[DEBATE] : George Soros: rocketing oil price is a bubble

[Riaz K Tayob]

George Soros: rocketing oil price is a bubble


By Edmund Conway, Economics Editor

Last Updated: 12:53am BST 27/05/2008

 

Speculators are largely responsible for driving crude prices to their 
peaks in recent weeks and the record oil price now looks like a bubble, 
George Soros has warned.

The billionaire investor's comments came only days after the oil price 
soared to a record high of $135 a barrel amid speculation that crude 
could soon be catapulted towards the $200 mark.

In an interview with The Daily Telegraph, Mr Soros said that although 
the weak dollar, ebbing Middle Eastern supply and record Chinese demand 
could explain some of the increase in energy prices, the crude oil 
market had been significantly affected by speculation.

Telegraph TV: George Soros on oil prices

Telegraph TV: George Soros on oil prices

"Speculation... is increasingly affecting the price," he said. "The 
price has this parabolic shape which is characteristic of bubbles," he said.

·  'We face the most serious recession of our lifetime'

The comments are significant, not only because Mr Soros is the world's 
most prominent hedge fund investor but also because many experts have 
claimed speculation is only a minor factor affecting crude prices.

Oil prices stalled on Friday after their biggest one-day jump since the 
first Gulf War earlier in the week.

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At just over $130 a barrel, the price has doubled in around a year, 
causing misery for motorists and businesses.

However, Mr Soros warned that the oil bubble would not burst until both 
the US and Britain were in recession, after which prices could fall 
dramatically.

"You can also anticipate that [the bubble] will eventually correct but 
that is unlikely to happen before the recession actually reduces the demand.

"The rise in the price of oil and food is going to weigh and aggravate 
the recession."

The Bank of England recently warned that soaring energy and food costs 
would push inflation above its target range for most of the next 18 
months, making it more unlikely that it will cut borrowing costs soon.

Mr Soros warns Britain is facing its worst economic storm in living 
memory, dwarfing those of the 1970s and early 1990s, with a housing 
slump and serious recession.

He said: "The dislocations will be greater [than in the 1970s] because 
you also have the implications of the house price decline, which you 
didn't have in the 1970s."

The warning undermines predictions that Britain will suffer only a brief 
and relatively painless recession, unlike the precipitous dives of 
previous years.

Mr Soros also warned that the Bank's inflation report represents a 
"Faustian pact", obliging it to keep interest rates high to control 
inflation, even as the economy is starting to slump.

"You had the nice decade," he said. "Now that is over and you are in a 
straitjacket."

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