Saturday, May 31, 2008

Making sense of the Oil bubble

Prices of oil cannot continue to rise and sky is not the limit as most speculators would have you believe right now. Yes fossil fuels reserves are limited but human ingenuity would find a way to use alternative energy sources. Already a lot of ways which were not economically viable earlier are now profitable because the price of crude is way above the breakeven mark for them. As for limited refining capacities there is always a cycle of over capacity and shortage similar to all commodities.

Guess it is easier to return to these reasons when the price trend reverses than now. Till then keep looking at the following reasons for price rise and take your pick:
  • Limited fossil fuel reserves
  • Rising crude demand due to rapid demand increase from emerging economies
  • Limited crude refining capacity leading to short to medium term fixed supply
  • Cartelization from OPEC/ hoarding
  • Speculation / Traders playing on uncertainty due to all of the above / Psychology

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