Outtanames999

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

We all hope you are right. Where is Greenspan to declare "irrational exuberance" for oil? Well, at least we have you.

But even if this market eventually corrects itself, one has to wonder, why is the cost of oil is so disconnected from the cost of production, refining and distribution, and why is it disconnected from actual supply and demand?

We can see clearly now the supply chain is corrupted when futures market pricing drives retail prices in real time (but of course in the up direction only - prices at the pump somehow never fall as fast as they rose).

Speculators should be free to make whatever speculative bets they like in free markets. However, there is no reason those bets should affect the underlying subject of the bet.

When you bet on the outcome of a sports game in Las Vegas, your bet has no affect on the score of the game (unless there is corruption which of course would be, uh, how should we say, Illegal).

Can you imagine what would happen on the field if the players had a stake in the betting action on the game and the odds were posted on the stadium scoreboard in real time during the game? This is what we have in the oil markets today.

In the same way, speculators should be able to bet in a disconnected way on the future price of just about anything. But their bets should not drive the market or corrupt the supply chain. And this is what we must achieve in the oil markets or we will certainly have more bubbles in the future.

The price of a commodity is a kind of score. And the scorekeeping must not be in the hands of the gamblers in the oil markets any more than it is in the sports betting markets.

Not to mention, this is the age of the Internet, the great disintermediator. Name one industry that has not been disintermediated by the net. Oh, yeah, Oil.

Why can't I buy my own barrels of oil direct from OPEC? Why must I buy through a corrupt, unregulated and disorderly commodity exchange market?

Where is the Amazon and Orbitz of the oil market that puts the customer in control? It sure isn't the commodities market.

As to drilling in Anwar, et al in the U.S., before we go down that path and begin consuming our reserves, we must ask ourselves some very fundamental questions.

So let me ask you this, if you could choose between these outcomes, which would you pick? We run out of oil before the Saudis. The Saudis run out of oil before we do. We both run out at the same time.

Now what do you suppose the odds are that we and the Saudis will both run out of oil at exactly the same time. You got it - that will never happen. So we are left with the other two.

I don't know about you, but if I had the choice, I would rather see the U.S. be the last oil field standing (our children's children and all that), so I'm not that eager to see us start the drilling quite yet. Oh and since we know that the price of oil has nothing to do with supply and demand, all the drilling in the U.S. will do nothing to bring down prices. Sad, but true.

So we are left to other means of ensuring that prices are not corrupted by the markets. Anyone have a plan for that?