally consume the homes they are speculating on.

If speculators were rapidly tearing down most of the houses they bought and sold, then the analogy would be apt.

A bubble in something like tulips or rabbits collapses because tulips and rabbits reproduce. The same is true of other objects that are easily reproduced, or are subject to easy substitution and consumer whimsy -- Cabbage Patch Dolls, Pokemon Cards, are examples of these. You'd be wise not to invest in these objects if you don't enjoy them for what they are.

A bubble in objects that are not generally consumed, such as houses or gold, occurs when financial markets are not properly regulated, and an unreasonable amount of debt becomes associated with these objects.

The speculation in oil is something else. There are no reasonable substitutions for oil now or in the foreseeable future. World oil reserves are probably overstated and dwindling every day. It is becoming increasingly difficult to maintain the extraction rate. The only reasonable market response is to drive up prices until actual demand destruction occurs.

But the true horror of this "rational" market response is not that fairly well off Americans will find it more difficult to fill their automobile fuel tanks, buy airline tickets, or purchase the highly processed and traveled foods they are used to. The true horror is that people of the world who are at best simply surviving will no longer be able to afford simple necessities like food or water, and they will die.