[DEBATE] : (Fwd) Oil as financial bubble

[Patrick Bond]

Dotcom crash, credit crunch ... oil bubble?
Jane Merriman | London, United Kingdom    
20 June 2008 04:15

The dotcom boom and bust shook the world economy almost a decade ago, 
last year the credit crunch seized up financial markets, and now an oil 
price bubble may cause more havoc.

A rapid price surge, big investment inflows and a chorus of bullish 
analysts are some of the characteristics of the oil market that have 
echoes of the internet boom of 2000.

In the dotcom era, securities analysts and strategists talked of a new 
economic paradigm created by the internet and high-tech companies. It 
didn't matter that many "new economy" companies had barely any revenues 
or profits.

This time analysts and economists point to a structural shift in the 
price of oil. Supply will struggle to keep pace with huge demand growth 
from China and India for years to come.

The word "bubble" has started to appear regularly in investment bank 
research and in the media, given oil's virtually uninterrupted climb 
this year.

"Bubblemania" was the title of a Barclays Capital note published earlier 
in June.

If oil were to reach $150 a barrel, it would bring the market 
capitalisation of oil and gas equity in the S&P 500 United States stock 
market index to more than 25%, exceeding the valuation of technology 
stocks at the peak of the dotcom bubble, Deutsche Bank estimated in a 
research note.

"The obvious parallel in our mind is we think oil is overvalued where it 
is priced based on the underlying fundamentals, which is a parallel to 
the dotcom boom and bust," said Michael Waldron, oil analyst at Lehman 
Brothers.

Oil has doubled in price in the past year and has climbed by 40% since 
the start of 2008 to nearly $140 a barrel.

The Nasdaq stock market index, where many dotcom companies listed, hit a 
peak of more than 5 000 in March 2000. But by the end of that year it 
had halved in value.

Some predict a similar fate for oil.

"If there is a genuine downtrend in industrial growth, there is going to 
be a fall. If that happens, then you can expect a fall as sharp as the 
rise has been, maybe even sharper," said Sunjoy Joshi, a former Indian 
Oil Ministry official now at the International Institute of Strategic 
Studies in London.

Speculators
Politicians in the US and Europe, facing protests over high fuel costs, 
blame speculators for the price hike. They point to hedge funds, 
investment banks and even pension funds, which have moved into oil and 
other commodities in search of portfolio diversification.

In 2003, 10 investment banks paid out $1,4-billion in a settlement 
linked to conflicts of interest in equities research after a regulatory 
crackdown that followed the Dotcom crash.

US politicians are already looking at possible curbs on pension funds, 
institutional investors and investment banks in the crude-oil futures 
markets. One proposal would ban pension funds and institutional 
investors with more than $500-million in assets from futures markets; 
another would set trading limits on investment banks.

Barclays Capital has estimated investment flows into commodities 
totalled about $225-billion at the end of the first quarter this year, 
but the bank does not believe there is a price bubble. "Nor do we see 
the involvement of institutional investors as being a cause of price 
rises," it said in a note.

While dotcom parallels exist, there are also some major differences.

"Oil is a physical commodity with a finite amount while internet stocks 
had an unlimited supply that was created out of thin air," said Evan 
Smith, of asset manager US Global Investors.

Analysts point to real supply constraints in the oil market that result 
from under-investment, both upstream and downstream, that has coincided 
with the emergence of China, India and the Middle East as new large 
consumers on the world scene. -- Reuters