Tech stocks, real estate... crude oil? Has the oil market become the latest of a series of financial bubbles, fueled by low interest rates and cash sloshing around in search of quick returns? Probably.
But even a bubble can keep floating for a while if enough people keep pumping it up, and it looks like that is what individual investors and financial wizards at pension funds are doing by injecting more and more money into commodity funds. Guessing when oil prices might fall back to earth is a treacherous business; Wall Street is littered with analysts who said prices would drop $20, $30 or $40 ago.
Crude oil topped $119 a barrel on the New York Mercantile Exchange yesterday, up more than 25 percent this year and more than double what the price was just 14 months ago. That's astonishing given that 1) there has been no new disruption in supplies, 2) the world's largest oil market - the United States - has been relatively stagnant amid economic slowdown, 3) the prospect of a U.S. military clash with Iran has diminished since last year in the wake of the National Intelligence Estimate downplaying Iran's progress in developing nuclear weapons, and 4) many hedge funds and investment banks are believed to have sold down their energy positions to raise cash to meet pressing financial needs as the sub-prime mortgage crisis spreads.
Yes, I know. China's oil thirst is growing and Nigerian pipelines were just blown up. But China was growing last year, too, and Nigerian pipelines have been disrupted regularly for years now. All of that should have been "priced in" before. True, the U.S. dollar is weaker, but even at $1.60 to the euro it has dropped maybe 10 to 15 percent since last summer, while oil prices have soared 75 or 80 percent.
So if this is only a temporary bubble, how long can it last? There's the rub; it could last a while. That's because investment funds, pension funds, hedge funds and maybe individuals are all diversifying their holdings by adding energy-rich commodity funds. That diversification process could take some time because some of the funds, especially pension funds, are very big. Also, while U.S. demand has leveled off or even dropped a bit amid high prices, a steeper drop in demand will be needed to put a dent in prices. That will take time too, as people seek more fuel-efficient cars.
Here's a February Harper's magazine piece suggesting that alternative energy could be the next bubble.