Is Oil a Bubble? Part One

Oil is now front and center on everyone's radar. Last night, CNBC ran a special tonight about oil, and had a banner running across their ticker titled "America's Oil Crisis." Congress is looking for scapegoats to blame for high oil prices, and is hauling in oil executives to testify, and propsing stupid ideas like a windfall profits tax.

Funny, look at the first chart below of wheat (and the chart for corn looks identical). Looks like wheat and corn have had parabolic moves higher, but I haven't heard any talk of windfall profit taxes on the farmers. Rather, Congress is trying to pass further subsidies for the farmers, who are arguably in the best position of any industry in the country.

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The next two charts show the extreme, straight up moves in other commodities. I have included lead and nickel, but there are several that fit the bill. What I am highlighting is that these parabolic moves higher are never sustainable. And when they eventually run out of steam, they usually succumb to large corrections.

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Given what we have seen in many of the other commodities, take a look at the chart below for oil. Look similar? If I showed you the charts for all of the other commodities, a logical conclusion would be that the trajectory of the upward moves was unsustainable, and susceptible to a sharp pullback.

However, for oil, for some reason, people think that the recent high prices are a sure signal that $150 and then $200 are right around the corner. Now I want to be the first to say that I have no idea how high oil will go. To be honest, I am surprised it ever reached $135.

Unlike stocks, which can shoot to the moon, high oil is self-defeating. As prices skyrocket, it slows economic activity and can bring some forms of transportation to a halt (just look at the news from AMR Corporation (AMR) that it is cancelling flights, and Ford (F) is curtailing production on some of its gas guzzling vehicles). That, in and of itself, would cause a correction in the price of oil (as demand trails off).

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The chart below is from the good folks at Bespoke. It shows the relationship of the current oil bubble to the last 2 big bubbles in tech stocks and then the housing market. This week, the rise in oil eclipsed the mammoth rise in tech stocks in the late 90s. Pretty incredible, huh?

And we know what the end result of those two bubbles were, right? They both ended very badly, especially for folks who got sucked in anywhere near the top. Which brings me to the million dollar question: where is the top?

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No one knows for sure where the top is, and those that tell you they do are simply lying. If you had bailed on tech stocks in 1998, you missed quite a move higher still. If you sold your house in 2004, you left a lot of money on the table. So my hunch is that I want to remain long oil/energy names, although I do not want to chase the recent move higher.

That said, when this bubble bursts, most people won't believe it and will continue to buy on the way down. But history tells us that we should look for those signals as a reason to lock in profits for good, and then simply move to the sidelines.

[In Part 2, I will delve into who is really to blame for high oil prices (hint: it's not the oil companies).]

Comments

[papita]

not really sure I understand the logic here. the demand for oil is real and necessary. we can not live without it. and it is a global demand. no one had to have nasdaq stocks or a new house to survive.

[CLH]

Pap ---Not true. The Nasdaq is necessary. People need jobs. There would be no jobs w/o capital. Try to live w/o a house in Maine.

Very good paper Kahn. No matter how many times bubbles happen. Pleople always say its "different this time".

[User 198491]

Oil is King today as is Gold. Invest but have a hair trigger and be ready to take profit. Hogs they bring to slaughter

[ship shape and bristol fashion]

Yes, oil has got ahead of itself. This weeks capitulation of the oil bears shows it and it will correct. But to call a similar crash like the tech bubble is ridiculous.

It is complete nonsense, to compare wheat to oil. The supply picture for wheat changes every year, oil's doesn't.

And please: To say that AMRs move will cause the oil crash is a bit daring, wouldn't you say? Airlines have been managed incompetently and restrained by unions when oil was 10 bucks and they went broke at 10 bucks a barrel.

The same goes for Ford. A bureaucratic union restraint organization which will hopefully go bankrupt soon along with GM. Why does every carmaker in the world from Mercedes over BMW and Volkswagen to Toyota and so on want to produce cars in the United Sates? Because it pays! Ford and GM simply suck!

Established demand destruction doesn't apply today, because unlike in previous decades the world is out of capacity and the 400.000 barrels we use less are getting sucked up easily from others. May be when the emerging markets stop emerging and go as developed we can calculate as we used to.

As I recall, in January a lot of people called an end to the commodities boom when the Baltic Dry came down rather swiftly. Hoopla, it is at a new high, economies around the world report high growth rates, most of the times against expectations.

May be it is because there are folks out there, who unlike us, don't have to beg for credit so they can buy stuff. They have the money we shipped overseas in exchange for goods, because we are to inefficient to produce these goods ourselves.

So what are we doing: We complain and look for witches we can burn at the stake. Great that always helped - for centuries.

Instead we should buy more efficient cars, trucks and aircraft and we should kick some serious Washington butt until they open up every area for drilling, so may be we get some more oil of our own in 10 or 15 years.

May be our leadership should stop begging the Saudis for more oil. What a humiliation. We saved their butt more than once and know we beg on our knees: Please, please great king. Give us a little bit of oil! Because they worry about what the sight of an oil rig would do to the coastlines at home.

That is why we are loosing. We complain and drown ourselves in selfpity, while others do stuff.

Brazil can do it, we can do it. I think we have more coastal waters than Brazil.

[fxtrader07]

@papita: REAL demand for oil hasn't changed all that much, but "paper"deman... for oil-futures has been skyrocketing over the past years. contrary what the most media-guys tell (mostly due to lack of knowledge and lack of skills and willingness to thoroughly research a story before publishing crap) it is not an issue of real supply real demand-disruptions or threats thereof. nothing the like has developed since decmber to justify a 40% spike in prices.
i suggest you read this sa-article referring to a recent eye-opening testimony about impact of speculators and pensionfunds(!) on oil prices before the us senate:

seekingalpha.com/artic...

[ecp]

You were being very subtle to say the least, and equally brave. High time somebody spoke some sense. I can't wait for part two, which you were blatantly building up from the beginning.

[redbaron]

Great discussion. I vote with Papita and Ship Shape. An 'oil bubble' will become a reality, when we start conserving, and/or the developing countries are no longer emerging. We Americans look at the world only through our own perspective, and that ignorance of what is actually happening here is going to cost us big time. Those billions of Chinese, Indians, et al, want what we have, and are making progress towards getting it. They are buying cars now, instead of bicycles, and it is not going to stop just because we don't like it. We are beginning to take some basic steps towards doing some things right, but we have a long way to go, and the rest of the world is not waiting for us to figure this out. I'm holding my oil positions until I see some genuine progress, and at this time that seems a long distance into the future.

[ship shape and bristol fashion]

By the way, the 'oil is bubble' - discussion is in a bubble itself. I have never in my life, seen and heard so many people call a bubble, than in this particular instance.

Being a contrarian, I will wait for a pullback to take out my stop-loss limits and get back in, when oil bottoms between 95$ and 105$.

[fxtrader07]

@red baron: are you even aware of the fact that most emerging market economies, esp china dn india are subsidising oil and gasoline to a very large extent these days to their citizens? China consumes much more oil in relation to its economic output than the u.s. (not to speak of much more energy-effcient economies in europe). as long as people get cheap oil and gasoline there they have zero incentive to save. now, the problem comes in exactly here: everybody assumes china has huge $ reserves to buy up the entire world with. but how long will they last to support domestic prices while oil prices keep escalating? how much loneer can less capitalized emerging economies sustain their subsidies? and the moment they can't anymore, economic activity will slow down very dramatically! which, in turn, will btw also affect agricultural output.
I think, that oil will go down substantially, it's long-term uptrend notwithstanding while grains and agricultural commoditoies will stay high and climb higher. there is speculative money in them, too, but demand growth there is much more real than in oil and while you can stop driving for a month - you cannot stop eating

[ship shape and bristol fashion]

fxtrader07

Do you even realize, that without oil, there is no grain production. And if there was grain production, you couldn't transport it to consumers.

10 calories of oil equivalent are spent to bring 1 calorie of food from the field to your table.

Oil makes the price of everything.

And if there is anyone badly capitalized, than it is us.

[investorslive]

I really hope its a bubble, this is really just nuts what is going on - All of the oil stocks I am watching began to cool down I hope that oil follows
www.investorslive.com/.../

[Panskeptic]

There are two predictable threads that pop up on Seeking Alpha time after time.

1) When people discuss commodity supply/demand, they always mean within the U.S. until they get reminded that there's other people out there.

2) Commodities and commodity ETFs are expected to behave like stocks, and chart overlays are produced all the time reinforcing this misconception. Stock mavens new to commodities have real trouble recognizing the differences.

And BTW, no farmer gets executive compensation like the heads of oil companies. So discussion of a windfall-profits tax for the ag sector is not in the cards. But a wpt for Big Oil does not offend my theology.

[redbaron]

FXTrader, yes I am aware of the way the chinese subsidize gasoline, but how is that different from what we do with grain and ethanol production? A gov't subsidy in the US is not any different than a gov't subsidy in China or elsewhere. We do the same thing!

[ZMaNFaRLee]

Ship shape I am convinced you didn't read the article.

[pachanguero]

This kid (author) needs to get a passport and see the world. He had better wake up to the fact that the "third" World dude who was walking, now wants a bike. The dude who had a bike now wants a car.

And so they will be having their industrial revolution now. They don't care about the falling U.S. Peso and what the price up crude is today.

Deal with it. Inflation is here to stay.

[ship shape and bristol fashion]

ZMaNFaRLee

Why is that, Sir?

[flexmarketman]

The last two Business Weeks have featured articles about people making tons of money bringing previously ignored oil sources to market. Other articles, mentioned here, talk about how companies and consumers are starting to conserve.

There is much discussion about how the prices are being driven by the "Emerging Markets". Having spent a lot of time in third world countries, I can tell you that those markets are far more sensitive to price swings than the US. Thus, if they are exposed to the same price swings, they are more likely to drop demand quickly.

Of course, there are factors that make these scenarios "sticky" like the comments on subsidized prices in some countries. However, like the thousands of examples in history, governments usually have a hard time maintaining price constraints on commodities. They will move. Prices will moderate.

[ZMaNFaRLee]

The simple fact is that oil is at $130 a barrel. We have been talking about alternative energies since it was much cheaper, now/soon those alternative energies can get real margins going because of demand for energy. Maybe Oil makes it to $150 let's say, anything above that will be spikes and nothing more, oil can't stay that high without alternative sources eating up market share.

In the end, high oil prices will be what helped us get away from it's leash. When 400 miles travelled can cost you $50 vs. $100 people will start thinking that an extra $2500 for hybrids/elictricals are pretty smart.

Say what you will about emerging markets needing oil, if the U.S. cuts it's usage in half over the next 30 years oil goes down (adjusted for inflation ofcourse).

Also don't forget..... OIL IS PRICED IN DOLLARS!!!

see what happens eventually when rates go up (that is definitely more long term however)

Disclosure:

Disregarding numbers which were used to just have a number, the logic I don't think can be argued. There was an old saying in times long ago "No wood, No kingdom" wood was the fuel, then came coal, then came oil, next is something else. When people say oil is a necessity it just makes me laugh. Intelligence and ingenuity is teh necessity.

Agree?/Disagree?

[ezrasfund]

Supply and Demand 101....Just because you get a PhD, it doesn't mean you can forget the first day of school.

Prices will increase until demand shows some elasticity. When a rise in price causes a drop in demand large enough to create a net drop in revenue prices will stop going up.

Of course the reaction is delayed, and we are still waiting for the demand side of the equation to react, but it is inevitable. Then comes the price correction.

Timing the inevitable can be a bit tricky.

[ZMaNFaRLee]

Ship Shape... He was not using wheat or corn to show there must be a reversal but showing why putting a wondfall tax on corps in oil makes no sense.

And AMR and ford he used as examples that trasportation is failing right now due to high oil which will in turn drive demand down for oil not that one company will take it down.

I was a little harsh.... didn't think you were still looking at article :)

[Andy1234]

I hope its a bubble.....but I think peak oil production will say otherwise.

This price will rise high enough to put everyone in a global recession. as the economies try to expand again....it will again put the economies back into a recession until we can find another energy source.

the problem is.....there is nothing out there that can dispalce the amount of energy from oil in any timely fashion.

We currently use 3 cubic miles worth of oil for our total energy needs world wide.

It is estimated that we will use 6 cubic miles worth of energy by 2030.

1 cubic mile worth of energy is an equivelant of

1,300 wind turbines installed every week for 50 years

1 900MW nuclear power plant installed every week for 50 years

250,000 solar panels installed EVERY DAY for 50 years.


During that time frame...we will hit peak oil, peak NG, and peak coal.

How do you grow economies without growing energy? We can get more efficient.....and maybe we can reduce our consumption of energy by 1 or 2 CMO worth.....but the math still doesn't work out.

Its going to get ugly.....and neither price nor technology will increase our oil supply....just pull up a chart of USA oil production.....neither price nor technology changed our supply....why would it for the world?

The true problem is too many people......or growth of either economies or population. its not sustainable.

there is a couple of scenario's.

demand falls while supply remains flat (lower prices) but as prices fall those expensive projects come offline

demand tries to grow....but supply is flat. higher prices

demand grows, supply falls, very very high prices

demand falls, supply falls faster, higher prices.


I think we are at demand is growing and supply if flat now...and supply will soon start to fall at 6% a year, year over year.

[ZMaNFaRLee]

One thing to note user is that reserves are based on what oil is profitable to get to. If oil Hits $150 maybe drilling through Ice in Russia becomes worth it economically, maybe boiling oil shale in Colorado becomes worth it, etc. The odd thing about oil and using the word production or reserves is that when price goes up so does supply..... odd as hell but absolutely true. This would make price increases in oil haveing an almost plateau like effect. So it would make sense to figure that into your numbers. It only takes one pipe in russia drilled through the Ice to change everything once again.

I just hope we don't have to get it. Keep it in the ground and let us continue our work on alternative sources. It is extremely unfair to talk about how long it will take technology to offset current demands when technology grows faster than the price of oil.

[redbaron]

I see signs that we are beginning to conserve here in the states, but actual consumption of energy is still going up. At the same time, consumption globally is also still going up. There will be a correction in the price of oil, but the question is 'Are we there yet?' I don't think we are because of what I observe each day. Eventually, it will happen, but it is going to take more significant moves than what we come up with so far. We first have to un-do some of the mistakes we have made (i.e., ethanol). We are beginning to ask some of the right questions, but the solutions for us here in the states to me seem far in the future. In the mean-time, I will own oil and oil related stocks.

I also am looking forward to Part II, which will likely promote more great discussion. I think such discussion, debate, or whatever, is a large part of the solution.

[Andy1234]

reserves grow.....but the rate of flow of oil does not.


its going from one well that produces 5,000 barrels a day in SA

to huge capital, long lead time, low flow rates of oil from tar sands....which require huge amounts of resources...which could ultimately limit us. just do the research. Money can't defy physics...regardless of how much there is.

[ZMaNFaRLee]

We drill it, suck it up, and it flows. All I can say in defense. And I think it is a proper defense.

[gzlatin]

"Do you even realize, that without oil, there is no grain production. And if there was grain production, you couldn't transport it to consumers."

Anyone can turn this statement around and say, do you realize that without grain production there would be no oil because there would be no people alive to make the oil because they would all starve to death!

[ship shape and bristol fashion]

gzlatin

Congratulations! That is the best answer I heard in a ling time.

Sure, you can produce food without oil, but there will be 3 billion people less to eat it.

[LoveShorting]

Jordan: Best I've read on the topic. Thanks. Go DUG (I'll keep adding)

[ZMaNFaRLee]

www.ft.com/cms/s/0/571...

uh oh.......

[Donald E. L. Johnson]

Good charts. They show how bubbles pop sooner or later. The Black Swan says no one can predict prices. But bubbles pop. And despite the desperate longs, we have a bubble.

It's always interesting to see how people who or long or short a stock or commodity leave their brains at the door. They're like directors of not-for-profit organizations.

No matter how deeply invested you may be in a trade or an idea, you've got to be able to step back and look at the situation objectively, or you'll lose your shirt. Some people never learn.

At this point, the bulls are focused on what they see as a limited supply of oil. They may be right.

But price also affects demand.

And demand doesn't have to go down to prick the oil bubble.

All that needs to happen is a shift in expectations.

Once the markets decide that consumption will be contained by price, prices will drop. The bubble will be pricked.

Are we at that point? The markets aren't saying so yet, but the growing commentary by bubble skeptics suggests that perceptions are changing and the adults may be gaining a hearing.

[Ernie Montague]

In a static model, oil prices remain fairly static.

In a world where the population increases yearly, and the growth of oil hog middle classes is skyrocketing, consumpion of a finite (please note that word) resource increases. So tell me again how a finite resource, which has between 25 and 65 years of life is overpriced. If it were water, and we were running out, what would you say?

[John Pseudonym]

Looking at the chart, a big pullback is due. The question is what will send oil plummeting?

Sinking the price of oil will require a sinking of demand. Since the world runs on oil, the world will have to stop demanding it...

A worldwide recession?

[user 191485]

CLH, the oil bubble doesn't obey Laplace's law. The only thing that will bring oil prices down is a strong dollar, and only then oil might drop to 100 bucks a barrel. But there will be no giant burst with oil going back to less than 100 bucks a barrel. Kiss those days goodbye. Alternative energies are not even close to being ready for widespread usage across the country in the next 1-2 years. You cannot compare the housing market/tech stocks bubbles with the oil bubble. It is like comparing apples to oranges. Buy those oil stocks now and sell them when they hit 200 bucks a barrel next year, when the oil bubble "deflates" slightly (but there shall be no "burst" of thy bubble) to around 150 bucks a barrel next year.

[Andy1234]

well think of it in another way that an oil exec explained on TV in Europe.


The current conventional oil resource RATE of 75ish million barrels a day will experience a conservative rate of decline of 6%. If you extrapolate those numbers going forward....in 25 yrs we will be producing 15 million barrels from that base. Estimates have oil demand going to 115 million barrels over the same time frame. We need to find and develop 100 million barrels during that time.

There is no way we will be able to produce that amount of oil at that RATE....No way...thats higher than our current base of easy and cheap oil.

all energy comes from the sun......alternative technology isn't there to produce the amount thats desired at the prices we want....we will have to live with less energy IMO.

[boardroom_jimmy]

Wow, what misconceptions! Oil is priced in dollars? No, oil HAS a price in dollars and dollars have become much cheaper to most of the rest of the world. We devalue our currency and then call the resulting commodity increases a bubble? It's compared to gold and paper stocks, both of which can be manufactured by just mining or issuing paper?

[Moby Waller]

Great chart showing Nasdaq vs. Homebuilders vs Oil. I tend to think we will hit $150 soon, then major correction to $100 or $75. I wrote an article here on seekingalpha yesterday about that.

[CLH]

Andy You cant extrapolate oil production or needs. These are both dependent on the price. As the price goes up, the demand goes down and production will go down. You need to study how the market works.

[Ramrod]

I amazed to see the number, and certitude, of pontifications from the peak-oil-evangelists here. Unfortunately, the fact is there is simply a massive amount of crude out there that is profitable to produce at $100/bbl. Collectively speaking, you have no idea of what you are talking about if you insist that supply is "inelastic".

Without ANY DOUBT, this bubble will pop. How high it goes before it does I have no idea. But based on the sheer number of ignorant rants proclaiming there is "No Direction But Up Forever" it is clear this bubble will be a whopper. Unfortunately, if it pops later rather than sooner it may even be The Whopper.

The issue isn't that oil has spiked and is BY GOSH GOING HIGHER. The issue is that by setting energy policy based on irrational fears of theoretical ecophobic circumstance we have caused energy to spike BY SENTIMENT ALONE and have thereby created an environment of extreme uncertainty regarding future CAPEX not only in the oil patch, but the entire energy sector. The result is now Shortage-By-Fiat with prices dictated ever-higher in the commodities pits with the net result that major sectors of the economy are now in extreme jeopardy of collapse.

In other words, congratulations to all you left-wing energy scholars and self-appointed enviro-geniouses out there! You have literally worried us to death. Well done!

Yada, yada, yada. I can already hear the replies. The sky is falling, yada. Too many people, yada. Too much wealth, yada. Too many cars, yada. The world is ending in 18 months, yada.

Personally, I am going short against you and I will take your money when this does what it always does because I assure you that it is NOT different this time.

[CLH]

Ramrod --You are right but remember few people study how markets and capitalism works. Our colleges are a disgrace.

yes it is different this time. People never learn. Oil is evil. All Chinese make 50k a year and can afford oil at any price. During a bubble people will find a 1000 reasons why it will never go down.

[neutronforce]

A big problem which has contributed to the oil price increase is that there isn't a supply cushion anymore like it used to be. Nowadays if there is a supply disruption, there is no country or cartel that can significantly increase its oil exports to compensate for it. I don't think it is possible for the oil bubble to completely burst (it there is one) until the world goes back to having spare energy supply capacity.

[Mangolf]

It always goes up slow, but always falls very fast....

[user 191485]

Ramrod, please short me. I will enjoy watching you pay through the nose.

[ship shape and bristol fashion]

Ramrod and CLH

Since I am not a doomsday leftwinger, may be I can answer you.

The only thing You guys ever say is: 'It's a bubble' and 'This time it's different'.

You don't give any solid reasons or facts. You simply are convinced, that oil is in a bubble. You may be right or you may be wrong.

Ramrod, it is not a question of whether or not we run out of oil tomorrow. I don't think this is going to happen in my lifetime. The Question is: How much daily production can you have? And that is obviously a problem. While it is true, that new production is coming online - all that E&P money must be going somewhere, bubble proponents always, always, always forget the depletion rate of existing fields. The best example is the Cantarel field in Mexico, which is so crucial for the US, because it produced such a vast amount of light sweet crude, the stuff our refiners want so badly. PEMEXs output imploded and suddenly the Mexicans get, how hard it is to replace a million barrels.

Again, yes oil has gotten ahead of itself. Yes, if the entire world not just the US goes into a recession, the price will be cut in half. But nothing changes the fact, that the world has to get used to elevated levels, when it comes to the price of oil. Or do you seriously believe, that someone, who pays five and six hundred thousand dollars a day for an offshore rig, will sell that stuff for 15 dollars? Or that Shell will sell that oil from their oilsands project for a handout, when they have to invest 15 billion dollars for 500.000 barrels a day output.

To sum up: You guys basically pray the same thing over and over again: Oil must be in a bubble, because it is inconvenient, and anyhow, oil is a bubble.

Why don't you take a look at the inventories at Cushing, which are the bellwether for NYMEX Light sweet crude? They are down by almost a third compared to last year. Considering that the dollar doesn't buy a spring 2007 dollar, the rise in the price of NYMEX crude is justified.

There may not be a lot of demand for the sour Iranian stuff, but they are not getting 135$ dollars per barrel. But there is a lot of demand for sweet grades.

This has nothing to do with doomsday stuff. The simple fact is, that cheap oil is history. The economy will adapt, and even you guys will get used to it.

In the short run You guys may be right, but in the long run I am.

Long: RIG, SLB, HAL, OXY, APA, APC, PBR

[Andy1234]

then explain to me why prices have risen the past 6 years or so and supply is completely flat since 2005?

and if production coming online the next few years equates to how many barrels? and you look at the declines from mexico and russia...not to mention their internal demand.....you have no DATA to stand on.


there is going to be short term prices volitility....but on a long term uptrend unless we get some other energy source or transfer to a different fuel for transportation.....whi... takes time.

furthermore....even if we do go to NG or electric.....we just shift the problem to something else.....and we don't have the energy required to transfer the majority over....unless we start acting now.

[Everyday Finance]

The Commodity Futures Trading Commission recently called a meeting because traditional commodity investors were worried that commodity ETFs and speculators were causing prices to diverge from their fundamentally justifyable levels. The conclusion was that these forces were not having a meaningful impact, nothing near what people had been anticipating. In light of this, there are plenty of ways to capitalize on the volatility, right or wrong. Personally, I like synthetic options:


everydayfinance.blogsp...

[pjw3]

Why does DUG trade up when USO is also up. I suspect that it is the nature of ETFs linked to futures, but good thoughts and links clarifying would be appreciated.

[krwada]

oil prices will correct ... just like wheat did. There is no reason that this will not happen. Oil futures will correct. Everyone is playing the proverbial game of chicken ... with oil!

[Sophisse]

I think both sides can be right, depending on what your timescale is. If oil drops from $130 to $80 and then starts rising again, the bubble proponents will be proud of their correctness, and meanwhile the peak-oil people will look back to $10 oil a decade ago and look forward to $200 or $300 oil in the future.

3 or 4 years ago, when the price of oil was up 4x to $40, you had to be a peak oil optimist to predict $80 oil. Now the peak oil pessimists are predicting a bubbleburst down to $80 oil.

To my mind, that's not a bubble. It's a long term trend with high volatility. I guess if you're a day trader, that's the same thing.

[meinster]

It is interesting how even if you all talk globally, it all comes back to the U.S. Mexico's oil troubles.. Did you know that the government is now attempting to introduce private capital to increase oil production and refining. The problem with Mexico is not depleted reserves. it is the lack of investment that PEMEX has not had in the past. The Mexican fields were shallow and therefore are not taking advantage of deeper resources, also, their infrastructure is leaking and the lose thousands of barrels because of that.

If anyone bothers reading news articles from around the world, they will see that, aside from China and India, the rest of the world is looking at curbing demand for oil. All those emerging economies are suffering because everything is priced in U.S. dollars, and whatever net gain they were having from exporting to the U.S. is now being eaten up by importing of oil at the higher rate.

One thing that I would emphasize is for people to look at the larger picture, how the population is being affected, etc. not simply at the reaction of the markets. I can tell you one thing, people will react a lot faster than the markets.

[CLH]

Soph---Yes time scale makes a difference. However, the long term has no meaning. Everything we use has a limite but people (science) find something else (usually better). The cost of something in the future is not important (its always cheaper).

PJW---USO is oil and DUG is oil producers. Its like gold and gold mines. The mines usually go up first and down first. Same with oil. Oil producers will go down before oil. Producers look to the future (or they are soon out of business).

[Wez]

pjw3:

Dug is short oil stocks, not oil, thats how they can both go up.