Forbes warns of oil bubble [price could return to $30-35]

Herald Sun (Australia) ^ | 31aug05 | James McCullough and Mandi Zonneveldt

[cloud8]

PUBLISHING billionaire Steve Forbes has predicted that soaring oil prices will lead to a crash that could make the hi-tech bust of 2000 "look like a picnic".

Mr Forbes, publisher of Forbes magazine, said the price of oil, which peaked at more than $US70 a barrel on Monday as Hurricane Katrina headed for the US Gulf Coast, was unsustainable.

He said factors such as inflation and increased demand for oil from China and India accounted for only a small part of the price hike from $US25-30 a barrel three years ago.

"The rest of it is sheer bubble speculation," he said.

Mr Forbes, who was speaking at the opening of the Forbes Global CEO Conference in Sydney yesterday, said the higher the oil price rose, the harder it would eventually crash, creating more pain for hedge fund managers and their clients.

"I don't think it's going to go to $US100 but if it does the crash is going to be even more spectacular," he said.

"It will make the hi-tech bubble look like a picnic -- this thing is not going to last."

He predicted that oil would fall to $US30-35 a barrel within a year.

Mr Forbes's comments came as the price of oil eased following US Government comments that it could release some of its Strategic Petroleum Reserve.

The 700 million barrel stockpile is set aside for emergency use and could be used to counter oil shortages caused by Katrina's impact on the Gulf of Mexico, which accounts for about a quarter of US output.

After leaping nearly $US5 a barrel to $US70.70 on Monday, US oil futures retreated more than $US1 a barrel yesterday.

more

[cloud8]

Sounds like good news. If energy speculators lose their shirts when the bubble bursts, even better. But at least someone is saying that high oil prices are only temporary.

[Zarro]

Sounds like good news. If energy speculators lose their shirts when the bubble bursts, even better.

Yeah, I tend to agree. Trouble is, the oil companies have already racked up huge profits. If you saw the last quarterly round of profit reports from the major oil companies, you know they made never-before-seen profit levels. And that was the last quarter. I'm very interested to see what their next reporting period brings. My prediction: record profits. So, the speculators who don't get out in time may lose it all, but many others will have done quite well. While the public has been told of all the disasters that caused the prices to rise.

[xkaydet65]

Just got an E mail from a friend who's in the oil futures business. His take is not good. The refineries have several problems. Physical damage is one, but work force is another. The homes of so many workers being totally destroyed makes a start up for the refineries very difficult. The major pipelines have begun ops but they are at less than 20% of capacity with only slow increases foreseen. Off shore production is back, but to only 15 to 20% of pre storm levels. The shortages of crude are affecting refineries as far north as the Conoco installation in Illinois. I don't see $30 bbl. anytime in the near future.

[upchuck]

FYI, your "more" link doesn't work. Looks like you left off the "http://herald" part.

I sincerely hope Mr. Forbes is right about this. Some how I doubt it. Given the world energy situation, I don't think we'll ever see oil for $35 again.

I do think it is over priced now. $40-50 seems about right to me. A drop to that level might bring the national average for gasoline to $2.20 or so. This is a SWAG (super-wild-assed-guess) on my part.

[pissant]

They are. There is no shortage of oil. Now the US better get busy and get some more refining capacity though!!

[snowsislander]

He predicted that oil would fall to $US30-35 a barrel within a year.

As I said in a previous incarnation of this story, Mr. Forbes' prediction would gain much more credibility with me if he were to announce that he is shorting oil -- he certainly has the financial resources to do so.

[The Great RJ]

I agree with Forbes, the $70 price level is not sustainable. These high price levels will stimulate new production whether from opening up old less efficient wells that were not profitable at $30 price levels to developing new sources like oil shales and tar sands. Consumers will respond by driving less and buying fewer gas guzzling vehicles. While I don't necessarily see $30 per barrel oil, I think prices in the $40-50 range are realistic in the near future. Markets work, governments don't.

[jwh_Denver]

If energy speculators lose their shirts when the bubble bursts, even better.

Why? You a communist or something? I'm profiting from the burst in oil prices but I didn't cause the price of oil to go up. I'm helping oil companies get more money so they can do more exploration to get more oil thus someday lowering the price.

I don't know enough details since the link does not work of why Forbes is saying $30 to $35 a barrel within a year but everything goes in cycles. We may be near the high before it drops back down some but everybody else is saying oil is going to go much higher. That $30-35 I believe is pure bull within a year.

[Tacis]

Forbes is such a little old lady! It is nothing like the 90s! If the oil bubble bursts, only the oil companyies will be hurt that vast bulk of the economy will surge, maybe, explode. $35 oil would effect so many industries, cars, vacations, airline, chemicals, power generation, that the immediate fear would be inflation as folks competed for goods and services.

[CharacterCounts]

The refineries have several problems.

Wouldn't lack of refining capacity tend to make oil prices decline?

Refining is the potential bottleneck in the system. If we have reduced capacity retail gas prices may climb at the same time a demand for oil decreases.

[databoss]

This is bad news actually...hedge funds are the new S&L's...the underlying basis for these speculative funds would have a deep impact on the current real estate boom....

[ChadGore]

I have to agree with Forbes on this.

[ChadGore]

FULL TEXT:

Forbes warns of oil bubble
James McCullough and Mandi Zonneveldt
31aug05

PUBLISHING billionaire Steve Forbes has predicted that soaring oil prices will lead to a crash that could make the hi-tech bust of 2000 "look like a picnic".

Mr Forbes, publisher of Forbes magazine, said the price of oil, which peaked at more than $US70 a barrel on Monday as Hurricane Katrina headed for the US Gulf Coast, was unsustainable.

He said factors such as inflation and increased demand for oil from China and India accounted for only a small part of the price hike from $US25-30 a barrel three years ago.

"The rest of it is sheer bubble speculation," he said.

Mr Forbes, who was speaking at the opening of the Forbes Global CEO Conference in Sydney yesterday, said the higher the oil price rose, the harder it would eventually crash, creating more pain for hedge fund managers and their clients.

"I don't think it's going to go to $US100 but if it does the crash is going to be even more spectacular," he said.

"It will make the hi-tech bubble look like a picnic -- this thing is not going to last."

He predicted that oil would fall to $US30-35 a barrel within a year.

Mr Forbes's comments came as the price of oil eased following US Government comments that it could release some of its Strategic Petroleum Reserve.

The 700 million barrel stockpile is set aside for emergency use and could be used to counter oil shortages caused by Katrina's impact on the Gulf of Mexico, which accounts for about a quarter of US output.

After leaping nearly $US5 a barrel to $US70.70 on Monday, US oil futures retreated more than $US1 a barrel yesterday.

On the physical market, Texas Intermediate was trading at $US67.40 while London Brent Crude was up $US1.88 a barrel at $US66.75.

Katrina crossed the United States coast yesterday after closing the Louisiana Offshore Oil Port, the biggest US oil import terminal, and halting 92 per cent of normal Gulf output.

The market was nervously awaiting news of the impact of the hurricane last night.

Royal Dutch Shell reported that its production platforms in the Gulf of Mexico may have been damaged.

BHP Billiton's operations were expected to remain suspended for the next few days, company spokeswoman Emma Meade said.

She said the impact of the storm would not be known for several days.

Petsec Energy said its two offshore platforms were not in Katrina's direct path.

In Australian trade yesterday shares in BHP Billiton bounced back 44 to $20.47. Petsec finished 4 higher at $1.60.

Oil heavyweights retreated on profit-taking and after Opec indicated it would increase production to deal with any supply shortages.

Woodside slid 41 to $32.94 while Santos fell 30 to $11.52.

with AFP

[Jazzman1]

the LIBERALS and tree-huggers will sue to stop them. No-win situation for consumers.

[Lessismore]

Not really. The S&Ls were directly involved with real estate mortgages, and repossessed real estate was flooded onto the market during the S&L clean-up.

The dot com boom collapse involved a lot of people losing jobs which were funded by so-called investments by which didn't result in any productive assets.

The hedge funds that are driving up the oil prices occupy a different position in the economy, one in the higher reaches of the financial system. Their collapse will resemble the Enron collapse times ten.

[HawaiianGecko]

	I'm not an economist or an oil executive. I have a hard time determining which pundit is correct, but I tend to believe Forbes. A doubling of the price of oil would seem correct if there was a doubling of the demand for oil (or something along those lines). It also seems that if $70 oil was thought to be sustainable, every oil company on the planet would be poking holes in your back yard. They aren't doing that, so common sense says it is speculation driving prices.

 

 

I'm not an economist or an oil executive. I have a hard time determining which pundit is correct, but I tend to believe Forbes. A doubling of the price of oil would seem correct if there was a doubling of the demand for oil (or something along those lines).

It also seems that if $70 oil was thought to be sustainable, every oil company on the planet would be poking holes in your back yard. They aren't doing that, so common sense says it is speculation driving prices.

 

[DaGman]

Irrational exhuberance.

I agree this is nothing more than the latest bubble. When I can drive around and see gas for $3.00 at one place and $2.79 at another that means there's not a lot of support for the $3.00 price. And, there's also a "terror premium" built into oil prices. Just like the tech bubble, this won't last.

[IronJack]

I'm profiting from the burst in oil prices but I didn't cause the price of oil to go up.

Oh, so you're just hitching a ride on the Gouger Express?

I'm helping oil companies get more money so they can do more exploration to get more oil thus someday lowering the price.

HAHAHAHAHA! So THAT'S what they're doing with the obscene profits they're making by exploiting this tragedy. Here and I thought they were using the money to flush their toilets with Perrier.

[nevergore]

Sounds like Forbes is trying to sell short on oil futures....

NeverGore :^)

[Felis_irritable]

"...developing new sources like oil shales and tar sands."

I'm going from memory here...oil shale becomes economically feasible at ~$50.00 bbl for crude. Why else would the Saudis open the spigot like they have? Oil shale technology isn't complete, but it will become so if oil stays over $50.00.

[Lessismore]

Mr Forbes's comments came as the price of oil eased following US Government comments that it could release some of its Strategic Petroleum Reserve.

Part of the demand has bee the filling of the Strategic Petroleum Reserve, which had just about been completed prior to Katrina. Presumably this was to give the US enough stocks to ride out an interruption when we invaded Iran, Venezuela, etc.

However, seeing what happened when Katrina took 1 million barrels per day off the market for a month or so, I'm not sure that taking Iran's 4 million barrels a day off the market for a year or two looks like an attractive proposition anymore.

[SlowBoat407]

I would think that if refineries are incapacitated temporarily, at some point there's going to be a drop in demand for crude as inventories back up. Any economics experts have a model for a production chokepoint when demand and raw materials are both high?

[RetiredArmy]

Ok. So it drops to $35. Will the prices come down to the $35 per barrel level? Probably not. I seriously doubt they ever come back below $1.75 or so a gallon.

[jwh_Denver]

I laugh to the bank. I did my homework and now the profits of investing wisely are far out weighing the cost of oil to this household. Many many times more in fact.

[chiefqc]

Greed has a way to make a fool of those who try to call it something else.

[headsonpikes]

Even if crude oil is destined to go higher eventually, its price could drop to $40-ish in the near term without surprise.

That's just a normal retracement of a price rise from $25 to $70.

[hermgem]

We face two different scenarios.
World prices of oil accd. to Forbes will drop. The bubble bursts, just like the one of Bill Clinton who then passed along a recession.
What directly affects the U.S. is refining, or precisely lack of refining capacity.
Prior to Katrina the U.S. was short 11% of refined products from heating oil to diesel to to gasoline, kerosene. Therefore we imported refined fuels from Mexico and Canada. We became dependents to pricing.
This shortage is directly due to not building any refineries for three decades.
Hurdles after hurdles were thrown into plans to expand. Environmental regulations are of the cumbersome variety to require between seven and nine years of approvals, with the high probability that some judge will block the whole process, even after approvals have been obtained.
We need to clearly hold in mind that Democrats are dependent on green votes, and for these reasons kept on blocking, stalling, and saying nay.
Only through Democrat tactics did we lose refining independence and face hardships at the pump.
Recall how their presidential candidates Gore and Kerry denounced, pilloried these oil monsters for the sake of garnering green anti oil, anti automobile votes.
Just when you see, as in the case of Unocal getting bought by the Chinese and thereby taking these profiteers and polluters off the Democrats hands they temporarily fall numb.
Oil does drive the U.S. economy, as well as the Chinese.
Difference is: These Chinese realize this and intend to continue growing.
Democrats and their green tax exempt interest groups have not caught up with reality and decided to stall some more, say nay, and when all else fails go filibustering.

[DaGman]

"It also seems that if $70 oil was thought to be sustainable, every oil company on the planet would be poking holes in your back yard. They aren't doing that, so common sense says it is speculation driving prices."

That says it all.

[IronJack]

I laugh to the bank. I did my homework and now the profits of investing wisely are far out weighing the cost of oil to this household. Many many times more in fact.

Good for you! Whatever it takes to make a buck!

[SlowBoat407]

Ok. So it drops to $35. Will the prices come down to the $35 per barrel level? Probably not. I seriously doubt they ever come back below $1.75 or so a gallon.

With production of the gasoline at 80-100% capacity, we're going to keep seeing inflated prices at the pump. Sadly, the countries that have the shortest downstream production (crude to gasoline) are Saudi Arabia and Venezuela.

[SierraWasp]

A most excellent summation!!! (China didn't get Unocal, however)

You, and all the others here, need to keep pounding this theme until it's picked up and becomes "conventional wisdom!"

[winodog]

I am not suprised that the gov. of LA was not prepared. However I am suprised that the oil companies were not prepared. I would have thought they would have extensive plans in place for this when they knew it was going to happen. I understand that theres not much they can do when the cat 5 cane wrecks things but they should have forseen the need for workers and their families to survive and adapt and continue working.

[IronJack]

Greed has a way to make a fool of those who try to call it something else.

You said it.

[ConsentofGoverned]

I have to agree with Forbes on this.


Care to risk your own money on betting oil is going to $30's you could make a killing on shorting oil..
A fool and his money..forbes is sore he did not get in before prices rose and he is now talking it down to get some action..

low cost energy is a thing of the past and yes my money is long oil.

[databoss]

but aren't hedges tied to the bond which in turn is the cause for the current low mortgage rates (which are also inverse for the current fed rate hikes?)

[Grampa Dave]

We had the grandkids up for part of the weekend. We went to Sacremento to take them to see the play Dora and the Pig Pirates.

Yesterday, we took them back home. My trophy bride commented that most of the gas stations on the way out of town had dropped their prices 5 to 12 cents per gallon overnight.

Considering that there were two more days in the Holdiday, that was a fairly significant drop.

[dakine]

"obscene" profits

Interesting choice of words...


I think you are making too much of a paycheck for your labor, please forward a portion of said "obscene paycheck" to: dakine.

[Smokin' Joe]

Damn! It is unconscionable that those who spend 3-4 million (or more!) to drill a well get a return on their investment.

Ever stop to think that those profits get rolled over into the next round of technology which makes a lot of domestic production possible?

The well I am working on would not have been possible 20 years ago. When we are done we will have drilled a hole in a 6 foot thick target zone nearly two miles sideways, two miles down, effectively turning 6 feet of pay into nearly 11,000.

I know of no other industry so berated for making the money it needs to crash the price of its product.

[Smokin' Joe]

The demand is not just ours alone. India and China factor into the demand side of the equation, where before a couple of years ago, they did not. The paradigm has changed.

[Landru]

"He said factors such as inflation and increased demand for oil from China and India accounted for only a small part of the price hike from $US25-30 a barrel three years ago."

~eh?

"'The rest of it is sheer bubble speculation,' he said."

~eh?

"Mr Forbes, who was speaking at the opening of the Forbes Global CEO Conference in Sydney yesterday, said the higher the oil price rose, the harder it would eventually crash, creating more pain for hedge fund managers and their clients."

Smart man, Forbes.
Knows a fruad when he sees one.

But do remember where ya heard it *first*.

...'k. ;^)

[Timothy]

So does Jealousy and Envy.

[Smokin' Joe]

No room for a rig in my back yard, but there are a few within 100 miles--and none of them are exactly laying in the weeds gathering rust. Rule number one in oil exploration: Drill where the oil is.

[mysterio]

They have gotten us used to $3.00 per gallon. It will not drop under $2 unless a serious, viable new alternative energy is developed. They will keep it in the 2s regardless of market conditions as long as they possibly can.

[TheGeezer]

You cite refinery problems. That may only indirectly affect gasoline prices by making oil prices DROP. Think about it: if you can't refine it, you don't buy crude. If you don't buy crude, demand drops. If demand drops, price drops.

At the other end, at the gasoline pump, demand will rise. Prices will rise. Since pump prices will rise with crude falling, profits will be enormous.

Next, consumers will get all upset and demand government control of the means of production and delivery. Sure. That always makes things better... What we need more than anything is doubling of refinery capacity, which has been suppressed by enivironmental whackos for thirty years (thank you, U.S. Congress).

[Sam's Army]

"Trouble is, the oil companies have already racked up huge profits."

Since when is a corporation making a profit "trouble"?

[Zarro]

SJ,

I never said that they shouldn't earn a profit. Maybe you need to go read the post again. My problem is with the manipulation of the prices to create HUGE, OBSCENE profits. Every single thing that happens in the news these days means higher prices at the pump. Bad season for Hollywood this summer? Oh, well that means people will be driving more instead of sitting in theaters. Gas price needs to go up. Yep. And, BTW, if you are not sharing in these record profits, then maybe it's YOU who ought to spend a little more thought here.

I am in industry, so I do understand how profits fund further research and development. No problem with that. In fact, if it's helping us find and get more oil, even better.

So, again, my beef is with the LEVEL of the profits and the fiction that surrounds the pricing of the commodity. Oh, and you want an industry that gets more berated for their profits? I'll help you out with that one: pharmaceutical companies.

[Sooth2222]

"As I said in a previous incarnation of this story, Mr. Forbes' prediction would gain much more credibility with me if he were to announce that he is shorting oil -- he certainly has the financial resources to do so."

Yeah, I agree.

(This Steve Forbes guy is a commodities trader or something? Or is he some sort of a Nooo Yawk City magazine publisher?)

I'd be a lot more impressed if I had heard that T. Boone Pickens had gone short crude, and I haven't.

[WilliamofCarmichael]

RE: "if $70 oil was thought to be sustainable, every oil company on the planet would be poking holes in your back yard. They aren't doing that, so common sense says it is speculation driving prices."

That makes a lot of sense.

If I recall correctly the 1970s resulted in many dormant wells in the U.S. being re-opened when oil price reached a certain level. That made a lot more sense than "speculation." At least someting was being produced. What does speculation produce, I wonder, besides bubbles and hot air?

[pointsal]

What is Soros' position in the market?

[SierraWasp]

Well, the post Labor Day price drop is something that I've been expecting to see. So it's gratifying to get that report from your trophy girl after you and her racing around with those darling grandkids to see Dora and the Pig Pirates.

Were the Pig Pirates in the gasoline vending business too??? Did the grandkids notice the sunflower farm over by Vacuumville??? Was there someone hanging around there tryin to tell everybody that would listen that they could squeeze enough oil outta them sunflower nuts to run yer diesel???

Glad you all made it back safe and sound without running out of petrol. (as they say in jolly ol England)(right DG?)