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When tech stocks were rising fast and drawing in numerous active but inexperienced investors, two problems arose. First, most had experience only with rising stocks so thought of each leveling off or dip as the market "catching its breath" for the next climb. As new investors experienced gains and experimented with leverage, they realized how much more they could have made had they leveraged earlier investments. And seeing their portfolio gained most with tech stocks, they poured even more into stocks in order to make even more.

For most though, it was much less clear how to "invest" in falling stocks, or how to leverage such bets. To what extent did this asymmetry about speculation contribute to the unfortunate final year or so of the dot.com boom? This is not so much a question of optimists vs pessimists, but one of rates of growth. Even optimists prefer stock prices not rise faster than reasonable present values of future returns. So tech stocks finally crashed wiping out many who just wanted to invest in the future and hadn't thought market valuations could be so far off (Sun Microsystems stock dropping 90%, for example).

Next came the housing crunch. Baby-boomers burned by the dot.com crash turned to "safer" investments in housing. Tens or hundreds of thousands purchased larger homes or a second or third home, using modest down payments for easy leverage. I thought housing prices were way high when I moved to Seattle in 2003, so I chose to rent. But prices went way higher, and anyone then speculating in housing doubled and tripled their money. But it is much easier to buy five or ten houses as investments or speculation than it is to sell five or ten houses on speculation. So again the asymmetry pushed prices up. People who felt housing prices were too high could sell houses they owned, but could not easily sell houses they did not own.

Now, as housing prices stagnate and drop, investors and speculators will lose much, though homeowners will lose only the imaginary valuations of the last few years. Those burned but not educated by tech stocks and housing, are looking for another "hot" investment. How many have turned to energy stocks and oil?

Again, for new investors, it seems like oil prices can only go up, and stabilize just to catch their breath on the inexorable march to 100 dollars a barrel and beyond. Environmental investors are on board too, and perhaps think of their oil and energy bets as helping "save the Earth" as well as sticking it to SUV owners (not to mention the hope of making big bucks for themselves, of which they silently pledge to donate a portion to eco-charities).

Many of course expect oil prices to fall, especially at some future point when the U.S. government stops threatening to bomb or invade major oil-producing countries. But still, the oil skeptics are overwhelmed by the legions of newby investor-speculators betting on higher and higher oil prices.

Apart from the media misinformation on oil scarcity and peak oil, is there an asymmetry with investment tools for oil that tilts oil investments toward prices increases, as seemed to be the case with housing and tech stocks? Or is it just as easy for the average investor to bet on oil prices falling as it is on rising prices?


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5 Comments so far

  1. Tony on November 2, 2007 1:08 pm

    Based on my 30 years experience finding and producing oil and natural gas, I have little doubt that the world has reached peak oil. It’s misinformation to suggest otherwise. Oil prices are arguably a little frothy right now, but in the long-term prices will reach and far exceed $100 per barrel. The only thing that can cause a sustainable decline in oil prices is a decrease in global demand brought on by a severe global recession.

  2. Acetrader on November 2, 2007 3:05 pm

    OIL is rising due to relentless demand in China and India not the one lot speculators….

  3. Jeff Baatenberg on November 2, 2007 4:23 pm

    The misinformation with regard to peak oil is the lack of information. Oil production has clearly peaked and entered irreversible decline. Anyone who suggests otherwise has not heeded the chair’s admonition to count.

  4. Dan Sturzenbecker on November 3, 2007 10:50 am

    I don’t see the asymmetry. If oil companies think the price is way too high, they would be stupid not to sell their future production forward to lock in the absurdly high prices, thus increasing supply. A similar argument could be made for oil consumers such as airlines. They would cease buying oil for future delivery if prices were absurdly high, and such action would reduce demand.
    I also think it is dangerous to attach moral values to the investment choices of others. I seriously doubt that there are many speculators out there buying oil to “stick it to” SUV owners since one’s primary goal in any investment is to make money and the other side of the trade would be ready and waiting to “stick it to” you.

  5. Greg Feskoe on November 3, 2007 3:37 pm

    I agree with Mr. Rehmke. First we must establish what kind of timeframe we are referring to. I don’t think it would be absurd to suggest that oil will be $400/500 a barrel in 20 years, but that is not what we are talking about. I think the last bubble of this decade is going to be energy.
    I haven’t watched the show lately, so tell me if I’m wrong, but I would think a lot of the Jim Cramer watchers and amateurs are weighted heavily in oil stocks. They don’t have the sophistication to understand the importance of the low crack spreads etc.

    They are starting to feel the heat now with Oil companies reporting bad earnings. I think oil is more likely to snap back down to $80 versus it going to $120. I also think the FOMC is done cutting, this along with good economic data from the US (example: the recent Non Farm Payroll) I think the dollar will start to stabilize, causing a drop in Crude. If China’s bubble bursts in the midst of a stabilizing USD or while the FOMC is hiking rates later on, we could see Crude slide to $65/$60.

    Though, I think the energy bubble is going to be less of a shock than the technology or housing bubbles, it is going to be the people investing in the windmills and alternative energy who are really going to be left “holding the bag.”

    So I think the way to profit from this is to start shorting the Canadian dollar. I would love to be on the other side of your (the people who commented) long crude positions as well. I will buy a big SUV with the profits and maybe even put some chrome on the wheels. Just kidding.

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