Thursday, May 29, 2008


The single biggest factor influencing the global economy today are surging oil prices. Oil has risen from $ 20/bbl in 2002 to $ 130/bbl now. However this may not affect markets negatively and may in fact even be a bullish signal for stock markets going ahead.

The main reason touted for rising oil prices is the increasing demand for the commodity from growing economies. Therefore the very fact that oil prices are increasing means that the growth drivers are still intact. This is a very significant indicator for the future and it may be one of the reasons why, in spite of a surge in oil prices stock markets around the world are stable.

The second reason for the spiraling prices is the speculative element. Now if oil prices show some volatility on the downside, it could make the oil bulls run for cover. In turn this could trigger a sharper fall in prices intensified by speculators rushing to cover long positions.

The long term reason why oil cannot sustain current prices is that there are huge oil reserves in the form of oil shale, estimated at 2.6 trillion bbl. The only problem is that shale oil requires a different technology to convert into petroleum and new refineries have to be built. The cost of converting shale oil is estimated at $ 35/bbl. Now, as long as oil was in the $ 50/bbl range, this was a problem as it could slip back to less than $ 35 and render these refineries unviable. But at current prices investing in these technologies makes eminent sense and many companies are rushing to set up new plants.

Alternative technologies like wind power, solar power, nuclear energy are likely to get advanced as oil sustains its high prices. Also clean technologies being developed will ensure that demand for oil stops growing even though economies maintain their pace of growth.

When we combine all the above factors, it can be seen that oil is in a bubble zone presently. Whether the bubble goes on to assume larger proportions or deflates shortly remains to be seen. But deflate it will and stock markets across the world are picking up this signal well in advance, as markets have a habit of doing. This is the reason behind their surprising resilience.

1 comment:


Oil is still headed higher long term.