The price of oil has risen 729.58% from its low on November 19th, 2001 to its closing high of $138.54 on June 6th. When compared to the tech bubble of the '90s and the real estate bubble earlier this decade, oil's rally is just about in between the two. As shown below, from the Nasdaq's significant bottom on June 24th, 1994 to its peak on March 10th, 2000, the index rallied 639% over 2,086 calendar days. From its bottom on March 14th, 2000 to its peak on July 20th, 2005, the S&P 1500 Homebuilder index rallied 839% over 1,954 calendar days. Surprisingly, oil's rally is now longer in duration than both the tech and real estate bubbles at 2,391 calendar days. As we all know, the tech and real estate bubbles eventually burst and fell by as much as they rose. Their declines were very similar in both duration and size as well. While significant gains in any asset class carry their own set of circumstances and positive arguments, it's hard to look at this chart and not expect to see oil's red line come down significantly at some point. The demand argument for oil might be strong, but there were no shortage of "demand" arguments during prior bubbles either.
Note: we always maintain a certain allocation to commodities in our all-ETF portfolios, with regular rebalancing to keep the allocation inline.
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Your graph is wrong. You say the oil bubble has is 2,391 days but your graph shows it is only around 1,650 days.
Posted by: Rick | June 12, 2008 at 01:23 PM
Rick,
Sorry about that. The days in the chart are trading days and the days in the text are calendar days.
Posted by: Justin | June 12, 2008 at 01:27 PM
I know every time a bubble is created someone out there always says "This time it's different." And they are always wrong.
However with oil while it may be a bubble I don't think that the correction will be on the order of the tech and homebuilders.
Why?
Oil is a non-renewable resource. That is, limited supply. The homebuilders overbuilt and overbuilt. Increasing supply. Same with tech. Profitless companies going public increasing supply of stock shares.
Less public participation (to this point in time) in the oil speculation. Homebuilders and tech were driven by massive public speculation. In tech in the stocks themselves. In the homebuilders, by house flippers.
What caused the bubble to burst? In tech, it was a growing realization that there were no profits supporting the stock prices. The fools rushed to the exits.
In the homebuilders, it was rising interest rates affecting adjustable mortgages. Tightening of credit for house purchases. Cutting off demand and leaving a large unsold inventory.
What could it be for oil? Certainly a recession (global or US0 will decrease demand temporarily. But long-term growing demand in Asia and again limited supply. It just seems that oil can't fall that far for too long.
What the high prices could do is to build in a mentality toward energy efficiency. Such that even if oil prices drop, the demand for oil won't rise to pre-bubble levels. For example, if the CAFE milage increases by 10%-20%, those vehicles are on the road for a long time. If the price oil and gas suddenly drops, people won't rush out and buy gas-guzzlers right away.
It took a long time in the 80s, for the lower price of oil and gas to result in the demand for SUVs and other lower gas mileage vehicles to arise.
I've rambled enough. I may have missed a point or two. Or gotten a detail wrong. but no one reads these anyway.
Posted by: San Fran Sam | June 12, 2008 at 01:47 PM
I dig the chart and the underlying theme. But if you look at actual home prices instead of homebuilder stocks, that boom market lasted over 10 years from Feb 96 thru Jun 06.
The point is that the oil bubble could last for many more years before popping.
Posted by: mike simonsen | June 12, 2008 at 07:51 PM
Well put BIG.
It didnt take long for the comments saying "this time it's different" to show up. At least they are willing to explain it slow for the rest of us.
Posted by: Murray | June 12, 2008 at 09:51 PM
A chart on retail gas price would be very informative. Here in the US the price is market based. The same can not be said about other large consumers, e.g China & India.
That would shed some light on why demand hasn't responded to the run up in crude.
Posted by: a reader | June 13, 2008 at 12:37 AM