Still Laughing

Kling's Oil Speculation Question

That was a great analysis. But I still think what investors now really need to start pondering is: regardless of the current supply and demand and any shocks that happen in the future, are we reaching the point where the current price now justifies capitalization required to develop the infrastructure and technology of a replacement energy source? Oil is not a in an economic vacuum. It is subject to the same substitute good laws of any commodity.

I think there are two groups of people who are calling the high price speculation: those that want it to be because it's just so expensive and those that realize that the high price invites substitution. In other words, the very existence of the high price is why the price will crash. I think it's also why even executives in oil producing companies are starting to make divergent statements about oil prices. There are those that want to reap the short term profit (so they say, "the price will go up to xxx"), and those that realize a substitution scenario would have a far greater and lasting negative impact on their firms (and they say "we're supplying more than the price would suggest" in an attempt to drive the price down.)

So You Think Oil’s Expensive Now?

KoS - you know while you're right and maybe the best thing would be to just let the speculators drive it up and eat the loss, I'm still trying to grasp the half-assed economic logic of the "low supply" argument.

So many people are trying to say that it's high because supply is dwindling, but these are futures that are being traded and not gas which means they expect the price to continue to increase. However, how can the price continue to increase when it is heading past the point of being more expensive than a substitute energy and the research cost to develop it. It's like half of Wall Street was only paying attention in economics class to a basic supply and demand curve and missed the opportunity cost and substitute good lectures. The tragedy is that unlike other "bubbles", energy behaves like a tax and and the true cost of speculation isn't the gas high price but the slowing overall slowing of global GDP.

Bye, Bye Oil Bubble?

To all the speculators who are sure that we're not in a bubble because oil has a finite supply, thank you for stating the only one half of the obvious. Unfortunately oil is a form of energy with substitutes. Speculative pricing rests on future cash flows. If the price becomes too inflated and invites substitution, oil will crash hard. Oil is OIL because it is the cheapest and most efficient form of energy on the market today. Remove that, invite research on more effective nuclear fission/fusion and renewable energies and more effective batteries and oil becomes irrelevant and worthless except to the chemicals industry. As energy, it is simply a substitute good. That's not wishful thinking, that's the same economics book you are reading for when you trumpet lack of supply as the reason we're not in a bubble.