The Next Bubble is Already Inflating

These days it seems like oil prices have broken all economic relationship with reality. Oil prices continue to soar and have repeatedly broken the all time price records over the past several days. Is this a question of too much demand? Is supply falling? Not according to this article from CNN:

"In its weekly inventory report, the U.S. Energy Information Administration, a government agency that measures oil and gas supplies, said crude stocks rose by 6.2 million barrels last week. Analysts were looking for a rise of 1.6 million barrels, according to a Dow Jones poll. Gasoline supplies rose by 1.7 million barrels, significantly more than the 300,000 barrel rise that analysts had forecast. The government said gasoline stockpiles are well above average for this time of year."

So why are oil and other commodities such as gold, wheat and others going through the roof? Could it be that this is the next economic bubble? Could it be that investors spooked by the falling stock markets, troubled by the unstable credit and money markets, and losing faith in the crashing real estate markets are all of a sudden flooding into this new asset class? That's what I think is going on.

Don't get me wrong. I have previously stated that I am very much in favor of high gasoline and oil prices. I have even advocated here for aggressive carbon taxes, and this spike in oil prices is effectively a form of taxing carbon emissions. This unintended tax on pollution appears to be having the desirable effect. From the same article:

Gas demand much lower. Still, oil's rebound is somewhat surprising given continued low demand for gasoline. Gas demand held steady last week, still averaging 9.1 million barrels per day over the past month. Demand is 0.4% higher than the same period last year.

The EIA revised its U.S. oil and gasoline demand forecasts downward Tuesday, citing a slow economy and high oil prices. The government agency now expects oil demand in the United States to grow just 40,000 barrels a day, or 0.2%, in 2008, down from 0.5% or 100,000 barrels a day in its previous forecast.

Since 2001, oil demand has grown an average of 0.9% annually or 175,000 barrels a day. In 2007, oil demand was statistically flat, growing only 10,000 barrels a day.

Gasoline demand has grown an average of 1% annually over the past six years, but this year's demand for gas is expected to increase only 0.3% from last year, down from last year's annual growth of 0.4%."

High oil & gas prices are prompting folks to drive less and to seek cheaper alternatives. High energy prices are also making renewable energy more economically viable. Heck, even one of my colleagues who drives an SUV to work - a 45 mile commute each way - told me last week that he is seriously considering working from home for a couple of days a week, or even getting a (gasp!!) smaller car. Of course, I would be happier with a direct carbon tax - one that would keep our tax dollars in the U.S. instead of exporting our money to our terrorist-supporting "allies" abroad. Such a tax would also be imposed on other forms of carbon emmission (in particular coal burning power plants). Nevertheless, high oil prices are a decent substitute with the prospects for a half sane energy policy coming out of Washington being as dim as they are.

But, I digress. The point of this post is to highlight the fact that money is flowing into commodities at a rate that has very little to do with actual demand or with economic reality. So, while I hope that we continue to see high energy prices in the coming years, there is a distinct possibility in my opinion that commodity prices will come crashing down to earth at some point. Think the stock market is scary? If you are putting a large percentage of your portfolio in commodities, it is possible that you are in for a much scarier ride when that little bubble finally pops.