[DEBATE] : (Fwd) Oil as financial bubble

[Riaz K Tayob]

What is speculation, according to some, even hawkers selling on the 
street are speculators - as opposed to "traders" - so ...

Patrick Bond wrote:
> 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
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