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July 14, 2005

About that house-price oil-price bubble

I’m definitely sticking to my $40-a-barrel guns:

A sudden and mysterious drop in China’s oil consumption helped to push down the International Energy Agency’s estimate on Wednesday of global demand for this year. After growing 11 percent in 2003 and 15.4 percent last year, China’s overall oil use declined 1 percent in the second quarter from the comparable quarter a year earlier, the agency said.
The drop is the latest in a series of unclear and often conflicting indications about whether the Chinese economy is still growing strongly. Top officials of the agency said in interviews they believed that the decline was temporary and that they expected Chinese demand to rebound in the second half of the year, but added that world oil prices could take a heavy blow if Chinese use did not increase.
The International Energy Agency, supported by the governments of the world’s leading consuming nations, has recently become known for warning that the world does not have enough oil and calling for the Organization of the Petroleum Exporting Countries to push its member countries to increase their output. But William C. Ramsay, the agency’s deputy executive director, said Wednesday that there were signs that worldwide production capacity was starting to move ahead of demand for the year, and he expressed surprise that oil prices had nonetheless stayed high.
“There are not the conditions out there right now that should lead to these kinds of prices,” he said in an interview in his office here. The international oil market has gotten out of line with the availability of oil, he said, adding: “It gets in one of these bullish moods and it has to be dynamited out of it. The fundamentals are not disquieting.”

If you’ve been reading this blog—or James Hamilton’s Econbrowser—none of this will be news. You’ll also have read about the vast amount of speculation in the oil market:

The past 2-3 years have seen increasingly vast bets on higher oil prices being made by hedge and pension funds—largely via indexed products developed by companies like superspikers Goldman Sachs. […] The size of this speculative premium is open to, uh, speculation. Last summer, when oil was around $45, the industry consensus was $7-8 a barrel. Some more recent estimates put it as high as $17, which is probably over the top. But few analysts will quibble with $10.

As I’ve written before, if global oil consumption starts to falter and OPEC continues to pump for all it’s worth, the speculators—especially the pension funds—will bail faster than you can fill up a Prius.

And oil will be heading for $40 a barrel.

Posted by Stephen at 12:01 AM in Energy + environment | Permalink | TrackBack (0)

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