The recent surge in oil prices from the December 2008 low of around $35 a barrel to the $110 level reached last week has caught the world by surprise. This represents a staggering 214% increase over only a ~2.5 year time span. In contrast, the Dow rose “only” ~90% from its low during March 2009 to its recent high in early April. Have the fundamentals of oil supply and demand changed so dramatically over the past 2.5 years as to warrant this 214% increase, or are there additional factors to blame?
Lately, Web 2.0 companies like Groupon ($6 billion), Twitter ($4+ billion), and Facebook ($50 billion) have fetched enormous valuations. I think there’s more human ‘hype’ factor to these valuations and less emphasis on fundamentals. Let’s face it, these internet companies are cool and trendy, and their ubiquitous street presence builds tremendous public and corporate interest ala the snowball effect. The right aura around a company can help investors look past otherwise glaring issues.
Oil seems to be following a similar path. Rather than Web 2.0 hype, oil has fetched higher and higher prices on peak-oil hype and geopolitical fear. Is oil supply the culprit? Not likely. The world’s oil reserves certainly haven’t shrunk by 214% over the last 2.5 years, in fact, they’ve only risen due to new finds and groundbreaking technology (pun intended). New advances in exploration, drilling, completion, and production techniques by service companies like Schlumberger and Halliburton have greatly increased operators’ abilities to extract oil and gas in places never before imagined. Is oil demand the culprit? Possibly. Global energy demand has increased along with the world economy that has picked up steam – though to the tune of 200%?
Essentially oil prices are being driven up on speculation. Unrest in Libya has upped the ‘hype’ factor of fear several notches, even though it’s not a top 10 oil producing nation, (Libya is #17, according to the EIA). China’s increasing energy needs are also frequently cited by energy analysts. The energy intensive manufacturing sector hasn’t popped up overnight either; it’s been booming for over a decade now. The number of Chinese purchasing cars is significantly increasing, yes, but is it really exploding to the point of increasing global demand by such a large percentage? Probably not. It seems that with everyone talking about diminishing oil supply and demand at new highs that a similar snowball effect as experienced with Web 2.0 companies is at play here.
Until the hype bubble of peak oil, Middle East unrest, and exploding global energy demand is deflated, oil prices will continue their upward trend. Perhaps like the ever increasing popularity of Web 2.0 companies, oil’s skyward hike won’t be reversing anytime soon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.