What is the main cause of the high oil prices?

[MooooMoo]

I know that this isn't the best place to go for financial advice, but I've been thinking about investing a small part of my money in airline stocks - Northwest (NWA), Delta (DAL), and JetBlue (JBLU). Those stocks have dropped a lot recently, mainly because of soaring fuel costs.

So, what is the main cause of the high oil prices? Financial speculation (oil bubble), or geologically-restricted supply (peak oil)? If it's because of speculation, then the oil price will soon crash and make airlines more profitable. But if it's because of geological factors, then the airlines may never recover.

Arguments for the "oil bubble" view:

1.) The value of the dollar has dropped against the Euro and other currencies, which has attracted speculators to the market. The volume of oil traded on the futures markets is much greater today than the volume traded in the 1990s.

2.) The market doesn't seem to be responding to supply and demand. Saudi Arabia increased production by 500,000 barrels/day last month, and prices went up. China, India, and developing countries cut fuel subsidies to reduce oil demand, and prices went up. Consumption in the U.S. has decreased this year because of high gas prices, and prices still went up.

3.) There have been a lot of "bubbles" recently, where the price of something keeps going up even though it is overvalued. The price then crashes eventually, and examples of this are the Japanese stock market of the 1980s, the dot-com boom of the 90s, and the housing market of the early 2000s. Today, oil looks remarkably similar to those bubbles:

http://bespokeinvest.typepad.com/bes...-vs-homeb.html


Arguments for the "peak oil" view:

1.) We're discovering less and less oil every year. World oil discoveries peaked in the 1960s, and it has gone down ever since. As a result of this, we've been consuming more oil than we discover since 1981. The gap between consumption and discovery is getting greater each year, and today, we consume oil four times faster than we discover it.

2.) Major oil producing regions have plateaued or declined. North American oil production has remained the same today as in 1980, South and Central American production peaked in 2000 and is now declining, European oil production has been stagnant since 1996, and Saudi Arabia's production today is roughly the same as it was in the early 1980s.

3.) There is still quite a lot of oil left, but it's in places that are very expensive and difficult to extract - in the Arctic, in oil shales and tar sands, and under miles of ocean.

[ewmayer]

FYI, there is a quite-active thread about this issue already, in the Soap Box forum, here:

http://mersenneforum.org/showthread.php?t=2313

If the thread starter and the other mods think it appropriate, suggest we merge this post in with the existing thread. Or is there an issue with non-members not being able to view Soap Box threads?

[Uncwilly]

I don't like the 2 restricted options.
The main cause is: people are willing to buy oil.
If no one wanted it, it would be cheap.

[cheesehead]

Originally Posted by ewmayer

Or is there an issue with non-members not being able to view Soap Box threads?

Non-members can view Soap Box threads. I presume you meant "contribute to".

[cheesehead]

Originally Posted by MooooMoo

I know that this isn't the best place to go for financial advice

!!

So, what is the main cause of the high oil prices? Financial speculation (oil bubble), or geologically-restricted supply (peak oil)?

Both (Shouldn't that have been a poll choice, along with its antonym?).

The approach of Peak Oil has narrowed the margin that would otherwise cushion supply-demand-price fluctuations. Speculators have taken advantage of that.

Similarly, Arabs knew that U.S. domestic oil production had peaked, or was about to peak, in 1973. This allowed them to exert more leverage with their oil embargo then than they would have had at any earlier time.

If it's because of speculation, then the oil price will soon crash and make airlines more profitable.

There will be an oil price decline; it may not be a crash.

But if it's because of geological factors, then the airlines may never recover.

... going the way of buggy-whip manufacturers, eh?

(Psssst ... buggy-whip manufacturers could stage a comeback after Hubbert's Peak. Buy their stock now, while still cheap!)

[MooooMoo]

Originally Posted by ewmayer

FYI, there is a quite-active thread about this issue already, in the Soap Box forum, here:

http://mersenneforum.org/showthread.php?t=2313

If the thread starter and the other mods think it appropriate, suggest we merge this post in with the existing thread. Or is there an issue with non-members not being able to view Soap Box threads?

I wanted this to be a separate thread because the other one didn't have a poll. Although there were good arguments for both viewpoints, it was hard to see which one was more popular - the oil bubble view or the peak oil view.

Cheesehead, you were wondering why there wasn't an option for "Both". It's true that both factors are responsible for the high oil prices, but I'm unsure as to which factor is more to blame. For example, some analysts say that oil should be $100/barrel and that anything above that is pure speculation. If that's the case, then Peak Oil is to blame because $100/barrel is still far higher than the $20/barrel price of the late 90s.

[ewmayer]

MooooMoo, I suggest you modify your first poll option [if it's still possible] to something along the lines of

"A speculative oil price bubble"

The second option might also be clearer if it read something like

"Supply and Demand [e.g. Peak Oil]"

If I were posting the poll, I would've added a third option of "Dollar Debasement" and a fourth, "All of the Above."

If the current poll stays as is, I suppose we could always add an enhanced one to the Soapbox thread, subject to thread starter approval, obviously.

[MooooMoo]

I can't edit the poll options, but I don't mind changing the first option to something like "A speculative oil price bubble" and the second option to something similar to "Supply and Demand (Peak Oil)".

However, I don't feel like adding another option of "Dollar Devaluation" because, IMHO, it belongs to the first option. The declining value of the dollar causes more people to invest in oil, which further inflates the bubble.

[Uncwilly]

http://en.wikipedia.org/wiki/Abiogenic_petroleum_origin

[jasong]

The reason that gas prices are higher is easily explained.

The employees have at their disposal a large rod with a suction cup at the end. If they press this hard on one of the cards in the gas station sign, then they can remove it from the sign. Alternately, they can stick a new card on the suction cup and use the long pole to stick it on the sign. Conversely, this can also be an explanation for lower gas prices.

In the cases of grocery store prices, the employees tend to simply use their hands to change the cards, because the signs tend to be lower to the ground.

If anyone starts a thread asking for the meaning of life, or why firemen wear red suspenders, I'd be willing to take a stab at those, to.

[cheesehead]

Originally Posted by jasong

The reason that gas prices are higher is easily explained.

!

In the cases of grocery store prices, the employees tend to simply use their hands to change the cards, because the signs tend to be lower to the ground.

... not to mention their handheld price sticker applicators, which can affix a higher price's sticker over the sticker already on the item.

Alas, we're soon going to see more of those grocery store food price increases (perhaps except for tomatoes) than we've been accustomed to here in the US. High corn prices are affecting prices for beef cattle (usually fattened up on corn for their final few days before sale).