November 30, 2004


The Oil Bubble II: Listen for the “pop.” (Frederick P. Leuffer, November 30, 2004, National Review)

In my column last month (“The Oil Bubble: Set to Burst?”) I discussed the speculative factors that pushed oil prices to all-time highs. I pointed out that despite fear of supply outages stemming from terrorism and a series of odd events, virtually every fear so far has gone unrealized: Terrorism has not removed a single barrel of oil production. Oil output in Saudi Arabia, instead of falling due to terrorism as some have feared, has increased by more than 1 million barrels a day. OPEC has steadily increased production and consistently outpaced analyst estimates of its capacity. Production at Russian oil giant Yukos has not fallen. And, despite a difficult war in Iraq, production in that country has averaged 2 million barrels a day this year — a 68 percent year-over-year increase. The only meaningful supply interruption to hit the oil industry this year was four back-to-back hurricanes in the southeastern U.S.

All of these non-shocks are sucking some of the speculative air out of oil prices. In the past three weeks, despite no significant developments on the macro front, oil prices have fallen by more than $9 a barrel to around $46. There was a similar correction at the end of August when fears of a terrorist attack during the Republican convention went unrealized. The “fear” premium in oil, approximately $15 a barrel currently, fluctuates with events, but I continue to believe that the absence of a significant prolonged supply outage will gradually push speculative money out of oil.

Posted by Orrin Judd at November 30, 2004 11:03 AM

After the Iraqi election, once the spring rolls around, the price will fall off the table back to around $25-30. Refinery capacity, a major issue, is being increased all over the world.

Posted by: Bart at November 30, 2004 11:16 AM

Another great thing about Bush: he continued adding to the U.S. oil reserves all summer and right through the election despite it's inflationary pressure on oil prices. That's just another political micro-heroism to supplement the near political suicide of valiantly doing the right thing in Iraq.

Posted by: JimGooding at November 30, 2004 11:24 AM

I don't think you can call the oil price high because of speculation. Markets always factor in risk in price, and there is a lot of risk out there. A reduction in risk (by stabilizing Iraq) will reduce prices, but by how much? Successful terrorist attacks cannot be completely discounted, nor can an actual attack by the US on Iran because of the nuclear issue.

Posted by: Chris Durnell at November 30, 2004 12:09 PM

But there isn't new refinery capacity in the US. That is a problem even Bush may not tackle.

Posted by: jim hamlen at November 30, 2004 12:09 PM


A friend of mine in the commodities business was telling me the other day that there is an increase in refinery capacity in Texas and Louisiana, along with readily accessible places like Canada and Mexico. Of course, refinery capacity is increasing in Indonesia and Russia.

Posted by: Bart at November 30, 2004 12:14 PM

It's the consumption, Stu! Consumption is rising faster than production. You cheap oil bulls are ignoring that fact.

Posted by: Robert Duquette at November 30, 2004 1:26 PM

There's plenty of excess.

Posted by: oj at November 30, 2004 2:56 PM

Oh, right, oil consumption is rising. That's always a bearish indicator for the economy.

Posted by: David Cohen at November 30, 2004 2:56 PM


C'mon now, you know what happens when oil consumption rises... they pump more.

Posted by: oj at November 30, 2004 3:05 PM

Jim/Bart: It is virtually impossible to build a new refinery in this country, but the ones already in place have been increasing capacity in a variety of clever ways (and not advertising the fact). The new capacity, while significant, is nothing like a new refinery would add, and is nothing like we need.

Posted by: curt at November 30, 2004 4:03 PM

When consumption rises faster than production it is a problem. It spells higher prices. Cheap oil is history, get used to it.

Posted by: Robert Duquette at November 30, 2004 4:30 PM

When consumption rises faster than production it first leads to shortages, of which there are none, thenm more production, for which there's plenty of room.

Posted by: oj at November 30, 2004 4:39 PM


At US$ 50/bbl, oil IS cheap.

300 billion virtually untapped barrels of oil in Canada...
13 billion untapped barrels of oil under the Caspian Sea...

Production will eventually peak, to be sure, and oil will get more expensive, but that's a couple of decades off, at the very least.

Posted by: Michael Herdegen at November 30, 2004 4:57 PM

Not to mention the cartel that controls production so as to receive between 5 and 10 times the competitive price.

Posted by: David Cohen at November 30, 2004 5:02 PM

When do you think oil will hit $80/bl? I'll say that it will happen before 2005 is out.

Posted by: Robert Duquette at December 1, 2004 2:45 PM


Oil @ $80/bbl will only happen if we tangle with Iran, AND things gets protracted.

Even if we bomb all their nuclear facilities, it is extremely unlikely that we will put troops on the ground, so that shouldn't be an issue. If the mullahs decide to attack Iraq (to get at us), well, they are free to commit suicide if they choose.

Posted by: jim hamlen at December 1, 2004 3:37 PM


Setting aside temporary price spikes, if the US, Indian, and Chinese economies continued to grow strongly for another decade, we might see sustained $ 80 oil by 2015.

Posted by: Michael Herdegen at December 1, 2004 9:21 PM