Crude oil is ready for a long-term bear market that can signify the end of hydrocarbon era of our civilization
Peter Oberois
Jul. 4, 2008

There is no doubt the oil charts look like a raging bull making its way. But it is a bubble by any standard. Bubble not necessarily is formed by just speculation. It can also form by negligence, conspiracy, and just demand supply instability due to a transitioning economic phase.

The reason oil has reason to the heights never imagined before is because of the above reasons – not one but perhaps all of them.

The whole thing started when oil fell below $10 a barrel in early nineties. Oil companies, the Middle East oil tycoons and the oil business friendly politicians became to make sure India and China prosper with imported jobs from the western nations.

They called it outsourcing. It essentially shipped labor-intensive non-management jobs of repetitive nature to Asian giant economies. India focused on services and China on low-tech manufacturing. Foreign direct investments poured in and India as well China started subsidizing the petroleum products for their native population. The use of hydrocarbons skyrocketed.

Then came the negligence of the world leaders to recognize the problem and formulate a sustainable energy policy. Other than Brazil, very few countries have thought of alternative fuels in early 2000.

Finally the emergence of ETF (Exchange Traded Fund), the private equity funds and the hedge funds started speculating on a raging bull market in oil. The genie finally went out of the bag. The pendulum shifted to the extreme and oil approached $150 a barrel cre3ating hyperinflation in food and energy.

US trade deficit and budget deficit dragged the US dollar down. In terms of Euro (currency) oil revenues did not see that kind of a raging bull market. As a result the oil curtail OPEC did not make any serious move to pump more oil.

But remember, the pendulum has shifted to an extreme from $10 a barrel to $146 a barrel. The rise took more to more than ten years but it did happen. the problem with commodities is that it always forms hills – up and then steeper down. The top is relatively small area.

What has happened is a realization among the people that oil is priory and also environment unfriendly. For example, with the U.S. economy mired in a slump, Americans still believe saving the environment is more important than fixing the economy, according to a new poll released Thursday, July 3rd, 2008.

According to a CNN/Opinion Research poll, 49% of Americans say protection of the environment should be given priority, even at the risk of curbing economic growth. That compares to 44% of those surveyed who said the economy is the top priority, and the government should focus on economic growth even at the expense of the environment.

This awareness creates the top of the hill in every commodity. The government agencies and businesses are planning telecommuting. India and China has finally reversed their insane policies of bleeding the state owned and run oil companies to subsidize the oil consumption of native citizens. The small businesses are imploding back to the basements of the owners and using Internet to do business.

There are signs o0f that ‘hill top’ in the oil commodity. What happens next is interesting. If oil follows other commodity demand supply model, it will start a very slow decline withy sporadic bear market bull moves on the upside. After sometime the bleeding speculators will give up and the oil producers will realize that the golden days of hydrocarbons are over. They will start pumping as much as they can at the elevated price levels. Tat this stage the oil price will collapse without a ground floor in place.

Most likely the extreme position of the pendulum will not allow back to this level ever again. The fact people are still environment aware will bring in the use of alternative energy in the form of Hydrogen, Solar energy and nuclear reactors. The transformation can be very fast – faster than the oil tycoons and the oil company executives can ever imagine.

MORE ARTICLES >>