Is $130 oil a bubble?

Some say no. They say unlike the tech and real estate bubbles, there's no overabundance of supply. Others say these high prices are not sustainable.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Steve Hargreaves, CNNMoney.com staff writer

oil_prices_052208.mkw.gif
What is to blame for high oil prices?
  • OPEC
  • Big oil companies
  • Supply and demand
  • They are unavoidable

NEW YORK (CNNMoney.com) -- Oil prices have doubled in the past 12 months, surging nearly $8 a barrel in the past four days alone.

Big investment funds are putting money into oil futures as if Saudi Arabia's spigots will run dry tomorrow. At the same time, the supply of oil and the demand for it hasn't changed much in the last year.

So it raises the question: Is $130 oil nothing more than one big bubble?

The answer depends on who you ask.

"A bubble is where supply overwhelms demand," said Stephen Leeb, an investment manager who has authored two books on oil scarcity.

Leeb pointed to previous bubbles - like the tech bubble in the late 1990s where companies with zero earnings issued massive amounts of stock, and the real estate market a decade later where home builders went on a frenzy, overshooting the number of homes the market could absorb.

"But unless I'm missing something here, I don't see any massive increase in the supply of oil," he said.

Like many in the not-a-bubble camp, Leeb pointed to surging demand from places like China - some estimates see auto ownership there surging 30-fold in the next few decades - coupled with dwindling supplies as the main reasons behind pricey oil.

Thursday, the International Energy Agency gave advance warning that its previous forecast for supply and demand remaining in pleasant equilibrium over the next two decades was flawed. Its new projections, due in November, will say supplies may fall 10 percent short of demand, according to a report in the Wall Street Journal.

Leeb said Russia was already seeing a drop in production, and there's little evidence Saudi Arabia could increase production even if it wanted to.

"If the two biggest oil producers in the world can no longer increase production, that's a catastrophe, not a bubble," he said.

Others say there's no way $130 oil is justified.

"This thing has to turn around, it's insanity," said Peter Beutel, an oil analyst at the consultancy Cameron Hanover. "Ultimately we'll see a huge collapse in prices."

Beutel doesn't know when that collapse would come, but he predicts it will be within weeks or months, not years.

But he doesn't know just what might bring it about - perhaps the Federal Reserve increasing interest rates or a big drop in consumption as people worldwide can no longer afford to fuel their cars or heat their homes.

"If these prices stick, you may see whole neighborhoods where people abandon their homes," he said predicting that in the Northeast U.S. it will cost $5000 to heat a home unless prices fall.

Many analysts said supply and demand justifies expensive oil - maybe $90 or $100 a barrel - but $130 is just too much.

"To see something run this far and this fast, you see it leveraged by financial players," said Neal Dingmann, senior energy analyst at Dahlman Rose & Co., a New York-based energy investment boutique. "The direction is corect, the speed isn't."

Dingman said demand is slowing in the U.S., and the Chinese numbers are inflated because they assume the government will continue to subsidize fuel, which he feels they won't do.

Over the next five or ten years, he said it would be possible to see a return to $70 or $80 oil by gradually increasing supply - both in OPEC countries and non-OPEC countries like Brazil, as well as aggressive measures to limit demand like increasing fuel efficiency standards.

Robert Kaufmann, director of Boston University's Center for Energy and Environmental Studies, also says oil is overpriced by about $30.

He says current markets are adequately supplied, and traders are pricing in future predictions of surging demand.

"To me, that's a bubble," he said.

But Kaufmann still thinks oil should be priced at around $100. He says supplies just aren't growing, and the only way to bring prices down to the $100 range is to reduce consumption.

"Even when that bubble pops, you're not looking at $60, $70 oil," he said.  To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
These 10 food trends could dominate 2015 So long, kale. Here's what's expected to shake up the food industry next year. More
Beyond Russia: Geopolitical hot spots in 2015 Investors beware: These 5 global crises are likely to rattle the stock market and world economy. More
These 20 antique guns could fetch big bucks Morphy Auctions in Pennsylvania is putting nearly 1,000 old guns on the block. Here are just a few. More


Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.