| Oil Prices: Speculative Bubble or Not? |
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| Written by Nick Osinski | |
| Thursday, 26 June 2008 02:55 | |
 Yes, I know, it"s not exactly an original headline, but the question does still persist. I"m certainly on the side of the argument that says it is a speculative bubble, but even I have my doubts about the extent to which the latest rise is due to speculation as opposed to real demand and supply factors. No one, for example, could argue that the supply of oil is not ultimately limited and that certainly has an effect on the price of oil. There is no doubt that the price of oil has to rise as the known sources of oil slows. On the other side of the argument, my side, you balance the falling supply of oil with the rise in alternative fuel sources such as wind power that has received a lot of attention lately. Similarly, there"s more talk about hybrids and plug-in hybrids among the automakers than ever before. As the cost of these alternatives fall, consumers will demand more of them and consequently require less oil (traditional fuel), which should drive-down the price of oil. As a result, you could argue that the force of dwindling supply is being countered by the rise in the availability of alternatives. The question then becomes, of course, which force is more powerful? Actually, would anyone really question the suggestion that alternatives such as solar, wind and nuclear eventually outweigh the demand for oil? The cost of drilling and refining oil is only going to rise as the world"s oil companies must search for less available reserves off-shore or in oil sands like those in Canada. By comparison, the improving technologies are only going to help drive-down the cost of the alternatives. The result almost certainly has to be that the demand for oil falls as the demand for the alternatives rises. The real question then becomes, of course, what is the timeline. Unfortunately, I don"t have an answer for that, but I will say that I don"t believe the current price of oil is sustainable and that a bet against oil will undoubtedly pay off in the long-term. I"m just not sure of my definition of "long".
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