My earlier post about the possible oil bubble seems to have touched a nerve, so here is more. The good people at Factset have out a fascinating new report on the same subject — how energy markets are becoming awfully bubblish — and it’s worth a read in its entirety.
Here is one quick figure from the report showing how profits are growing so quickly that oil companies can’t keep up by raising prices. It creates an interesting box for energy companies and is one sign of a crack in the market.
To be clear, I see no reason why oil prices tumble materially tomorrow. Matter of fact, I’m usually two years too early on these calls — at least I was in 1998 on dot-coms, and again in 2004 on housing markets — but it feels, as they say, directionally correct (couldn’t resist), and the vehemence of perma-petro-bulls helps (and you can be petro-skeptical and an energy bull at same time).
More seriously, I don’t buy the argument that oil is a special case. Yes, oil supply is finite and yes, demand is growing, and yes, energy is the core of our modern life, but oil is also a classic complex system: Small demand perturbations, given the market’s current criticality (c.f., Per Bak), could have massive implications for price. Oil is special, but it’s not that special.
So, what would it to take oil prices down from here?
- A huge oil find might help, but it wouldn’t likely make much difference. Too long to market, too much capital, too much uncertainty about productive size, etc.
- A brilliant technology innovation would do the deed, but you have to be truly a wild-eyed optimistic sort to buy that argument, at least in the short run.
About the only thing I can realistically imagine is a material decrease in demand, or potentially in demand growth. Oil supply and demand are currently delicately balanced at the 85-million barrels-a-day mark, and supply is growing, at least a little. A decrease in demand growth, likely caused by a regional recession in China/India/Europe, or an outright demand decrease, which could only be caused by a global recession, would do the deed.
And how likely are either of the above? At current prices, a lot more likely than they were $30-a-barrel ago.