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The oil price bubble – and its aftermath


Francisco Blanch, the Merrill Lynch & Co. analyst who called the $147.27 record crude-oil price nearly on the nose, sent markets into a tailspin with his forecast that the next move may be back to $25 a barrel in 2009. Such relief for consumers may be short-lived once the global recession ends, he said.

“If we reignite economic growth to a very fast level, we will have a shortage of energy again,” said the 35-year-old head of global commodity research at Merrill Lynch in London. Oil may rise to $150 in two or three years, said Blanch. World growth will reach 2.2 percent next year and rise to 4.8 percent by 2011, according to the International Monetary Fund. (via Bloomberg.com: Exclusive).

What’s being trotted out …

it was largely due to the surging middle class in India and China

Cant be true. India and China are still too small and consume too little of oil., still. India produces 30% of its own oil – and another 50% is tied up with long term supplies. The last 20% of this is tied to spot markets – which is where the oil prices yo-yoed.

it was price fixing by the oil companies

For how much and how long … They no longer have the power or the reach to do that – the way they did earlier. Oil production, supplies and trading is now controlled by State Oil companies of OPEC, Russia, Norway and para-State Oil companies like BP. For them to do this for such a long time was not possible

others said the Enron loophole was largely to blame for high oil prices

How much difference can regulators make … ‘Irrational exuberance’ did result in a few contracts – but they would have vaporised in a jiffy, with the coming of settlements.

Further I would draw attention that all these theories came from the Governments (US, Saudi, etc.) themselves – which immediately disqualifies them (in my mind).

I would draw attention to the following dots – which may paint another picture altogether.

  1. The biggest shareholder of Citibank is a Saudi prince (HRH Prince AlWaleed bin Talal bin Abdul Aziz Al Saud (Arabic: الوليد بن طلال بن عبد العزيز آل سعود‎).
  2. The housing and mortgage boom ran concurrently with the boom in oil prices.
  3. Most of the petro dollars were invested back in the US funds
  4. Many private funds (like Blackstone, Cerberus, etc.) came up on the back of this liquidity.
  5. The Chinese appetite for dollar Treasuries and debt.

This spike in oil prices was designed by the US and OPEC to ‘suck out’ the excess ‘dollar liquidity’ from the world currency markets – to sustain high dollar exchange rates, to sustain the dollar hegemony. Since very few people were involved, the operation continued.

If you notice, every few months, there would be a supply disruption – like a fire on a rig, a boat would crash into a rig, a pipeline would undergo maintenance, etc. Not to forget the Iraq War, the Afghan War, the 9/11, etc.

All this was done to prolong the spike. As this situation, ground into an impossibly high bubble, it crashed. Likely architects – Citibank, Alan Greenspan, Ben Bernanke, OPEC, and of course, our favorite, George W Bush.

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