The New York Post must be reading Astute Bloggers, because we've been predicting this for weeks. From NY Post:
Go read the whole thing.June 6, 2008 -- THE price of crude oil has jumped as high as $135 lately, up from $87 in early February. The news encouraged some Wall Street analysts to suggest oil might approach $200 before long. In fact, that's quite impossible: The world economy can't handle current energy prices, much less a big increase.
Which in turn means that oil prices will fall.
Market analysts often claim oil prices are almost entirely determined by supply. Demand is said to be insensitive ("inelastic") to price. The standard example is that many Americans have to drive to work and most gas-guzzling SUVs will still be on the road even if the affluent few can trade theirs for a Prius. Whatever the price,
we'll pay it.
This idea rests on two fallacies. The first is to exaggerate the United States' importance when it comes to ups and downs in worldwide oil demand. In fact, America is using no more oil than we did in 2004.
The second fallacy is to greatly exaggerate the importance of passenger cars in the United States. It's true that Americans are driving less and buying four-cylinder cars - but that's not where we should be looking for serious "demand destruction."
Two-thirds of petroleum in the United States is used for transportation - but half of the transportation sector's fuel flows into commercial trucks, trains, buses, airplanes and ships. As a result, only 44 percent of each barrel of oil is used to produce gasoline in this country, and some of that gasoline fuels business - delivery vans, landscapers' trucks, fishing boats, industrial and farm machinery, etc.
Most crude oil is used to produce diesel fuel for trucks, ships and trains, heavy fuel oil for industry, aviation fuel, asphalt, home heating oil, propane, wax, and innumerable petrochemical products ranging from detergents and drugs to synthetic fabrics and plastic.
In short, a huge share of crude oil is used to produce and distribute industrial products. That explains why the price of oil is extremely cyclical - that is, it tends to rise during economic booms and fall during contractions. It dropped 44 percent in the last recession (from November 2000 to November 2001), 48 percent from October 1990 to January 1992 - and 71 percent from July 1980 to July 1986.
The Washington Post is singing the same tune:
Hedge funds and big Wall Street banks are taking advantage of loopholes in federal trading limits to buy massive amounts of oil contracts, according to a growing number of lawmakers and prominent investors, who blame the practice for helping to push oil prices to record highs.And more, from Jordan Kahn :
The federal agency that oversees oil trading, the Commodity Futures Trading Commission, has exempted these firms from rules that limit speculative buying, a prerogative traditionally reserved for airlines and trucking companies that need to lock in future fuel costs.
The CFTC has also waived regulations over the past decade on U.S. investors who trade commodities on some overseas markets, freeing those investors to accumulate large quantities of the future oil supply by making purchases on lightly regulated foreign exchanges.
Over the past five years, investors have become such a force on commodity markets that their appetite for oil contracts has been equal to China's increase in demand over the same period, said Michael Masters, a hedge fund manager who testified before Congress on the subject last month. The commodity markets, he added, were never intended for such large financial players.
Commodities have become especially enticing to investors as the credit crisis has roiled other investment opportunities such as stocks and debt-related securities. The recent flood of investment money has transformed the markets for oil, as well as uranium, wheat, cotton and other goods, into a volatile realm that some insiders call the Wild West of Wall Street.
Global oil consumption grew 2% in the first quarter of this year, while production increased 2.5%.
So there is not an outsized amount of demand being physically consumed.
That means that a large amount of demand is coming from speculators, who drive the futures prices of oil higher purely for investment reasons.
BUSINESS | June 7, 2008DOES THIS MEAN IT'S NOT A BUBBLE AND IT'S NOT GOING TO BURST???
Dow Slides Nearly 400 Points; Oil Surges
By ABHA BHATTARAI
The markets were hit by a remarkable rise in the price of crude oil and a spike in the unemployment rate.
NOPE.
IT ACTUALLY PROVES IT'S A BUBBLE.
HERE'S WHY:
The DOW plunge and the oil surge are both speculative.
The DOW plunge (on increased RECESSION fears) should make oil lose value - because a recession would REDUCE the demand for oil.
The whole surge in oil prices on recession-news stinks of OVER-EMOTIONAL VOLATILITY.
Markets function that way sometimes: a bubble is a distortion - which always gets corrected.
The current volatility is caused the MSM: people are being egged on by an MSM which wants a recession so they can anoint/elect Obama.
A great post by Evil Glenn:
Are we in a recession? Possibly -- it's unknowable until the data come in. But that's always true, since calling a recession is a retrospective act, and the media coverage -- which is what I'm critiquing, remember -- is all couched in terms that suggest that the data clearly indicate that we're in a recession right now, or something more like the Great Depression, when that's not what the data we have indicate so far. Meanwhile, contrary to his assertion, my posts aren't just anecdotal, but point to data. As I've noted before, I can't call the economy better than experts -- who themselves can't call the economy very well -- but I can spot a media bulldozing operation when I see one, and I see one now.RELIAPUNDIT: THE MSM DOESN'T WANT YOU TO RELY ON THEIR "ECONOMIC DATA" FOR YOUR HOUSEHOLD FINANCIAL STRATEGY, JUST YOUR VOTING!
That said, this is good advice: "Build savings. Be careful when starting new projects or switching jobs. Carefully watch the risk in their households’ balance sheets." But, then, it's always good advice, to be followed in good times and bad, regardless of what's on the news. If you rely on media reports to set your household financial strategy, you'll have the financial equivalent of bipolar disorder.
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