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What Goes Up Must Come Down

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The obvious question, then, is: why are oil prices rallying so violently of late? Well, because that is how markets typically behave at the final stages of a powerful bull run. Prices get disconnected from fundamentals and enter a blowoff stage as everyone wants a piece of the action. Financial flows into oil-dominated commodity funds in just the first quarter of this year exceeded the entire 2007 influx. The price of oil has more than doubled over the past year after rising steadily at an annualized rate of 35 percent in the preceding five years. The NASDAQ had a similar blowoff in the year leading up to the major top in March 2000. In another telling sign, currently six of the world's 10 largest companies by market value are energy firms. Back in March 2000, technology stocks occupied an identical position in the global top 10.

Of late, the world seems split between oil and non-oil nations, with all the producing economies booming while their consuming counterparts are threatened with oil-induced stagflation, meaning slowing growth and rising inflation. Over the past three years, net oil-importing countries have transferred more than $3 trillion in wealth to oil-producing nations. At the current price of oil, the annual wealth transfer is nearly $2 trillion. However, there is a limit to which the fortunes of the oil-producing and oil-consuming nations can diverge. With evidence of demand destruction mounting in oil-consuming countries, it will not be long before the term "peak oil" invokes images of a peak in both the price of oil and its demand, rather than fears that the world is running out of oil.

Sharma is head of emerging markets at Morgan Stanley Investment Management.

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Posted By: azadrafat @ 06/06/2008 10:00:11 AM

All of this oil price increase is part of the Bush plan to keep the Arab producing countries quiet while he does what he wants in Iraq. This was a plan that was hatched between Bush's administration and the Saudi's.
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Posted By: aceditor @ 06/03/2008 7:29:01 AM

I am afraid you are sadly mistaken. To say that there is no evidence that world oil production is peaking today is plain wrong. Production has been essentially flat for 5 years and light crude is declining. The delines in good quality crudes are being offset by liquids stripped from natural gas production. We have reached peak exports, that is the oil exporting countries are keeping the oil for themselves (they have subsidised gas so are not so effected by price). The most scary evidence is the recent reports by CERA and the IEA showing that the rate at which production from fields currently in production is delining is about 5%. This means that every year we need to bring on stream 4 million barrels a day of new production to stay at 86/7 million barrels a day. In other words we have to bring on stream the equivalent of 4 new Saudi Arabias in the next ten years to stay flat. Supply and demand will match for a long time, the question is are we prepared to outbid the rest of the world?
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Posted By: timaster @ 06/02/2008 2:05:02 AM

Furthermore, the american people who are struggling with those mortgages should not have gotten into them in the first place. How is it fair to expect me, who pays my bills and my REASONABLE mortgage on time, to bail out all the morons who overextended themselves on a house they could not afford. Do you think government money comes from nowhere? it comes from the taxes on the people. And for people who say tax the corporations, who do you think pays the higher resulting prices on goods that are the result? Let the people lose their homes and find something they can afford. If the lenders allowed themselves to lend to people who could not afford the mortgage, let them take the losses. That is how capitalism is supposed to work. Anything else rewards stupidity, and actually encourages it.