Wednesday, September 07, 2005

Steve Forbes on oil speculation. Again.

The strong opinion in this neck of the woods has long been that pre-Katrina oil spikes were less the result of dwindling oil supply and more to be blamed upon speculation. Some time ago, Paul referenced Steve Forbes' support of this argument in a previous post. Well Forbes is back at it.

He said factors such as inflation and increased demand for oil from China and India only accounted for a small part of the price hike from 25-30 usd a barrel three years ago. 'The rest of it is sheer bubble speculation,' Forbes said. 'I'll be blunt, there's hardly a hedge fund in North America that hasn't speculated on oil futures.'

Of course China and India play a role. Limited domestic refinery capacity plays its role. Instability in the Middle East and Venezuela play theirs. And now Katrina's devastation will place even more upward pressure on prices. But it must again be emphasized that dwindling reserves are not the fundamental issue. Speculation, legitimized through increased risk premiums since 9/11 have pushed prices to their ethereal heights. So if anything is causing problems on the supply side, it is the lack of refinery capacity and indeed, this aspect of the supply chain has been dealt a serious blow by Katrina.

Forbes argues that the bubble will eventually burst and that when it happens, it will rival the popping of the tech bubble in 2000. I imagine he is right on the first point, but I honestly don't know about the second. Nonetheless, something worth considering for those of you holding energy stocks.

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