Nawar Alsaadi

The Oil Bubble Will Meet the Same Fate as Tech, Housing

What the bubble prophets continue to ignore is a simple fact: Oil is a finite commodity, unlike internet stocks (manufactured in wall street), or housing (built and stays there), or Gold (extracted and remains there), or food (grown year after year), oil once used is gone forever, what the fundamental oil guys are saying is that the “easy” oil has been extracted used and burned, what remains is a harder to tap, harder to refine and harder to transport oil, thus a possible oil shortage will happen in the next few years as supply of sweet crude does not catch up with demand.

However the market is doing its trick, the market have risen so much as to align oil supply with crude demand, the goal of a rising oil price is: demand destruction, this is how markets function, this is their function, their function is to match supply with demand, and they have done their magic.

The question now is not about how high oil will go, the question is for how long oil prices will remain elevated?, as long as supply remain tight, prices will remain elevated, since lower prices will lead to more demand and quickly reverse oil prices higher again, for the oil price to push higher $150+ either supply need to decline further, or demand need to increase while supply remain constrained.

The world of sub $100+ is gone and probably gone for ever, as the world continue to consume 3 barrels of oil for each barrel is discovers, thus it is logical that the remaining reserves will continue to gain in value as the scarcity premium grows with time.

Further more it is worthwhile to remember 2 things going forward, world oil reserves in the middle east are questionable, as many countries such as Saudi Arabia, Kuwait, UAE and Iraq arbitrarily raised their reserves to gain a bigger OPEC production share (in the 1980s OPEC allowed you to produce more oil if you had more reserves), the second issue is that world oil demand in the developing world and oil exporting countries themselves is exploding, for the developing world it is economic advancement and the launch of Ultra Cheap Cars such as the Nano by Tata, while for the oil exporting countries oil demand is cutting exports as more oil is kept to service the internal economy, thus it is vital to look at total available oil for exports and not just production to gauge future oil prices.

Finally, it seems ever the late 90s tech bubble rook place (and the bubble concept become more wide spread), everyone became a bubble expert, whenever something rises, the bubble people go out screaming: it is a bubble, with total disregard to fundamentals, for some reason the bubble logic has replaced basic economic theory.

Regards,
Nawar