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Bursting the Oil Bubble


After all the bad news reported in the general and economic media over the past several months, it is nice to focus on the message given in “Betting On Oil’s Returning to Earth ” in this week’s BUSINESS WEEK issue (July 20, 2008). Fortunately, Ed Morse predicted the bursting of the oil price bubble in BUSINESS WEEK before it actually occurred.

We all must do anything we can to continue to drive the price of oil down. It is critical to the health of our economy to knock the price down as quickly as possible. What can we do to conserve and simultaneously reduce the price of oil:

Consider buying an electric car as your next purchase instead of the oil guzzlers that Detroit and Tokyo provide us with.

Stop investing in the Commodities index funds that Mr. Morris discusses in the last paragraph of the following article.

Explore all the recent media information on alternative energy sources and learn how each of us can contribute to the usage of such alternative sources.

If you have any comments, please send them to me at
edklein@kleinsolomon.com --Edward E. Klein

Betting on Oil's Return to Earth

Business Week

When will oil's visit to the stratosphere end? Almost to a man (and woman), the oil watchers of Wall Street say the question cannot be answered, even though the price per barrel slid more than $10 on July 15 and 16. There are just too many factors propping up crude even to contemplate a dramatic decline.

But Edward L. Morse, Lehman Brothers' (LEH) chief energy economist, says the oil bubble (he dubs it Oil Dot-com) will burst by New Year's. Not only that, he predicts a plunge to about $93 a barrel. Pretty audacious as prognostications go, at a time when Goldman Sachs (GS) foresees $200 a barrel. To that Morse just replies that he's the one talking sense. "We are trying to keep our heads in a wild market," he says.

Morse is the most prominent oil contrarian on Wall Street. Before joining Lehman two years ago, he taught international monetary policy at Princeton University, was Deputy Assistant Secretary of State for international energy policy in the Carter Administration, co-founded consultants PFC Energy, and was publisher of Petroleum Intelligence Weekly. "He likes to be a provocateur," says Frank Verrastro, director of energy at the Center for Strategic & International Studies in Washington, who served with Morse under Carter. Morse has made bold predictions that Russian oil would weaken Saudi Arabia's predominance (bad call) and that scarce production capacity would drive prices up (bingo).

The 66-year-old Morse gives several reasons for being bearish. First, oil has long been cyclical. Why should the pendulum stop now? Second, Morse thinks China's go-for-broke industrial economy is slowing, leading to a "radical" reduction in its oil demand after the summer. Third, he foresees a big buildup in oil inventories this fall and, longer term, a greater flow of crude as new deepwater drilling rigs reach equipment-starved producers in the Gulf of Mexico. Finally, 13 million barrels a day of new refinery capacity will be available by 2013, making hard-to-process crudes more marketable.

With oil sky-high, Morse's position has subjected his team to ribbings from colleagues and clients alike. Adam Robinson, one of Morse's deputies, says critics accuse the Lehman oil team of "falling out of touch with the market." They're frequently asked to visit clients and "defend our view," says Robinson. The clients, he says, ask: "Why do you still believe what you believe?"

"In Front of a Freight Train"

If anyone is following Morse's advice, they are being awfully quiet about it. Bears in general "don't want people to know they are losing money" says Peter Beutel, president of energy consultancy Cameron Hanover.

Andy Weissman can tell you a bit about the psychology. An energy consultant in Washington, Weissman recently came to believe prices would fall. So he went short on June 15—and stayed short only into the next day. Instead of falling, oil rose to almost $140 a barrel on June 16. "I just…don't intend to be in front of a freight train," he says.

Yet Morse will not be dissuaded. He estimates that $90 billion of new cash has flowed into commodities through index funds since January 2006, distorting the markets. Morse figures active investors such as hedge funds will soon notice the buildup of surplus oil and suddenly go short, bursting the bubble. And with mounting signs of recession in the U.S. and a surge in American oil supplies, the price of crude did pull back sharply in mid-July. The fall could be the start of Morse's predicted slide—or just a pause in the ascent. Either way, Morse, the provocateur, is holding his ground.

Copyright 2008 Business Week

By: Brian J. Markowitz
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By: Brian J. Markowitz
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