Is a commodity bubble the new housing bubble? [NPR]


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  1. tedyc03 says:

    Please god, let it be.

    I, for one, won’t feel bad about these oil investing asshats losing billions for bad trades once oil gets back to $20 a barrel.

  2. MissTicklebritches says:

    Of course, when oil gets back to $20 a barrel, we’ll all be riding our flying pigs to work, or skating over the frozen surfaces of hell to get there.

  3. laserjobs says:

    Whatever anyone does, don’t blame the federal reserve for this mess. According to Bernanke it is the “Global Savings Glut” that has caused all the problems and Greenspan thinks it because of the tearing down of the Berlin wall.

  4. Applekid ┬──┬ ノ( ゜-゜ノ) says:

    @MissTicklebritches: If by flying pigs you mean flying pigs powered by gasoline and if frozen surfaces of hell you mean the the frozen surfaces due to the new sinful central air of hell.

  5. puffyshirt says:

    @MissTicklebritches: isn’t that what they said during the last oil crisis? and oil was back at that point as recent as 1999. []

  6. jscott73 says:

    Not to toot my own horn or anything but…

    Looks like I scooped NPR on this by about a month:

  7. Wormfather says:

    @laserjobs: For a second I was going to flame you, but then I noticed my sarcasm meter was on mute. Close one.

    In other news, I belive the bubble bubble is the new bubble.

  8. jscott73 says:

    @puffyshirt: Can you shed some light as to why “US Price Controls” first made the price spike then fall?

    Great graph by the way, thanks.

  9. urban_ninjya says:

    I love bubbles. They’re so much fun. Who ever invented bubbles is a genius. Just think what our childhood would be like if we never popped any of the bubbles? We’d have slighly more money, but far less fun. Our summer days would be fairly boring since we’ll have to amuse ourselves with more active ways of having fun.

    Who knew a little Soap could bring man kind so much joy.

  10. TheFlamingoKing says:

    If by commodity bubble you mean businesses and people will be crying for a government bailout when it bursts, then yes, it’s just like the housing bubble.

  11. puffyshirt says:

    @jscott73: “The US imposed price controls on domestically produced oil in an attempt to lessen the impact of the 1973-74 price increase. The obvious result of the price controls was that U.S. consumers of crude oil paid about 50 percent more for imports than domestic production and U.S producers received less than world market price. In effect, the domestic petroleum industry was subsidizing the U.s. consumer.” []

    other constraints caused the increase in price, as they would be today. the yom kippur war & the oil embargo would be the main contributing factors, from what i have read. another good graph on that site: []

  12. Orv says:

    I expect it to fall somewhat, but I would be surprised if it got back down to $20/barrel. It would actually be pretty destructive if it did; a price that low would decimate both alternative energy industries and the oil drilling industry. At prices that low it simply wouldn’t pay to try to tap new supplies.

  13. TheFlamingoKing says:

    @Orv: …reducing the amount of new supply, which in turn raises prices since demand remains static but supply decreases.

    In other words, it can’t stay at $20 if $20 is unsustainable, because no one will be willing to lose money supplying it.

    But, I’m talking theory here because we don’t operate in a true free market, where a new competitor could start drilling for oil whenever and wherever to increase supply. The government restricts who can drill and where, which creates the system that rewards purchase of foreign oil over creation of our own supply.

    All I’m trying to say is it’s damn hard to destroy a market with booming demand, but too much regulation is one way.

  14. fearuncertaintydoubt says:

    I suggest a good read of “Fooled By Randomness” by Nassim Taleb. Taleb wonderfully describes the randomness of the market and the likeliness of unexpected events, such as a commodity price crash. No one really knows what the commodity market will do. Investors who behave as if it will be predictable (i.e., keep going up, or go down for sure in the next six months) will likely suffer spectacular failure if they bet too highly on it. What the real estate crash and many other examples of market crashes in Taleb’s book (written before the real estate bubble burst) show is that fund managers and traders are very stupid and foolish in their bets. The ones who are highly successful are often just lucky that their particular strategy (which is more of an innate predisposition than based on sound evaluation of risk) happens to fit the current conditions. The hedge fund managers who are making a killing are doing so in commodity markets. You would look like a genius to have been investing in oil commodity futures over the past few years. As more and more management of the funds is handed over to these “brilliant” traders (and shifted away from less successful but more risk-balanced traders), they take bigger and bigger gambles, because it keeps paying off. When the conditions change, their strategy stops working, but it stops working rather dramatically.

    The problem is that when the crash happens, it wipes out all their gains that they’ve made and much much more. The asymmetric nature of big market events means that a single crash will overturn years of success, especially due to over-leveraged positions by over-confident traders.

    Maybe food, oil, etc. will never crash. If it crashes, it could crash hard. If it keeps going up, it is less likely to go up as high as it would crash. It basically means that it is very risky to bet on the price being stable or going up, because it’s like reverse insurance — you’re gaining a small benefit while taking a chance on a huge loss.

    I wouldn’t put my money in commodity-based hedge funds, that’s for sure.

  15. Orv says:

    @TheFlamingoKing: The price may still not be high enough to encourage new drilling. In spite of what Bush is saying about excessive restrictions, oil companies already have access to millions of acres they aren’t doing anything with.

  16. jscott73 says:

    @Orv: Agreed, if you look at the article that puffyshirt linked to: [] about 2/3 of the way down it talks about “Rotary Rig Count”, it says:

    “The Rotary Rig Count is the average number of drilling rigs actively exploring for oil and gas. Drilling an oil or gas well is a capital investment in the expectation of returns from the production and sale of crude oil or natural gas. Rig count is one of the primary measures of the health of the exploration segment of the oil and gas industry. In a very real sense it is a measure of the oil and gas industry’s confidence in its own future.”

    Looking at the graph you can see the current increase in rig counts does not mirror the increase in oil prices nearly as mush as it has in the past. It is trending up but not as much as one would expect given the record breaking oil prices.

    This suggest the oil industry doesn’t really believe these prices will be around for long, either that or they are dragging their feet trying to get more land to drill in and/or more restrictions lifted.

  17. Orv says:

    @jscott73: A lot of people lost their shirts when the price of oil crashed in the 1990s, so that doesn’t surprise me. As the saying goes, once bitten, twice shy.

  18. laserjobs says:

    “According to Rep Peter DeFazio (D-Or), the entity that owns the most oil in the United States right now is not ExxonMobil or Chevron or Valero: it’s Morgan Stanley. So what’s Morgan Stanley doing with all that oil? Speculating on the petrofraud bonanza.”

  19. raisin says:

    Just like the dot-com and the housing bubble it will not be done until the last naysayer buys in. When the person bagging your groceries tells you they bot an oil future, that’ll be the top. When we’re asking if it’s a bubble we’re not even close to the top. Dot-com bubble talk was rampant in 1996-99, but by Jan 2000 it was a ‘new economy’ and ‘different this time.’

  20. bwcbwc says:

    The thing that’s truly alarming about this never-ending cycle of bubbles is that they’re a symptom of the diminution of the middle class in relation to the ultra-wealthy and the poor. There’s this giant pool of money that’s rushing around chasing profits in the hot item of the month, but there’s not enough consumer market in any of these areas to justify the money being invested there.

    There needs to be a serious redistribution of wealth from the investing class to the consumer class, or a redistribution of future growth so that workers receive a better percentage than CEO’s. Until the middle clase is able to spend enough money (without going over their heads in debt) to sustain real industrial growth, rather than inflationary speculation, this will just get worse. Based on past experience (1970’s), international stocks should be the next bubble after commodities.

  21. bwcbwc says:

    This business also sounds a lot like the inflation on electricity that Enron was doing. Speculators trade commodities futures contracts back and forth inflating the value until the person who actually wants to take delivery on something is paying a 50% premium. Not saying there’s collusion in the commodities markets, but it would sure explain a lot.

  22. Rusted says:

    According to T Boone Pickens, we reached peak oil production sometime ago. Demand is still going up, but more of it? No.

    Speculators get a worse name then they deserve. It’s their investment that gets resources into consumable product.

    @bwcbwc:No, Karl Marx was a lousy business model.

  23. sirellyn says:

    It isn’t a bubble as such. The housing bubble was created via easy credit and lenders lending to anyone who would buy. Cause it was so easy to buy houses the price of houses went way up (Supply and Demand anyone?) Now of course when people couldn’t pay for their rediculous houses and had to start foreclosing the bubble burst.

    Commodities are rising sharply because the fed has been printing money faster than parker bros prints monopoly money. More money, each dollar is worth less (Again supply and demand). Oil is rising faster than other commodities however so yes oil could go down. But it’s not based on speculators and greedy oil companies as much as you think. Maybe 10% of the rise is if that. The rest you can thank your government for those rises

    It’s doubtful you’ll see a commodity crash in general, although you could see a stock market crash which would screw everything up.

  24. Trai_Dep says:

    @laserjobs: By “global savings glut”, Bernanke means India and China have HUGE capital surpluses with no where to go, creating vast incentives for security companies to develop “innovative” products to draw them in.
    Have you heard TAL’s Giant Pool of Money yet?
    The Fed Chair, in this case, is making the best of a crappy situation. He’s not the policy-setter that destroyed the US economy. He’s just trying to pick up the pieces as best he can w/ the tools he has available.
    It’s like blaming the firemen for getting your couch wet after some Texan arsonist set your home on fire then ran away cackling.

    Probably similar things going on now: “too much money” competing to find “optimal” (read: highest) ROI. Now heading into commodities.

  25. Trai_Dep says:

    @sirellyn: The dollar hasn’t dropped b/c of vast increases of M2, it’s dropped because of huge deficits, an Iraq quagmire, our negative (and getting worse) capital balance, the shift away from the $US as the default currency and the world’s view of the short-to-medium term prognosis of the US economy.
    The growth in our M2 is comparable to the EU’s, and their Euro is doing comparatively better*. Their house is in better order than ours however.
    See how that works?

    Quite a bit more complicated than “printing too much money”. Were if it were true, though. Simply stop the presses and we all win! (cough)**

    * Shorthand for “kicking the $US’ butt”
    ** Shorthand for “Ron Paul needs to take a freshman Econ class – STAT!”