Excuses, excuses...journalists and sell side analysts produce newer and newer reasons to justify ridiculous oil prices. The latest "risk premia" were quite funny, i.e. hurrican jeanne (roaming somewhere in the ATLANTIC!) and Nigerian rebels trying to blow up some pipeline in the bush. Lots of short term events, yet almost everyone believes oil is going to be "permanently higher". Give me a break. A classic bubble. What is next? List some of your top reasons for oil staying "permanently high". Let's hear them...

QuoteOriginally posted by: Gmike2000Excuses, excuses...journalists and sell side analysts produce newer and newer reasons to justify ridiculous oil prices. The latest "risk premia" were quite funny, i.e. hurrican jeanne (roaming somewhere in the ATLANTIC!) and Nigerian rebels trying to blow up some pipeline in the bush. Lots of short term events, yet almost everyone believes oil is going to be "permanently higher". Give me a break. A classic bubble. What is next? List some of your top reasons for oil staying "permanently high". Let's hear them...Gmike, your post brings to mind the spectacular collapse in oil prices we had some time ago which brought us very near the 10 dollar level, after a spectacular runup. And former Sheik Yamani, who was Oil Minister of Saudi Arabia back then, is continuing to warn that today's current prices are way too high and that prices will soon collapse.That being said, here are my top 3 factors which will exert upward pressure on prices in the next 4 years:1. Burgeoning demand from China and Asia.2. A weaker dollar.3. Increased risk to infrastructure globally from terrorists (Saudi Arabia, Iraq, the Caspian Sea, Nigeria, Indonesia, Ecuador, and possibly Mexico and Venzuela).I look forward to what others think, as well as your views,Matthew

Very reasonable point (1) and one that is often recited out there. I partly agree but Socrates doesn't. Socrates has the following to say (to point 1):"Has it not been the case that China and Asia have grown their economies very rapidly for a long time now? And is it not true that for almost a year people have been predicting a slowdown in the Chinese economy? Have Chinese stocks not declined by about 10% from their tops in the past 12 months (disclaimer: measured in EUR)? How then can China all of a sudden gobble up so much oil as to make its market price double within only a few months?"(Socrates is short oil)

QuoteOriginally posted by: Gmike2000How then can China all of a sudden gobble up so much oil as to make its market price double within only a few months?"That's easy. They don't have to gobble up a single additional drop. They just have to bid $49 a barrel to make the last guy who does buy bid $50 to outprice them.Imagine 1 barrel and 1 buyer, unknown buyer elasticity, pure profit margin to the seller, the price will be negotiated, it could be anything. Ad a second competing buyer, and the price will jump from wherever it is, the whole way to the lowest buyer's maximum bid. Imagine you're selling concert tickets in the parking lot at showtime, or imagine a game of musical chairs.In a game of musical chairs, the price is set by the last person who doesn't get one. With 10,000 chairs, you could have 9,999 people each getting chairs for free. One more guy shows up, the price will probably be at most the lowest bidder's maximum bid. A second new guy shows up, with the 10,001st guy bidding a maximum of $49, and one of those people is going to have to go without, or they're ALL going to have to pay $50.This requires an assumption that all 10,000 people were making a $20-a-barrel "profit" on $30 oil, so none will give any up. It is hard to say how much profit I make when I fill my car up with gas. But it is certain that for at least some of my driving, like emergencies, I would be willing to pay $100 a gallon. And to get to work, or my girlfriend's house, I might pay $10 a gallon. It's fair to say that many of my activities which are still profitable at $45 a barrel, are set in stone five years in advance even if oil gets to $50, since five years ago I knew oil would never get to $50! I can't un-build that Hummer!At 1.65 a gallon, I'll stop driving to Colorado on a whim. At $2.00 a gallon, I'll stop driving to Montauk on a whim. At $2.20, I can consolidate and congestion-time maybe two short shopping trips a week, and then I'm out of whims. If my work isn't too far from my house, and I need the health coverage, the price has to jump the whole way to $20 before I start looking for a different occupation closer to home. And in case you haven't noticed, apartments in the city are not exactly going down in price.The global demand curve for oil doesn't have to be coarse, with big jumps like in my individual demand curve, or grainy like you would still get even with 10,000 people. It just has to be curved, so that each additional barrel demanded has a larger and larger effect.

Isn't the price of oil today not entirely a function of immediate demand, but partly a function of the highest price oil is expected to ever be? After all, if they expect $5000 oil in 50 years, then they can just keep it in the ground, right?If oil were perfectly storable, and perfectly predictable, people would buy it like government bonds, and it would be exactly the same price at all points in time to the day the last drop is used, discounted by the risk-free rate. Something like that.Given this storing arbitrage, only one more price point in the remote future has to become visible, for oil to jump today. If three consecutive points becoming visible, each referring to more distant times in the future, reveal successively higher prices to establish a linear trend, the confidence and extent to which that trend will be extrapolated becomes parabolic. After three points you're extrapolating the eighth, after four points you're extrapolating the 20th.As such, a butterfly could flap his wings in Japan, this could reveal an entire path of nuclear-hydrogen development and political change, and the price could collapse to $4 tomorrow - if they're storing, right? But would you have the confidence to store, if you know the number of people working on alternative fuels could be doubling every dollar higher you go?Oil has never been at this level before, in this age of technology. It was almost totally unexpected. You have no idea what will come out of the woodwork in reaction to it, or how long it will take. According to my elasticity model, it could go to $1,000, but technology could take it to zero a year later. It's an unknown land, I'm not inclined to draw a map.

Oil prices will never collapse. They might fall back to $43 but that's as low as oil will ever fall in the future. Numerous traders on the street are all predicting that oil will settle between $54 and $61. World will just have to learn to live with high oil prices. China is sucking up a LOT of oil and they're having tons of energy issues. Their factories are experiencing energy shortage and they're losing a lot of money. They simply need oil.

After all, if they expect $5000 oil in 50 years, then they can just keep it in the ground, right?Given the stability of most oil rich nations, the chances of keeping the ground for 50 years is not brilliant. Many such governments regard anything beyond 10 years as in the realms of SciFi as far as planning goes.It's an unknown land, I'm not inclined to draw a map. Agreed. There are a lot of marginal supplies that are only viable of oil remains at a high level for a long period.The long term trend however, has got to be up. Currently, oil "shortages" simply mean that the price goes up. Thus oil costs suck money away from other consumption.However there is a point where there simply isn't enough oil, regardless of price, and I don't think it is more than 20 years away.China & India's growth means strong demand at higher prices than we currently experience.The West has a very narrow window to build nuclear reactors in time, and I really can't see it happening. Arty green types have made them deeply unattractive to arty politicans.China of course doesn't have this problem, nor does India. Although it is possible that terrorists will blow up one or two reactors, only a strike by a serious military power could take out a nation's nuclear energy sources.Contrast this to the west, and it looks quite scary. Even a weak country like Iran can mount a plausible defence for its reactors, but Europe and the USA would have to defend tankers, refineries, and pipes spread over vast distances. Really very much harder.Emerging economies also have the advantage that their new infrastructure can be optimised for the new reality. Western homes, transport and manufacturing are optimised for oil & gas, with a bit of coal.

the lowest oil prices will reach for the next two years is at least is $33. I would almost bet my mortgage on that. Are oil prices too high now. I would say between now and three months time oil prices could well go higher , maybe even hitting $60. Higher than that....something truely dramatic would have to occur then. 6 months from now oil prices will start falling back brought about by both a fall in demand and an increae in supply. But oil wont fall back to the barmy levels of $10. Believe me....Current situation as it stands....demand hasnt yet outstripped supply.Noone has yet said they cant get any oil.But the oil that is coming through is of the dirty kind rqather than the sweet kind. And not many refineries can deal with this stuff. Hence even if there wasnt an "war premium" (ie pre Sept 11) oil prices would still be pretty high relatively around the $30-$35 mark. AS for a bubble......I would have to say there is a slight bubble but not much of one...I would still go long oil for the next three months at least..After that I would maybe sell up...As was witnessed this week..all it needs is one rumour and oil markets can go crazy......and let us not forget we only half way through the hurricane season with early estimates set to show that increased amount of hurricanes are set to hit landfall between now and 2007 ( the report I read was written in June) .What effect this has on oil we will have to wait and see.

QuoteOriginally posted by: DCFCGiven the stability of most oil rich nations, the chances of keeping the ground for 50 years is not brilliant. Many such governments regard anything beyond 10 years as in the realms of SciFi as far as planning goes.This was kind of my thinking. If our attempt to make Iraq like Sweden succeeds, then suddenly the Iraqi government can sell its reserves to US storers for immediate cash. If the probability of our success goes from 0% two years ago, to 50% today, it could extend the time horizon 20 years.The main thing we have in the United States is visibility. If the day comes when you can say what the Middle East will look like in 50 years, is it possible oil prices will go up, as they shift production into the future?Such gross misinterprations of factors, in the complete wrong direction, are what market volatility comes from (remember the day we invaded Iraq). If our invasion of Iraq creates visibility for actors, then the supply of energy should go up, as people explore and innovate. But if they expect our success to make the price of oil go down, then they will compensate 180 degrees out of phase, driving the price of oil down by exploring when there is unrest, and driving the price up by assuming we have enough oil when there is stability.

i read an interesting point somewhere yesterday - big oil companies aren't investing in new refineries. the newest one in the us was built in 1976. if these companies expected oil prices to remain high, wouldn't they start building more refineries, particularly those that could process heavy crude?

Well, so far as that goes, I heard a funny story from a guy in Germany. He said that like 10 years ago (ignore my exact numbers), they built a nuclear power plant for X billion dollars. For some reason they never turned it on. And now, 10 years later, they are selling it piece by piece and shipping to China, for 10 cents on the dollar.I really am a surprising fan of China, because they don't seem to have the election problem we have in the United States. In other words, nobody has any incentive to promise you a utopia every two years, if you just give them more power. And while ruling parties don't really have an incentive to do anything but insulate their own power, those Chinese people seem to think it will be a nice sport to beat the United States at our own game.Chinese population-control measures are pretty disgusting, and offensive to someone who believes a man is born with the capability to feed himself. Nevertheless, the wealthiest ordinary people in the United States - the urban professionals - aren't exactly having five kids these days. Given the choice, the people who can best feed themselves are more interested in feeding other people's children!

Just something else which I forgot to take into consideration...other fuel sources.The only one which I would say could possible have a near term effect on the price of oil is LPG, and by near term I am referring to 2-5 onwards. How effective will this be...really depedns on the rate of technology advancement....IPersonally while I'm hopeful that the technology will be figured out eventually within 10 years say, for the next five years i would say oil will remain pretty much unchallenged....as for the point made on refineries you have to realise that companies will only invest if they see it as long term solution. Building a erfinery to deal with both the sweet and the sour oil is expebnsive and is it really worth building it for only the sour type oil....????As far as I know almost all the refineries in US are built for the sweet kind with only a handful designed for refining both type of oil....