Is George Soros right about an oil price bubble that will burst?
With oil prices hovering around $130/barrel this week, the obvious question is how high can the price go. There are plenty of factors that affect the price of oil including possibly waning supplies, increasing demand and, of course, speculation. George Soros has made billions in his career by being able to judge where markets are going to go and then react accordingly. As the old investment disclaimer always, past performance is no guarantee of future results. Nonetheless, when Soros speaks people would be well advised to listen. In an interview with The Daily Telegraph, Soros seems to think that speculation is a much bigger part of the price run up than most other experts. If speculative buying is indeed playing a bigger part than supply/demand curves, then at some point the price will inevitably come down. And if this scenario does play out the price will come down hard. According to Soros, the oil crash will come in the wake of recession in both the United States and Britain. A collapse in demand in both countries will pull out the rug from oil prices.
The problem with all of this is that high oil prices are now driving a shift toward more efficient vehicles. If oil prices collapse it may well kill demand for those cars and if the collapse is driven by recession, it will definitely kill cars like the Chevy Volt and may well kill several automakers. Soros believes the recession will be longer and deeper than past recessions because of a drop in real estate values. However, if oil prices drop, it could also help reduce a lot of inflation we now face and it could dampen the recessionary dip. What do you think?
[Source: The Daily Telegraph]
Reader Comments (Page 1 of 2)
--Ed 9:02AM (5/30/2008)
He is probably right. As more and more people cut back the price is bound to drop. Probably the only thing I will every agree on him about.
For me it is business as usual no matter where the price goes. I still drive my F150 and take my 24ft boat out on weekends where my F150 gets a steller 10mpg. Life is to short to drive a Prius!!!
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BlackbirdHighway 9:21AM (5/30/2008)
The peak oil folks predicted this too. They looked back in history at the depletion of whale oil. Just after production peaked, the price didn't just go higher, it went into an oscillating mode, shooting much higher, only to collapse, then spike a again. The cycle repeats with each spike higher than the last one.
Some people will over react, spending huge amounts of money to save realtively little money on fuel, and others won't react at all.
Speculators see it going up, and all pile in, trying to make as much money as possible, and drive it even higher. When that's not sustainable, they all try to get out at once, and it dips.
If the market does a good job of determining the proper price, that's only true over the long term average. Over the short term, the market can be way, way off balance, driven more by human emotion than fundamentals.
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Bryan 9:33AM (5/30/2008)
I hope he is right. It cost nearly $70 to fill up a sedan. Airlines are struggling to keep profitable by nickel and diming us and I am absolutely frightened by how much heating oil is going to cost this coming winter.
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Tim 9:41AM (5/30/2008)
I'm afraid that Soros is becoming senile.
Yes, the US will eventually & slowly cut back on oil as alternatives come online and our standard of living decreases, but that will not stop the exponential growth in China and India on the demand side and the global decreasing crude production and the fact that we have not build even ONE new refinery in the US since the 1970s on the supply side.
If we do decide to drill in sensitive areas in the US, this will take over 10 years to hit the pumps and will only increase our supply by about 5%. If electric cars become available in 2010, it will take 15-20 years (2025) before they replace enough cars to really make a big difference. Food based ethanol will be stopped by international pressure very soon. You can already see the pressure building and cellosic ethanol on large commercial scale is still several years away. Solar, wind, tide, wave etc are electrical solutions and they will not affect transportation until the cars are electrically driven. Mass transportation is sorely lacking in the US and will take decades and a LOT of taxpayer money to build. We are in debt up to our eyeballs now and where will that money come from? Hydrogen is not even worth mentioning in this context because even under the BEST scenarios, it is 25-50 years away from becoming COMMERCIALLY viable without HUGE taxpayer subsidies.
I wish Soros was right, but it’s an election year and he’s got socialist ponies in the race.
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ron 9:44AM (5/30/2008)
What this man has not taken into consideration are China and India`s growing demand for oil which is very soon to become large. I believe that demand will NEVER go down.
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Mark 10:10AM (5/30/2008)
The sky is falling, the sky is falling...
"If oil prices collapse it may well kill demand for those cars..." Yes it probably will, Americans have short memories
"...and if the collapse is driven by recession, it will definitely kill cars like the Chevy Volt..." maybe yes and maybe no - hopefully GM and others will not be so completely stupid. Unfortunately, the best predictor of future behavior is past behavior so you might be right
"...and may well kill several automakers..." Like automakers have never been through recessions before. Prognosticators, bloggers, politicians, and journalists all love to predict how big the next disaster is gonna be and almost always are wrong. Chrysler could fold, I think Ford would probably survive, GM will certainly survive. Honda, Toyota, VW, Mercedes, BMW, Nissan, do you really think any of these will fail in a recession?
Wait a minute - you mean Tesla and ZAP and Aptera and all the other make believe car makers you always hear about on this blog.
My next car will still get 50 mpg minimum and will hopefully have a plug also.
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Zigster 9:53AM (5/30/2008)
demand growth is in the single digits. A 500% increase in price is not justified by supply and demand.
When the floor gives way (which should be pretty soon judging by the incredibly increase in volume in short vehicles like DUG) we will discover most of the price run up was due to futures traders at Goldman Sachs and other firms, as well as those financed by OPEC nations, cornering an unregulated market. Hopefully they will find a way to store a tanker full of oil inside a manhattan condo.
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KM 10:28AM (5/30/2008)
Anecdotal evidence from my business in property management in the NYC area - an area with high heating oil usage - indicates a heavy push over the current and next few months for increased efficiency in energy usage. I expect that along with the push to cheaper more fuel efficient vehicles and a half dozen alternative and oil-free energy development initiatives (wind in NJ and Texas come to mind) kicking in over the next 8-10 months, the demand this year for heating oil in particular and diesel as a result will be significantly reduced. In fact i specifically think diesel is driving the spike and this month it's because of China replacing hydroelectric power in earthquake struck areas with diesel generators. Overall I agree with Soros.
I also suspect that more oil fields coming online over the next year or two as a result of these prices will also pressure prices down. Whoever makes it through the 2008-2009 heating season will likely be facing a helluva lot cheaper heating oil for the 2009-2010 season.
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tinman 10:14AM (5/30/2008)
Look at what Charles Maxwell says about oil and you will see the future of oil.
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Rick 12:01PM (5/30/2008)
Not sure about China, but some of the developing countries that have an incredible demand for oil right now have the prices subsidized by their governments. Should the government decide to not cover costs of gas, I'd expect the citizens growing appetites to follow suit with ours which is to say it would be too expesnive for them.
Add our failing dollar and wall street oilmongers and it's easy to see that the bubble analogy could be plausible, and hopefully is.
As for people suddenly ceasing to buy fuel efficient cars, and? We've already made a dent in the number of large vehicles on the road, shown that small cars are cool and are fuel cost resistant. People who traded in their SUV to get a sedan, won't sell their sedan to turn around and buy another SUV (on average). That's too costly with down payments, etc. And the bubble won't burst overnight, it will take time. That will allow more advances in car engines and alternative fuels and means more effecient cars sold.
Also keep in my iron ore prices have doubled, that will make largers cars more expensive, which will also push some to smaller, lighter cars.
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jpm100 10:32AM (5/30/2008)
Statements by Soros are often more to achieve a desired effect than impartial commentary.
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Arthur 10:37AM (5/30/2008)
Bah. Soros is right and it is because of the nature of the markets. Even with China and India driving consumption, there is an unprecendented and record amount of money in the commodities markets *right now*. Will the oil bubble pop? Yes. But that depends on what you mean by pop. It'll probably pop back down to at most $70. And then it go right back up again. This is a long term trend we are seeing here: the rise of oil. But why is the price of oil any different when it comes to oscillations, especially those fed by speculator frenzy?
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fred schumacher 12:18PM (5/30/2008)
Oil prices are almost exactly double from a year ago, but the supply/demand situation has not changed that much, so we are in a speculative bubble, as Soros says, and all speculative bubbles collapse at some point, whether it's tulips, South Sea Company stock, or mortgage derivatives.
It's the excess supply of dollars searching for investment opportunities that has been a large part of the drive up in nearly all commodities prices. That said, the long term trend for oil is to continue going up, since supply is inelastic and world demand is increasing.
Last Sunday I drove across Illinois on I-80, at my usual fuel-saving speed of 62 mph. I was passed by only two trucks (while cars were zipping by at 70). Some weeks ago there was discussion by a few large trucking companies about lowering the national speed limit to 65 or even 60. Owner-operators were generally in opposition, but with diesel at $4.56 a gallon, I think 60 mph has become the new default speed for professional truckers.
We tend to focus on new technologies to solve our problems, but the quickest way to demand destruction in petroleum products is to use driving techniques to reduce fuel consumption, as truckers are now doing. In a 2,400 mile trip, half on two-lane roads with frequent small towns, I averaged 30 mpg in a 2000 Plymouth Voyager minivan with the 2.4 liter engine and 3-speed automatic. This is 20% better than the old EPA rating, which is known to have been generally optimistic.
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Dad 4:38PM (5/30/2008)
George Soros may have some successes, this is not going to be one of them. He is wrong. Prices will not drop.
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Lad 2:29PM (5/30/2008)
This guy might be right; however, too many people are now educated as to the insecurity of using oil products to power ineffecient ICEs. Project Better Place, the Tesla roadster, etc. are a large part of proving electric cars are the future. The idea of refueling your DD at home overnight is now viable because of the advances in battery technology. And the wiser of us will look beyond fossil fueled cars, define our personal transportation needs and act accordingly...electric drive is the only alternative that makes sense for many of us and once enough people make the investment, returning to ICEs will not be beneficial. The idea of burning carbon chemicals in the atmosphere and then trying to clean up the emissions makes no sense when we have all that solar energy available just for the taking. It's too damn bad our politicians have been so long in bed with the oil companies that our nation's energy policy is dictated by the oil market.
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Peekoyle 3:26AM (6/01/2008)
If China and India change to BEV Electric or Hydrogen drive-trains... rapidly and completely, then I will agree that the oil bubble will burst.
Until then I completely disagree with Soros.
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len simpson 4:04PM (5/30/2008)
Always admired the pure electric idea & it,s time has finally come.
The one I buy will have a minigas turbine generator
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Richard 4:35PM (5/30/2008)
SPECULATORS MY ASS! Crude oil is an $11B a DAY market. Just think of what it would take to influence that one way or another. Listen to the pessimists, they may be wrong this time but the will be right eventually.
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Tony 5:47PM (5/30/2008)
Oil prices are almost exactly double from a year ago, but the supply/demand situation has not changed that much, so we are in a speculative bubble, as Soros says,
Because he has his hand in it
He wants Obama as the president. How best to do this than to run up the cost of oil , Get his blogs and the Dems to say it's "Oilman's Bush fault" then as soon as Obama is president he puts in a big sell order and breaks the bubble.
Don't think he can't do that? Look up Black Wednesday (September 16, 1992)
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justin 8:43PM (5/30/2008)
I do believe the bubble will burst as they should in an open market.
I will not sell my truck now or later; it will always be needed here.
When they bring on the plug-in's I'll also purchase my solar panels.
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