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All The Characteristics Of A Classic Bubble

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Well not the bubble you thought anyway - made you look though!!!! :D

http://business.timesonline.co.uk/article/...1733856,00.html

The oil bubble will burst and interest rates fall...

THE August sun has been beating down and the driving season is in full swing. And, oh yes, oil prices have been hitting record highs again, topping $65 a barrel.

The driving season, usually thought of as an American phenomenon, kicks off on the Memorial Day holiday weekend in late May and lasts until Labor Day in early September, when American motorists take to the highways in large numbers in search of rest and recreation. But it is also a European thing and, judging from my recent experiences on our crowded motorways, one we embrace enthusiastically here, even with petrol at 90p a litre.

Its significance is that it is associated with strong demand for oil, putting pressure on limited refining capacity. Everything, in fact, seems at present to be conspiring to push up oil prices. The driving season gives way to autumn and winter heating demand. If the weather is cold, oil demand increases; if global warming makes it hot, turn up the air conditioning.

Our appetite for oil continues unabated in spite of record prices. The eastward shift of the global economy and rising demand from China, with its 9.5% growth rate, is another seemingly permanent oil-price booster.

I will return to that in a moment. The big domestic economic news this month, however, has been generated by the Bank of England, first by cutting base rate from 4.75% to 4.5% on August 4.

Then last week, Mervyn King, the Bank’s governor, presented a new inflation forecast that offered little encouragement to the interest-rate doves. If the Bank’s forecast turns out to be correct, the monetary policy committee (MPC) will see little need to cut rates further.

There are some serious questions about that forecast. Growth over the past 12 months has been roughly half what the Bank expected last summer, yet it persists in predicting an early bounce-back in activity — from where is not entirely clear.

That was not the only curiosity. King has stressed that the Bank can achieve as much when not cutting rates as when it does, as long as people expect it to do so. The prospect of a succession of cuts could have cheered up households, encouraging more spending, so minimising the need for the MPC actually to make those cuts. Last week’s signals went against that spirit.

The Bank, it should be said, will always have a built-in bias towards saying that the present level of interest rates is right. Otherwise, why not change it immediately? To me, however, the big issue has been oil. Inflation, on the consumer-prices-index measure targeted by the Bank, stood at 2% in June, exactly in line with the target. A year earlier it was 1.6%, three months before that just 1.1%.

What has caused this rise? The Bank offers two competing views. One is that inflation has moved up because of pressure of demand. Firms, in other words, have got back some of their pricing power because of the strength of the economy. The other explanation is oil. In just over two years, oil prices have gone up from the mid-$20s to more than $60 a barrel. Petrol has risen from under 70p a litre to more than 90p. In this context, the surprise is not that inflation has risen but that it has risen so little. At a time when world oil prices have more than doubled, 2% inflation is a minor miracle.

And last week’s inflation report offered no definitive answer on this, something I would want as a priority if sitting on the MPC. Is it really plausible that the strength of demand has pushed up inflation? Not according to retailers, who say consumer demand has been weak.

So we should look to oil, both for its effect on inflation — “core” inflation, excluding energy and seasonal food, is running at only 1.5% — and its impact on growth. Part of the slowdown we have seen in Britain is due to the fact that high oil prices act as a tax on growth. The more people and businesses spend on energy, the less they have for other things.

Petrol prices have yet to reflect the impact of the latest rise in crude oil. Gas and electricity bills will rise further over the winter. As the Bank said, the current inflation rate of 2% is unlikely to represent the peak.

What happens then? While the futures market suggests that oil prices will head gently lower, many market participants are not so sure. Options markets suggest that the chances of a big rise in prices are greater than those of a big fall, with a 1-in-20 chance of prices being $100 a barrel or more in a year.

I’m not so sure. This is a nervy time for the global oil market, but the surge in prices has all the characteristics of a classic bubble. The International Energy Agency, in its latest oil-market report last week, said: “The unfolding statistical picture increasingly reveals that fear of the unknown and the consequent desire to make forward oil purchases is behind oil’s higher price path.”

It also warned that while the emphasis now was on the risks of higher prices, “as stocks and spare capacity increase, it must not be forgotten that the downside price risks will eventually emerge as well”. It predicts a rise in oil demand of 1.75m barrels a day in 2006, but a bigger increase in supply, split between Opec and non-Opec countries. Opec’s margin of spare capacity, currently a wafer-thin 1m barrels a day, will rise to 3m.

That does not mean oil prices are going to collapse. It does mean they are likely to return gradually to earth — which probably means a sustainable $40 a barrel — when geopolitical worries subside. That, in turn, will expose the fact that Britain’s higher inflation is largely an oil phenomenon, enabling the MPC to reduce rates further. And what if oil prices were to hit $100 a barrel? The Bank would need to cut in those circumstances, too, to prevent an already slow-growing economy sliding into recession. Either way, despite the Bank’s cautious message last week, this month’s rate cut will not be the last.

PS: Robert Solow, the Nobel prize-winning American economist, once gave us his famous productivity paradox: “You see computers everywhere, except in the productivity statistics.” How come, in other words, a labour-saving device as significant as the personal computer hasn’t made us all much more productive?

One theory was that office workers spend the time freed up by their labour-saving PCs bidding for things they don’t need on Ebay, planning their holidays, or playing patience. Work, or something like it, expands to fill the time available, which we used to know as Parkinson’s law.

This theory suffered a blow when America experienced a computer- related (or at least an ICT — information and communications technologies-related) productivity boom, beginning in the 1990s. The question then became: Why isn’t it happening here?

According to the Bank of England, British workers have the same amount of computer capacity as American ones. But while American workers have been turning in improved performance, productivity here stays in the doldrums.

The solution to the puzzle, according to the Bank, could be that there have indeed been significant computer-related productivity gains in Britain. Heavy ICT-using sectors, such as business services, finance and distribution, have been responsible for two-thirds of the new investment in this area. And, sure enough, productivity has improved markedly, particularly in the past two to three years.

The trouble is this better performance has been offset by declining productivity elsewhere in the economy. The Bank cites the construction industry’s poor recent record. I am sure readers can think of others.

Edited by Time to raise the rents.

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A couple of things...

First, a question to people who know these things. Petrol prices jump fairly soon after oil price rises, but how long does it take for oil price inflation to affect the factory gate prices of manufacturers who rely on oil? Presumably deliveries/prices of goods to retailers are negotiated several months/even years in advance, so does it take that long for manufacter's increased costs to filter through?

Secondly "when geopolitical worries subside" - given the state of Iraq after two years of being run by the West, shouldn't that be "if"?

Edited by Leodhasach

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"- made you look though!!!! "

One wonders why anyone would want to spend so much time

writing so much stuff.

Does TTRTR get some strange pleasure from "making you look" ?

Edited by justanewbie

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What i dont understand with all this oil fuss is why some people expect oil prices to come back down? With the demand increasing what will cause prices to fall?..sorry if its a stupid question..

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Well not the bubble you thought anyway - made you look though!!!!  :D

http://business.timesonline.co.uk/article/...1733856,00.html

The oil bubble will burst and interest rates fall...

This is a nervy time for the global oil market, but the surge in prices has all the characteristics of a classic bubble. The International Energy Agency, in its latest oil-market report last week, said: “The unfolding statistical picture increasingly reveals that fear of the unknown and the consequent desire to make forward oil purchases is behind oil’s higher price path.”

Not so. The oil market currently has none of the characteristics of bubble.

Firstly, unlike the housing market, it is firmly supported by fundamentals ie growing demand, declining supply of the light crudes our refineries are set up to produce, and a general lack of spare capacity throughout the whole supply chain - production, refining, transport.

It is not a "fear of the unknown" that is driving prices up but a recognition of the vulnerability of supply. This is unlikely to be solved overnight. And demand is proving extremely inelastic. Demand at the pumps in Europe is consistent with last year.

Secondly, there is no speculative element to this "bubble". Although there is a lot of fund money being pumped into the futures market, figures show that the non-industry (ie speculative) long and short positions pretty much balance each other out ie they have a neutral impact on prices.

To suggest that the end of the driving season will cause oil prices to fall is either wishful thinking. In the fact the factor driving the market is not gasoline but middle distillates (diesel and heating oil, which are essentially the same thing). Europe produces excess gasoline, so can bail the US out of shortages. But both continents are now short of middle distillates, and if we have a cold winter our refineries will not be able to produce enough heating oil as well as diesel to cope with demand. Hence high prices.

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Interesting TTRTR,

Just before I saw this thread I was wondering (following a discussion in our office) as to WHY people are surprised that oil prices are so high.

I know people tell us house prices in the UK are so high because of a shortage or supply/demand imbalance. I've explained at length that I think this is tosh.

Now oil... I can quite easily see the issues in relation to a shortage and supply/demand imbalances (finite supply, increasing demand from China etc, geo-political issues).

It always makes me laugh when the oil price rises and OPEC invariably agrees to increase its output... like that's a solution (even if they could do it, which isn't necessarily the case).

If you increase the short-term supply at the cost of long-term supply what effect does it have? I'm not sure it is a positive one (sure, you can have more oil today but there is less in future, which pushes up the price of oil in the future, which... er... pushes up the value of oil today).

I remember last summer an eminent Scottish fund manager told me how oil was temporarily high (around $40 then if I remember correctly) and will soon settle back to $25-30. He seemed entirely unconcerned by the issue, I was amazed someone so bright and successful in the financial world thought that. He has since retired.

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I thought oil supply was due to increase this year to cope with increasing demand but hasn't through a variety of reasons. Predicted supply is supposed to be greater than demand by next year hence prices should fall - I'm not so sure.

I note China purchased a huge stake in Kazakstan oil recently - they're not convinced supply will increase sufficiently.

The oil price is displaying all the signs of a bubble at the moment because every conceivable disaster is being priced in.

To me the oil price issue is the crux to our economy. Some days I think we're doomed, others I just think we'll be in recession for a good few years. I was amazed last year when rates rose from 4.5 to 4.75% just as petrol pump prices increased. Double whammy to a beleaguered public.

Mentioned last week the debate between Tim Congdon and Roger Bootle. I'd advise all on here to read and try to disect both arguments.

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Interesting TTRTR,

Just before I saw this thread I was wondering (following a discussion in our office) as to WHY people are surprised that oil prices are so high.

I know people tell us house prices in the UK are so high because of a shortage or supply/demand imbalance. I've explained at length that I think this is tosh.

Now oil... I can quite easily see the issues in relation to a shortage and supply/demand imbalances (finite supply, increasing demand from China etc, geo-political issues).

It always makes me laugh when the oil price rises and OPEC invariably agrees to increase its output... like that's a solution (even if they could do it, which isn't necessarily the case).

If you increase the short-term supply at the cost of long-term supply what effect does it have? I'm not sure it is a positive one (sure, you can have more oil today but there is less in future, which pushes up the price of oil in the future, which... er... pushes up the value of oil today).

I remember last summer an eminent Scottish fund manager told me how oil was temporarily high (around $40 then if I remember correctly) and will soon settle back to $25-30. He seemed entirely unconcerned by the issue, I was amazed someone so bright and successful in the financial world thought that. He has since retired.

Now LL you're letting bubble thinking take a hold on you. The train of thought that the price will only rise is so bubbly.....

I buy well located freehold property because I know only quality will hold its value in tough times. So I concede that HP's don't always rise. But I am satisfied they're a great hedge against inflation. Oil is the same, an excess inflationary period increases the chance of a fall.

There is no finite supply of oil, there is oil being discovered all the time. Did you know that Canada has reserves equalling or exceeding Saudi Arabia? Only recently has it become economical for them to extract it as at sub $30 a barrel they would have lost money. But it takes time to develop those reserves into a supply.

Anyway, energy itself is exchangeable. I'll bet with a little research it would look like coal prices crashed over previous decades with the shift to nuclear & gas. Here in Sweden I have a choice, heat with diesel, heat with electricity, heat with wood or install a new system of heating called a warm-pump. Funnily enough, Buckingham Palace is installing one of these warm-pumps. It was in the paper the other day.

They bore a hole deep into the ground, install pipes down deep where the ground is warmed naturally, then pump their central heating down there to heat it up naturally. It costs about 20% of the electricity normally used to heat a house.

High energy prices encourage these type of investments in alternative energy sources & subsequently demand on the energy source eases.

Remember the old saying, the higher it goes, the further it'll fall.

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Anyway, energy itself is exchangeable. I'll bet with a little research it would look like coal prices crashed over previous decades with the shift to nuclear & gas. Here in Sweden I have a choice, heat with diesel, heat with electricity, heat with wood or install a new system of heating called a warm-pump. Funnily enough, Buckingham Palace is installing one of these warm-pumps. It was in the paper the other day.

They bore a hole deep into the ground, install pipes down deep where the ground is warmed naturally, then pump their central heating down there to heat it up naturally. It costs about 20% of the electricity normally used to heat a house.

The problem with the "warm pump solution" is that you need to drill a deep hole (expensive) until you hit solid rock, and there's no guarantees that it will actually generate enough heat.

It also does not work if too many people in your area already have pumps installed. Oh, and the heat can "run out", i.e. the heat runs out because you extract it and it doesn't replenish fast enough.

My parents in Sweden are considering installing something called remote heating ("fjarrvarme"), which is basically hot water pumped out from a central location. The heat is generated by burning rubbish.

The ground is not warmed naturally, it's just that it's already warm from eons ago (and a little bit of nuclear fission)

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The problem with the "warm pump solution" is that you need to drill a deep hole (expensive) until you hit solid rock, and there's no guarantees that it will actually generate enough heat.

It also does not work if too many people in your area already have pumps installed. Oh, and the heat can "run out", i.e. the heat runs out because you extract it and it doesn't replenish fast enough.

My parents in Sweden are considering installing something called remote heating ("fjarrvarme"), which is basically hot water pumped out from a central location. The heat is generated by burning rubbish.

The ground is not warmed naturally, it's just that it's already warm from eons ago (and a little bit of nuclear fission)

For us foreigners. Fjarrvarme is a central heating system provided by a local supplier. They heat the water & pump it round the city to your location if you contribute to the cost. And they certainly do take rubbish as a source of fuel.

Amazing what we human beings are capable of to save money!!!!

Don't forget Henrik, drilling further down usually solves the problem of extracting enough heat.

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I thought all Swedes kept warm by having 5 gorgeous women sleeping with each man, all cuddling up together in the nudity whilst singing Abba songs? Please do not tell me that I am wrong in this long-held fantasy... I mean, belief.

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For us foreigners. Fjarrvarme is a central heating system provided by a local supplier. They heat the water & pump it round the city to your location if you contribute to the cost. And they certainly do take rubbish as a source of fuel.

Amazing what we human beings are capable of to save money!!!!

Don't forget Henrik, drilling further down usually solves the problem of extracting enough heat.

Drilling for heat is a good solution, but it's not the be all, end all solution for heating.

Drilling is about 50GBP/m, so how much will your heating end up costing? Many places have a lot of soil, sand etc to drill through before you even reach the rock. Also, if you had to drill further down, i'd think that you'd have to drill a lot further down, as you need quite a big chunk of rock to heat your house for a long period of time.

There are methods to actually heat up the rock though, e.g. some people have sun panels installed that generate heat which is sent down into the rock in summers, and the heat is then extracted back in winter, essentially making the rock a massive heat store.

My parents were quoted 10k GBP to install the system, but with no guarantees that it would work for a lot longer than a few years... sounds like a bit of a crap deal to me (but I might be overly cautious) :)

Edit: So, by drilling deeper you're not solving the problem, you're just post-poning it a bit.

Edited by Henrik

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Look its all about the money supply

Since the late 90s we've had an unbelievable increase in the growth of M3 money supply.

The surge in bonds 2000 was inflation

The surge in real estate prices is inflation

The current surge in commodities - yes - thats oil is inflation

Central bankers have tried to limit the spread of this inflation but its shifting everyday, making us all poorer.

The current commodities one is the real killer though because this feeds through to goods and finally, hurrah, wages.

Current stock market prices are here to stay

Current house prices are here to stay

Current oil prices are here to stay

Interest Rates, hah, are gonna blow...................

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Now LL you're letting bubble thinking take a hold on you. The train of thought that the price will only rise is so bubbly.....

I buy well located freehold property because I know only quality will hold its value in tough times. So I concede that HP's don't always rise. But I am satisfied they're a great hedge against inflation. Oil is the same, an excess inflationary period increases the chance of a fall.

There is no finite supply of oil, there is oil being discovered all the time. Did you know that Canada has reserves equalling or exceeding Saudi Arabia? Only recently has it become economical for them to extract it as at sub $30 a barrel they would have lost money. But it takes time to develop those reserves into a supply.

Anyway, energy itself is exchangeable. I'll bet with a little research it would look like coal prices crashed over previous decades with the shift to nuclear & gas. Here in Sweden I have a choice, heat with diesel, heat with electricity, heat with wood or install a new system of heating called a warm-pump. Funnily enough, Buckingham Palace is installing one of these warm-pumps. It was in the paper the other day.

They bore a hole deep into the ground, install pipes down deep where the ground is warmed naturally, then pump their central heating down there to heat it up naturally. It costs about 20% of the electricity normally used to heat a house.

High energy prices encourage these type of investments in alternative energy sources & subsequently demand on the energy source eases.

Remember the old saying, the higher it goes, the further it'll fall.

I can only assume this reply is tongue-in-cheek (given how ingrained the "house prices will only rise" mentality is in the UK).

I'm not saying the oil price will only rise, just that there are logical reasons for the rise (as opposed to bubble thinking when prices rise simply because the person buying the good believes someone else will buy it for a higher price).

As Ignorant Steve suggests, the price of oil is high because it is pricing in issues such as a potential conflict with Iran etc. You might feel this (and other issues behind the oil price rise) will not come about and so conclude the oil price is too high and will come down (for example because, over time, other sources of energy come to the fore with an ensuing fall in demand for oil).

I don't disagree with any of this but that is not the same as it being "a bubble".

I think the oil price rise is quite different from people buying property to rent regardless of whether the rental levels support the activity (hence I rent at below the cost of borrowing but still buy petrol when my car starts to run dry).

And if I might dare to suggest it, overpriced property is probably not much of a hedge against inflation (particularly if it is funded by interest-only mortgage debt).

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Hmmmm. . .

Are all of the major upward pressures on oil about to disappear suddenly? Doubtful.

Are we approaching winter - a time of traditionally high demand? Yep.

I wouldn't therefore bank on lower prices this year - maybe next, but not this year!

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Drilling for heat is a good solution, but it's not the be all, end all solution for heating.

Drilling is about 50GBP/m, so how much will your heating end up costing? Many places have a lot of soil, sand etc to drill through before you even reach the rock. Also, if you had to drill further down, i'd think that you'd have to drill a lot further down, as you need quite a big chunk of rock to heat your house for a long period of time.

There are methods to actually heat up the rock though, e.g. some people have sun panels installed that generate heat which is sent down into the rock in summers, and the heat is then extracted back in winter, essentially making the rock a massive heat store.

My parents were quoted 10k GBP to install the system, but with no guarantees that it would work for a lot longer than a few years... sounds like a bit of a crap deal to me (but I might be overly cautious) :)

Again, amazing what we'll do to save money - heating rocks!!!!!

Yes it costs money to install which is why there is more incentive to do it when alternative energy sources are more expensive than they used to be.

And it's a one off installation

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Personally I am very keen on alternative energy. But there's a problem and it's one of scale and timing.

OK, so we use geothermal heat pumps to heat houses and hot water. No problem there. But do you really believe that the whole world, or at least a good portion of it, is going to install such systems over the next two or three years? We just don't have enough oil beyond that point (unless demand falters).

And of course this does nothing about cars, aeroplanes, trucks, buses, petrochemicals etc. If we got away from oil-fuelled heating altogether it still only postpones the problem by a few years at most. And it will take longer than that to make the transition.

This is not to say that there should not be a move away from oil AND IN DUE COURSE GAS for heating, there needs to be, but that in itself is not a solution. It's worthwhile, cheap and easy (compared to other options) but a relatively small contribution unfortunately.

Edited by Smurf1976

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I remember last summer an eminent Scottish fund manager told me how oil was temporarily high (around $40 then if I remember correctly) and will soon settle back to $25-30. He seemed entirely unconcerned by the issue, I was amazed someone so bright and successful in the financial world thought that. He has since retired.

Draw your own conclusions about the fund management industry from that. Bear in mind that somebody has to own every share and other financial instrument in existence. They can't all be geniuses.

In fact, none of them are. Most are bullsh*tters, and some are lucky bulls*tters.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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