I know, I know, oil prices are stratospheric (new high today of $136 per barrel as I write this) and it's hard to see how it will go back down with increased worldwide demand and finite supply, but just read what Richard Rainwater has to say about the oil bubble about to burst.
Who's Richard Rainwater and why you should listen to him? It's all explained in this article about Justin Fox for TIME magazine:
Eleven years ago, after doing a lot of studying and a lot of thinking, Richard Rainwater convinced himself that the long decline in oil prices that had begun in the early 1980s was about to end. As a billionaire who had made his name and fortune steering the Texas oil riches of Fort Worth's Bass family into lucrative nonenergy investments like Disney stock, Rainwater had the wherewithal to act on his conviction. So he plunked down about $300 million of his own money on energy-company stocks and oil and gas futures.
For a while it looked like a boneheaded move. At the end of 1998, the price of oil fell below $10 per bbl. Regular gas sold for 90¢ a gal. While Internet billionaires were being minted to the right and left of him, Rainwater was getting poorer by the day.
You can guess the rest of the story. The dotcoms imploded; the price of oil climbed, climbed and climbed some more--and Rainwater's energy bet came to look like one of the better investment calls of our time. It has netted him about $2 billion, vaulting him from the mid-200s on Forbes magazine's 1999 list of the 400 richest Americans to No. 91 last summer (with $3.5 billion overall).
So guess what Rainwater did a few weeks ago, right after oil prices topped $129 per bbl. for the first time? "I sold my Chevron," he says. "I sold my ConocoPhillips. I sold my Statoil. I sold my ENSCO. I sold my Pioneer Natural Resources. I sold everything."
Link - via The Curious Capitalist
The current price is a result of excess investment money controlled by entities like hedge funds and sovereign wealth funds looking for somewhere to go. The global economy is awash in capital, far more than it knows what to do with. Those funds have left the American and European mortgage markets, and entered the commodities markets. That is why gold, food, and oil have exploded in price despite supply and demand of all those things being fairly stable. The bubble will eventually burst, and the money will leave the commodities markets and find somewhere else to go. Then the price of food and oil will return to their levels of a couple years ago. Mark my words.
That's not how supply/demand works - a doubling in demand doesn't translate to a doubling in price. Neither will a drop by demand in half cause the price to drop by half.
An increase in demand by a few percentage point over supply can cause price of oil to soar.
superbad is right. Yes, there are fundamentals that started driving oil prices higher.
But the fact of the matter is, the price of oil is not dictated by what goes on the ground, it is dictated by the futures market. The futures market is practically unregulated and "big money" can print up as many futures contracts as they want regardless of how many barrels of oil are traded on the ground. And usually they also buy oil ETFs which purchase their newly minted futures from them in a feedback loop, driving the price up cyclically.
Whenever you have a bailout by printing money to solve your problems, that money goes to the big banks etc first before it reaches the little guys (us). When it reaches us it causes inflation. So before it reaches us, the big banks, funds etc put their money into an asset class, and the inflow of money creates its own market. We saw this with the dot-com's, with RE, and now with commodities.
Yes, there are fundamentals driving oil up. But the futures market is becoming increasingly disconnected from the facts on the ground. Smart money is exiting oil now, like the subject of your article. Oil may continue to bubble for some time, but you never know when its going to pop. Heebner and Jim Rogers think this is just the beginning of the oil/commodity bubble. Other more conservative investors are getting out to watch from the sidelines.
I suggest, if you are interested in learning more about this, to research the commodity and futures markes, as well as financial derivativest. It is a disaster in the making. Highly unregulated, like the stock market pre-depression era.
And speaking of refining, this last Tuesday we just got a step closer to having the first new oil refinery built in the US in 30 years, in southeastern South Dakota. An election was held whether to allow the area to be rezoned to allow the refinery to be built, and it passed by a 60/30 margin. (Rueters article)
A: well DUH!!!!
GIVE US NUCLEAR POWER!!!
GIVE US OUR OWN OIL!!!
GIVE US MORE REFINERIES!!!
GLOBAL WARMING IS A HOAX CONTROLLED BY ENVIRONMENTALIST AND GOVERNMENT BUSINESSES THAT EMPLOYS MILLIONS AND MAKES BILLIONS EVERY YEAR!!!
DRILL HERE. DRILL NOW. PAY LESS.
http://www.americansolutions.com/actioncenter/petitions/?Guid=54ec6e43-75a8-445b-aa7b-346a1e096659
Over 400,000 signatures already.
Of course, at the same time, we're artificialing limiting our own production and forcing ourselves to be dependant on foreign states. Brilliant.