Oil-nomics

Larry Kudlow blogged on the Administration's current policy of filling the Strategic Petroleum Reserve yesterday. While it wasn't the focus of his argument, he made the point that the oil market is sitting on a huge bubble:

We're already in an oil bubble, despite the fact that inventories keep rising and year-to-date we have the biggest inventory build in the past 25 years, according to Bear Stearns. Rising prices and inventories don't make any real sense. More bubble evidence: from the lows, oil is up 220 percent. Compare that to gold, which is up 64 percent, or spot metals, up 117 percent. Oil is way out of line. It's an Internet-type speculative bubble. Mutual funds, hedge funds, and even insurance companies are buying oil on the momentum trade. This could be dangerous.

I whole-heartedly believe that he is correct! There are no structural forces in the market accounting for oil in the mid-$50-dollar-a-barrel range. Several readers have posted comments that re-iterate the point.

-Folks, the world is going to run out of oil, SOMEDAY! But not THIS DAY! Larry's right. We're in IRRATIONAL EXUBERANCE. One more time. An oil refinery in Venezuela goes off-line (thus pushing more crude onto the market;) oil spikes $2.00 in New York. A storm builds in the Persian Gulf (meaning a ship-load of crude gets to market in 43 days instead of 41 days;) oil goes up. Crude inventories are 25 MILLION BARRELS above this time in 04; gasoline 7 MILLION BARRELS above a yr. ago. Oil is up $20.00 something a barrel, gasoline $.30 something a gallon. And, at $2.25/gal., demand is getting ready to fall. Bet on it.

-About 2 weeks ago, Lee Raymond, CEO of Exxon Mobil said that crude oil wouldn't be priced where it is right now were it not for "speculation." Speculation is his word and I believe that that Raymond knows a little more about oil than most folks--including all the institutions chasing it and financing it. This is the very same crowd that gave you $100 per share for your JDS Uniphase stock--if you were smart enough to let them have it. This isn't the first oil bubble either. The last time around you gave it all back in about 12-18 months.

-You do realize that the oil supply is only part of the problem. We simply can't refine it fast enough in the US to meet demand, but the current regulatory environment that the refineries operate in is helping to increase the actual cost of fuel.