June 4, 2008 | posted by Michael Baxter in Oil |

Some people say it is, others say it isn’t.

Take Michael Waldron from Lehman.   He has authored a report titled “Oil dotcom”.   Ummm wonder what he thinks. 

Then there’s the  OECD chief – this is what he had to say: “The best solution to high oil prices is high prices, that way demand will fall.”

Meanwhile, the road to Damascus is getting busy.  George Soros, the man who consistently earns more than $1bn a year from his speculative activities, told the US Senate yesterday when he talked about commodity speculators creating a bubble in the oil market which could send the US into recession.

It was just one of many sojourns down this road.  In his recent book – which by the way is very heavy going, he talked about a “super bubble”.     Mr Soros believes that markets do not tend to correct, or ever reach any kind of equilibrium, but rather the actions of individuals create extreme volatility – leading to bubbles and crashes.

But in the Senate hearing, Mr Soros was not the most outspoken.     Mark Cooper, director of research for the Consumer Federation of America, said, ”Americans are suffering needlessly due to the financial bubble,” and then went on to blame US regulators.  “Just fire the commissioners and clean the problem up,” he suggested.

Soros, by contrast, reckons speculation is just part of the story. “The bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality,” he said.

So where next for oil? Mark Cooper reckons only around a third of the current price of oil relates to its actual cost, another third relates to the actions of the OPEC cartel and the rest is down to speculation.

“I think that is an exaggeration,” said Soros.

Meanwhile, returning to Michael Waldron, there seems to be a snag with his theory.  While he likens the current activity in the oil market to the dotcom bubble, he says oil could fall to $90.

Now, to be frank, a fall to $90 is not that much.  After all, it broke $90 for the first time ever at the end of January this year, and way before then some were comparing oil to a bubble.

But maybe it is the OECD chief who hit the nail pretty close to its head.  “We can not allow the temporary slowdown in the world economy to distract us from something which is 20, 30 or 40 years from now the most relevant challenge that we have.   We don’t have to choose between saving the planet and not saving the planet.  We have means, we have the knowledge, the skills, we have the resources.  The cost of doing the right thing is a fraction of the cost of inaction.”

Okay, so what has all that got to do with the price of oil?  He was hitting out at those who want oil taxes cut, or subsidies put on. 

For as long as oil stays high, the attractiveness of developing alternative renewable sources of energy grows.   

The irony is this.  If businesses conclude the current hike in oil is a bubble, and will crash sooner or later, they will not commit sufficient resources to developing alternatives and, ironically, oil will stay high.

If people think oil at $120 or more is here to stay, they will put resources into alternatives, and in the longer-run price will fall.

Bubbles are like that.  In the short-term they are self-perpetuating, but in the long-term, bubble mentality leads to lower prices.

It is interesting, but if you look back through history, bubbles have often had a positive impact upon the economy.  The railway boom of the mid-19th century crashed, leading to depression, but the UK was left with a railway infrastructure that underpinned economic prosperity for a hundred years. 

In the US there was a boom in the laying down of telegraph wires, yet in the Crash, AT&T emerged, buying up cheap infrastructure and sowing the seeds for improved communication across the US – helping the economy transform from a developing to a developed country.

Google was able to buy up cheap server technology in the wake of the dotcom crash – even the Dutch tulip bubble left an industry that has lasted for centuries.

If you care about the planet, then the longer oil stays high, the better it will be in the longer-term.