The Bubble Century

There is a hot debate going on currently regarding oil prices. Is it fundamental or speculation? It seems like we have enough people on both sides. The ones who are looking from outside at the spectacular rise in the prices mostly think it is the speculators. And Wall Street is crying hard telling everybody that it is not the speculators. They say "it is the demand fools, don't you see". But then the biggest oil supplier in the world, Saudi Arabia, is saying, we don't see the demand. Where is it? Anyway, oil prices have risen more than 30% just this year, and more than doubled since the start of 2007 when crude was trading between 60-70$ a barrel.

Whom do you believe? I don't think in today's world anybody is believable. There are enough people out there profiting nicely from this fiasco. And as always the people who run the mill are paying the price. Does it matter whether it is speculators or the fundamentals. The only thing in their hands is to pay what is asked.

Probably this had to occur in one way or the other. And still it seems the sky is not falling. The only thing happening is patience being tried. Personally I feel this is not about fundamentals. Everywhere you see today you find bubbles. Bubbles everywhere. As George Soros puts it in his latest book The New Paradigm for Financial Markets, we are living in a Super Bubble era. Although his super bubble spans the world economy nevertheless it is a bubble he is talking of. At start we had the Internet Bubble, then came the Real Estate Bubble (or should I say the Credit Bubble which stoked the fire for the Real Estate Bubble), and now we are seeing the same is commodities. You have the bubble in food prices, oil prices and on and on.

When the real estate prices were going up, people who should have acted, the Fed, the bank honchos kept on playing the game. This is what Citi's Chuck Prince said in July 2007 - "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing". And I think he could not have been more right. This is exactly what all the bank CEOs whether knowingly or unknowingly were doing till the music really came to a grinding halt. You are living the aftermath now. The most affected are the people who were induced into it. So why cannot this be going on in the rise in the oil prices. The "fundamental" guys can always say that that's what they saw before.

We are either in or on the verge of a transition from the Oil economy to some "other" economy. This other is in the evolution stages right now and no one knows for sure what that is. That unknown is the cause for exploitation. And this phase is going to be an ugly one. Ugly for the people who will have to live through it. I am sure our children are going to be a part of this pain. We can only hope if not we they would find a solution.

So back to the point. The market which has driven the prices so high is just trying to check the demand. Or so should I say. The price will keep on going up till it can. Till it gets so high that things really come to a stand still. Till the pain becomes so high we cannot endure it. And then we will be forced to give up our habit. And when that happens the market will automatically retract. It is natural. That is the fundamental rule, isn't it? In that case then, why you would say, do I feel that the speculators are at play? Because things are not always black and white. If that was not the case, what has changed today that has moved the pendulum so much on the demand side? Yes the supply is not increasing fast enough. And yes the demand (or expected demand) is on the rise. But it is not so much to justify such a rise in such a short time. That is why the Saudi's are also baffled, because they also do not see the demand coming yet. Clearly then the market is driving up the prices in expectations of the future. The future which it thinks is eventual. But we all know that that future is not coming tomorrow, not in the next few months or even years. So why is the market asking such a high price today? Well as it is being proven, because the forces are in it's favor. Because the consumers are hand-tied and are ready to pay the price what is asked. The market thus is tightening the grip as hard as possible to find where is the break point. Once that is know then we will again revert back to what would be sustainable.

And so the bubble in the Oil markets will also burst. And between today and that day it will have done the damage that every bubble does. Exploiting the weak and strengthening the already strong. When they say Capital markets are ruthless, this is what it is. It is something we have created. We will have to live by it!

Take some heart, there is light at the end of the tunnel.