Are We in the Peak of an Oil Bubble?

July 7, 2008 By Lisa Zyga feature
Are We in the Peak of an Oil Bubble?
This figure shows the total world oil demand and supply (left scale) and the oil price (right scale) from 2004 to the first quarter of 2008. Data from: International Energy Agency and US Energy Information Administration (http://www.eia.doe.gov/ emeu/international/ oilother.html). Image credit: D. Sornette, et al.

Since 2003, worldwide oil prices have quadrupled. According to a new study, the price of oil is rising at a faster-than-exponential rate, and cannot be sustained. In other words, we’re in the midst of an oil bubble, say researchers Didier Sornette and Ryan Woodard of ETH Zurich in Switzerland and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai, China.

By analyzing oil prices over the past four years, the researchers have demonstrated more support for the hypothesis that the recent oil price run-up has less to do with supply-demand interplay and more to do with speculation.

In their analysis, the team gathered data on oil prices since 2005 in US dollars, euros, and other major currencies (to confirm that the results are not a consequence of the weakening of the US dollar). They also examined worldwide oil supply and demand data, specifically investigating the extent of increased demand from emerging markets such as China and India.

Then, the researchers analyzed this data using a method that Sornette’s group started to develop in 1996 that identifies bubbles as “transient superexponential regimes” – basically, areas of rapid growth that occur due to a source of positive feedback within the system. The scientists looked at the data in the context of three different models, and all three models revealed the existence of a “log-periodic power law,” in mathematical terms – in other words, a bubble. In economic terms, the researchers explain, a bubble refers to a situation in which expectations of future price increases cause prices to temporarily rise without justification from fundamental valuation.

Further, the models showed that the bubble is close to a local peak, and we may have even reached the peak already. On the other hand, the researchers noted, this critical peak may also be embedded in a larger-scale bubble, one that could develop in the coming months and years.

“The most fundamental difficulties [in trying to describe oil prices] lie in the operational definition of a ‘bubble,’” Sornette told PhysOrg.com. “There is no consensus. One standard definition is ‘exponential growth of price.’ But exponential growth of price is normal in economics, because it just corresponds to a constant growth rate. Our definition is ‘faster-than-exponential' growth of the price, which is necessarily unsustainable.”

The team also identified several particular characteristics of oil price dynamics that may help researchers understand the causes of the bubble. First, in the years 2004 and 2005, worldwide supply, demand, and price all increased together. In early 2006, supply started to drop, followed a few months later by a drop in demand, and six months later by a drop in price.

Around this time, from mid-2006 to early 2007, supply and demand fluctuated. Then, supply, demand, and price rose together, and have been continuing to rise through the most recent data point, which was taken in early 2008.

A comparison of supply and demand showed that, most recently, supply has been exceeding demand by more than a half million barrels per day. Meanwhile, the price continues to increase. Since it appears that the supply-demand balance has only a small effect on the price of oil, the researchers suggest that a major effect lies elsewhere. They point out several reasons why speculation, fed on rumors of rising oil scarcity, may be the positive feedback causing high oil prices.

As one motivating factor, investors could be searching for a new high-return investment following the collapse of three recent economic bubbles in the US (communication technology, which peaked in 2000, real-estate in 2006, and sub-prime mortgage lending in 2007). Also, speculation may have increased due to the deregulation of oil futures in the US in early 2006, corresponding to the fluctuations that occurred shortly after that time. Investors may also be concerned about a weakening US dollar, which may encourage protective hedging against future oil price increases.

“I expect rather soon some calming with a correction of the price,” Sornette said when asked about his prediction of future oil prices. “But it seems that, for the medium term, one has to be bullish on oil.”

More information: Sornette, D.; Woodard, R.; and Zhou, W.-X. “The 2006-2008 Oil Bubble and Beyond.” Arxiv:0806.1170v2. 13 Jun 2008. Submitted to Physica A.

Copyright 2008 PhysOrg.com.
All rights reserved. This material may not be published, broadcast, rewritten or redistributed in whole or part without the express written permission of PhysOrg.com.

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snwboardn
2.7 / 5 (10) Jul 07, 2008
So here is my question... If somehow oil prices burst... Can there even be a deflation? I mean the tankers that carry the oil will already be paying extra money to buy gas which causes the oil companies to sell their product at a higher price. To me this all sounds great and all but really what are the odds that anything will change? Not to mention the oligopolistic nature of the oil industry... What are the odds if their costs decrease that they will drop prices when they know how much they can charge?
Glis
3.3 / 5 (13) Jul 07, 2008
The same thing happened in the 70s. Oil rise, climate change worry, oil fall, back to gas guzzlers...

While everyone is screaming conservation, net US demand on foreign oil has actually dropped. Not to mention all the new fun poorly regulated securities that are traded like hot potatos with everyone taking a few %. These 'business cycles' are little more than pyramid schemes.
zevkirsh
2.1 / 5 (16) Jul 07, 2008
nostradums talked about this in the end of days as the evil bubble of oil!
Mercury_01
2.5 / 5 (15) Jul 07, 2008
If we were in an oil bubble, Whouldnt the sun look dark brown?
himbo
3.5 / 5 (8) Jul 07, 2008
Not a bubble.
Not caused by speculation.

There's no rule that says a good's price can't rise supra-exponentially; this is expected for goods with highly inelastic demand (like transport fuel)

Fun with crack spreads, inventories, crude specific gravities and refinery capacity:
http://www.theoil...t-374535

Fractional reserve growth: 1/T^2 ?
http://www.theoil...t-374648
dbren
3.6 / 5 (14) Jul 07, 2008
It's important to note that the price has only quadrupled in relation to the dollar. It's only about doubled in relation to the euro.
Mercury_01
1.7 / 5 (9) Jul 07, 2008
Come to think of it, oil dosent form very large bubbles at all. You'd have to create a soapy emulsion, in which case the sun would look more of a cream color, like at the top of a grease trap. No, Id say were not inside a large bubble of oil at all, based on the empirical evidence and a logical approach.
WolfAtTheDoor
3.6 / 5 (10) Jul 07, 2008
It's important to note that the price has only quadrupled in relation to the dollar. It's only about doubled in relation to the euro.


Right on, the 800 lb gorilla in the room is inflation.
pookawiz
2.1 / 5 (16) Jul 07, 2008
Our Prez is an Oil Baron, oil prices soar. Hmmmm....might be a connection there, huh?
Star_Gazer
3.2 / 5 (10) Jul 07, 2008
As I understand bubbles burst in the free market economy... as I understand oil market is everything but free.
DeeSmith
3.1 / 5 (12) Jul 07, 2008
The temporal proximity of the sudden speculative interest in (a) oil and (b) food commodities parallels anticipated future demand for limited resources, eg., the smell of money, to recent spectacular monetary losses in another speculative market, real estate, is no coincidence.

Investors are hoping to quickly recoup losses. The largest investors are the same bunch that lost the most through speculative acquisition of bad loans (student first, later subprime).

While the market price might peak soon, then fall, it will undoubtedly recover later on, because demand will outstrip supply, even if consumers in the US change their consumptive habits (but not before oil prices rise further).

Asians have already flatly stated that they have the 'right' to be consumers, pollution and oil shortages be damned.

Damage - economic and environmental (and we are NOT talking green house gases here) - is cumulative.

They will understand why it will cost them dearly, shortly.
Soylent
3.4 / 5 (7) Jul 08, 2008
It's important to note that the price has only quadrupled in relation to the dollar. It's only about doubled in relation to the euro.


It dipped to $10 per barrel for a short while but it stayed in the $20-30 range before we headed into this period. It has somewhere between tripled and quadrupled in euros and is now trading for %u20AC90.

Fundamentals clearly did play a part in the rise of oil but it appears to have started moving quite independently of fundamentals and inflation. It's not unlikely we are in a smaller bubble.
Soylent
2.7 / 5 (7) Jul 08, 2008
Damage - economic and environmental (and we are NOT talking green house gases here) - is cumulative.


Some times.

They will understand why it will cost them dearly, shortly.


Don't count on it; we've been rather successful at dealing with air pollution in Europe and North America(especially particulates, which were and still are a real killer, have been drastically reduced) even though some of us(I'm looking at you Germany and the US) burn more coal than ever.
RAL
3.8 / 5 (13) Jul 08, 2008
When the Democrats took Congress in January 2006, the average price of gasoline at the pump in the US was $ 2.19/gallon. Fact.

The Congress has consistently blocked drilling, refused to encourage nuclear energy, threatened additional taxes, conducted numerous high profile investigations, developed a scheme involving trillions of dollars to reduce carbon consumption -- the writing is on the wall. There is going to be a huge energy shortage in the world in the next ten years so with policies like these why is anyone surprised that the price is going up?

Can't drill ANWR. Can't drill the coasts. They are trying to block drilling and extraction in the newly discovered fields in North Dakota. Dems in Colorado stopped or delayed shale oil extraction. Here in PA the cost of leasing an acre to drill for natural gas has gone from 500 dollars to about 4000 dollars in a yeaqr and environmentalists are suing to block exploration and extraction. They won't allow nukes. They even block wind power anywhere near Kennedy's home (and recent studies have called into question how effective wind is as a source in Europe).

Why is anyone surprised that prices are going through the roof? Invest in continued liberal dominance -- buy oil and gas futures.
snwboardn
4.1 / 5 (9) Jul 08, 2008
I couldn't agree with you more RAL... The funny part is when "political parties" bring up the deficit... Ummm, hey guys you realize all the oil we import goes into that deficit. Imagine if we drilled some more oil and had to import less. It just amazes me how some people can make an argument, and then in the same speach contradict themselves. It makes you wonder if they count on the American people being ignorant ;)
Egnite
2.4 / 5 (8) Jul 08, 2008
I wonder how much a litre of gasoline costs in the east, anyone been to Dubai or around there lately and filled up? It wouldn't surpise me at all if the gvnmt & oil companies are playing us to see how far they can go and then not drop it back nearly as much as it started at.
kosmonaut
3.3 / 5 (11) Jul 08, 2008
And Exxon made $40 billion last year..
deatopmg
3.5 / 5 (8) Jul 08, 2008
And Exxon made $40 billion last year..


but still only 8 - 10% profit - which is NOT a windfall profit. Kosmonaut - re-read RAL above!!!
The fault lies somewhere else - try; (1) congress {time for a term limit amendment for the legislative branch of gov't too),(2)the IMF and world bank.

Watch this:
http://video.goog...67011147&hl=en
or buy the book
lengould100
2.4 / 5 (11) Jul 08, 2008
Doesn't the sort of "speculative bubble" the authors propose require large storage systems for the actual commodity? I suspect that the oil market is too large in finacial terms and has insufficient storage capacity, for the sort of speculation the authors are proposing (eg. the Hunt bros. and silver). The only ones who have the storage capacity to "speculate" on oil prices are the producers / owners of the product in the ground to start with. And for them, it's a very simple calculation, based on the obvious fact that they prefer more money to less.

I love how quick the "free market must rule at all costs, no exception" neo-cons become chicken$@it warmongers demanding government intervention the minute a free market system starts costing them a buck.
mrlewish
2.9 / 5 (8) Jul 08, 2008
So what if we drill in ANWR so what if we drill more anywhere.. the untapped reserves left are a pitance compared to what we have already drilled or are currently pumping. Even if we could get it up and running tomorrow it only delays the invitable.. Oil will run out sooner or later.. and as insane as it might sound the sooner the better.. better that it happen now with only 6 billion on this globe now as opposed to the 9 or 10 billion later. That way there are other resourses to tap and build up and a better chance of quietly and peacefully getting over the hump of changing our energy economies from relying on oil an other carbon fuels to renewables. If we wait longer the switch over has a much greater chance of being longer, bloodier and more costly.
lengould100
2.8 / 5 (6) Jul 08, 2008
Of course i'll agree that futures traders may be adding perhaps $20 / bbl to the current market price. We can easily find out how much by calculating 1/2 the maximum short-term price swings are over the past couple of years. From the author's own graphs, i'd estimate it's about $10 to $15 / bbl -

What's actually happening is that producers of oil for export (a diminishing group of mainly national oil "companies" plus the oilsands developers in Canada) are either a) making a bet on how much excess production capacity the Saudi's really have or b) testing the market to find out how price-sensitive consumption actually is.
deatopmg
3.4 / 5 (7) Jul 08, 2008
So what if we drill in ANWR so what if we drill more anywhere.. the untapped reserves left are a pitance compared to what we have already drilled or are currently pumping. Even if we could get it up and running tomorrow it only delays the invitable.. Oil will run out sooner or later.. and as insane as it might sound the sooner the better.. better that it happen now with only 6 billion on this globe now as opposed to the 9 or 10 billion later. That way there are other resourses to tap and build up and a better chance of quietly and peacefully getting over the hump of changing our energy economies from relying on oil an other carbon fuels to renewables. If we wait longer the switch over has a much greater chance of being longer, bloodier and more costly.


They are NOT a pittance. The well kept secret (or well ignored evidence) is that the KNOWN (for 20 - 30 yrs) north slope reserves of oil alone, that congress FORBIDS the oil companies from pumping, amounts to about 200 years worth of supply for the uS at the historic rate of growth. Why do you think Russia just claimed the north pole region's oil reserves?

Plus several hundred years supply in Alberta oil shale, a hundred year supply in western uS oil shale and in Venezuala oil shale etc, etc. (hopefully we will not have to tap oil shale)

The fault lies with congress's inability to look any further down the road than the next popularity pole. If we gradually shifted to our own oil supply, from imported, a small tax could be levied that would be used EXCLUSIVELY for research and development of alternate forms of energy. AND pay down the national debt. Granted, with the aid of congress, special interests would quickly form that would use much of the revenues for their personal pork barrel projects BUT some would get used for real research. Better than the present situation.

It's the only rational way out other than drastically cutting down the size of the 800 lb gorilla, TOO MANY PEOPLE. And I don't think anyone will be happy if/when mankind get into an overt global war over energy.

Let China and India have Mid-east oil. The crazies there would then go up against the Chinese. They'd quickly come to realize that we really weren't that bad afterall.
lengould100
3.2 / 5 (9) Jul 08, 2008
[QUOTE] 200 years worth of supply for the uS at the historic rate of growth. [/QUOTE]

That's so unlikely I'll need to seee a reliable reference, deatoping.

Sounds more like the hype of an early investor trying to "cash in" (re-sell) their investment.
lengould100
3 / 5 (5) Jul 08, 2008
http://anz.theoil...260#more

Pretty much resolves the entire issue.
CWFlink
2.8 / 5 (8) Jul 08, 2008
"...we've been rather successful at dealing with air pollution in Europe and North America(especially particulates, which were and still are a real killer, have been drastically reduced)..."

Note the NOVA show showing that global warming would have started much sooner if it were not for the global cooling caused by particulate polution... it is possible that the "cooling" due to polution has been masking the warming due to CO2 for many decades; now that particulate polution is down, warming has picked up.

It is amazing how little we know about the atmosphere that is most critical to our survival.
googleplex
3.2 / 5 (6) Jul 08, 2008
The issue is that oil is now a "safe haven" for capital as stated by George Soros. Physically this is taking large chunks of supply and storing it in the salt caverns in texas.
Because oil supply is closely pegged to demand this added speculation has been very disruptive on price. Oil production is lagged by about 10 years with the price. It takes time to build and install a deep sea platform. So production cannot keep in step with spike in demand.
Sure the world has plenty of oil. But it takes time and big money to exploit it.
Let's say you spend $50bn to tap oil sands. The issue here is that it would cause a collapse in the oil price and no longer be profitible.
For those who complain about price they should be hedging by buying USO on the NYSE. This will insure them against price rises. Please note that there is a 6 month lag between crude prices and pump prices. It takes time to move product via supertanker.
Don't blame the US oil companies. They are just the engineers working for Saudi, Russia etc. I can only imagine the wealth Saudi oil are making when it costs $3 per barrel to collect it out of their well heads.
Yes Bush and Co do benefit as it helps them open offshore drilling. People forget about the environment when they pay $80 to fill up.
mockmook
2 / 5 (6) Jul 08, 2008
It really is puzzling that the price of oil keeps going up.

Demand has kept rising as economies around the world grow. So, growing demand, prices rise. Demand still grows, prices rise more.

Yes, its impossible to figure out why prices are still rising.
Arthur_Dent
2.8 / 5 (5) Jul 08, 2008
Notice the FLAW:

Until now demand wasn't exponential,
or super-exponential,
but according to that graph,

The demand and price curves match.

Why should this be considered a "bubble" if the demand and prices match?

Why should the increasing demand of
China and India be considered some sort of ghost,
or non-valid factor?

I've read that China has less and less of a buffer for their needs,
because their need is accelerating,
not increasing-linearly.

When Supply & Demand are vetoed by a theory,
*then* this'll be news.
Soylent
3.4 / 5 (8) Jul 09, 2008
The Congress has consistently blocked drilling...


Oil reservoirs are not like milkshakes where you just stick down a straw and suck as fast as you want; you've got viscous oil working it's way slowly through porous rock an cracks towards the pressure drop at the drill sites and that takes a lot of time. Take oil out too fast and you risk stranding a lot of what you could otherwise have extracted.

EIA(US energy information agency) released a study a while back stating that if you gave the go ahead to drill ANWR now you would start getting a trickle of oil in 2013 and the peak extraction rate would be 876,000 barrels/day in 2025.

In other words, if you want to blame someone blame congress under George Bush Senior or Bill Clinton in the early half of the 90's for not giving the go ahead to drill ANWR.

As for the outer continental shelf an EIA 2007 study predicts that you could start to get the first trickle of oil in 2017 growing to 200 000 barrels per day in 2030. This should have been started during the Reagan or Bush Senior years in the late 80's. The technology to drill beneath kilometers of ocean is relatively new; they couldn't have done it back then.

US oil consumption is 20 million barrels/day. And oil is a global market, so what you're really looking at is a 1% increase in world oil supply. It wouldn't have done much to the price, at best it would have delayed the death of the SUV craze by a year or so.
shem
3.5 / 5 (6) Jul 10, 2008
The driver is fear. People are afraid to put their money in other areas, so they have parked it in commodities. When they realize this is inflationary and will drive down global GDP, i.e. won't provide return on their money, and see supplies increase, they'll move to more productive investments.
thku4grace
3 / 5 (3) Jul 11, 2008
Plenty of misunderstanding regarding the oil market. We can point fingers at politicians and the media for that. The fact of the matter is that their are a number of factors that came together at the same time to create the current situation. While it seems unlikely that we'll once again revisit prices below $3 or even $2 a gallon, much of what brought these high prices can reverse as well. We aren't running out of oil. This isn't a peak oil scenario. What we are facing is a relatively sharp increase in demand from a number of developing nations while currently tapped oil supplies were only marginally higher. More specifically we do have a shortage of the capacity necessary to refine sour crude, while we are a world awash in sour crude. On the horizon, India will be completing a major 600k barrel a day sour crude refiner, and China will complete another even larger one in a couple of years. This will improve the world situation somewhat for refining that grade of crude. These high prices will also bring about more discoveries as always everywhere but in the U.S. due to drilling restrictions that I doubt will go away anytime soon.
bombim2xslim
2.5 / 5 (8) Jul 11, 2008
I spent 18 years of my life drilling oilwells off of the coast of California and I know for a fact that our oil reserves are not diminishing. The U.S. has enough known oil reserves in our own country at this time to last for the next 500 years at the rate of what we are cosuming right now.

Arco discovered a major reserve in Alaska back in the 70's that alone could, if allowed to produce it, would drop the price of gasoline to less than $1.50 per. gallon tommorrow and it alone would last the U.S. for the next 200 years.

Gasoline is another form of taxation,that we the have been secretly manipulated/forced into paying which in turn is being used against us for our own demise along with the illegal taxation of our labor.

Back in the 60's Henry Kissinger was sent to make deals with all of the major oil producing countries. The deal was that the U.S. would puchase all of it's oil from them. It would be bought using U.S. currency,but 30% of it would remain in U.S. banks for 30 years. He promised to make them rich and they gladly took the deal, as at that time most of them were nomads traveling by camel. The only two major oil producing countries that did not take the deal were Iraq and Iran, where we are today, interestingly enough.

Well during that thirty year period the banks used that money to rebuild war torn countries, that could not repay it. The countries that took the deal were ,during that time, living it up, buying american cars and all kinds of american goods. Then as the price of gold was skyrocketing, they were urged to buy gold, which they did and soon after gold hit an altime low. The wore torn countries could not repay thier debts to the banks and had to sign over their resouces and land. At the same time, as continues today, the C.I.A. was creating conflict between countries who, in turn, borrowed from the banks to purchase weapons of war, which is the biggest industry in the U.S. Anyhow at the end of the 30 year period the banks, having lent the money to the war torn countries, could not repay the oil producing countries that took Kissingers deal, leaving you and I to repay it. So as it turns out if we were allowed to use our own oil and pay a fair price for gasoline, the legal tender that we use for trade, that the federal reserve prints out of thin air, would be exposed for what it really is, worthless paper, stating debts owed to the people that believe, because of their wealth and their bloodlines, that they should rule the world and we should be their slaves. They are the International Banking Cartel that hide behind the curtain of the United States Government as The Federal Reserve.

You can hear it from a man who witnessed first hand how the mega- wealthy elite planned to use crude oil to control the earth. Just enter the name Lindsey Williams into your search bar. Lindsey Williams has his videos available free on many web-sites. He has knowingly put his life at risk in order to let everyone know the truth. Lindsey has also written a book about what he witnessed, titled The Oil Non-Crisis.

Watch Lindsey William's videos and learn what I've been trying to tell people for years. You definately won't like it, but it is the absolute truth and everyone needs to know about it.

This may seem like alot to take in, but it's just the begginning of things that we've been lied too about. Once people begin to see how these mega-wealthy people have have used crude-oil to suck us dry, like parasites, then people will begin to see many other lies that we've been led to believe.
deatopmg
3.7 / 5 (3) Jul 12, 2008
The Congress has consistently blocked drilling...


Oil reservoirs are not like milkshakes where you just stick down a straw and suck as fast as you want; you've got viscous oil working it's way slowly through porous rock an cracks towards the pressure drop at the drill sites and that takes a lot of time. Take oil out too fast and you risk stranding a lot of what you could otherwise have extracted.


That's why the technology of using propends to open up the porous strata is so successful. (The strata is further fractured under very high pressure while the ceramic propends enter the fissures. When the pressure is released the fractures remain propped open allowing the viscous to flow out at a greatly increased rate.
Damon
not rated yet Jul 12, 2008
http://tonto.eia....bl_m.htm
This web site gives you more stats about the oil problem in the US than anything I have found.
goldengod
1 / 5 (1) Jul 12, 2008
This problem is going be become a historical blip as the world realizes the potential in water as a fuel. The sea change is coming and rising gas prices are simply encouraging the world to look for alternatives. Just do a quick look on you tube to see all the progress that is being made over the past few months/years.

BTW, it's really a good thing in the long run that we don't tap all the reserves because ideally we would like to have them available for a few millenia so we can continue to make plastics. Burning the reserves for fuel is only going to increase the level of carbon in the air. Surely it's easier to extract the oil from the ground than the carbon from the air...

superhuman
1 / 5 (1) Jul 13, 2008
This problem is going be become a historical blip as the world realizes the potential in water as a fuel. The sea change is coming and rising gas prices are simply encouraging the world to look for alternatives. Just do a quick look on you tube to see all the progress that is being made over the past few months/years.

Water can't make fuel as water molecule is the lowest energy state of its constituents - no energy to extract. Cars that run on water only are scams.

Here is some more info on this topic: http://en.wikiped...lled_car
billyswong
not rated yet Jul 13, 2008
The figure is very misleading. The y-axis of both demand-supply and oil price aren't starting from zero but somewhere arbitrary, give them a flawed look of steady climb with acceleration lately. The y-axis should have started from zero and reflect the true nature of the story.
mrlewish
not rated yet Jul 21, 2008
Why would any new oil sources go to the U.S.? Answer: They wouldn't, any new supplies would be sold on the open market like any other oil commodity. Same boat with a different paint job.
mbm
not rated yet Aug 05, 2008
Am I missing something? The article and the graph seem to contradict each other. The article states:

"A comparison of supply and demand showed that, most recently, supply has been exceeding demand by more than a half million barrels per day."

However, the graph accompanying the article shows demand exceeding supply since the start of 2007 and the gap growing. The most recent data point shows demand exceeding supply by over one million barrels per day.

Which is correct?

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