The Bubble Bursts

Not that bubble.

IT IS FINALLY HAPPENING–the much-predicted bursting of the bubble. Surprise: It is the gasoline price bubble that has burst, not the house price bubble. Prices of regular unleaded last week averaged about $2.34 per gallon, below the levels prevailing immediately before Katrina struck, and well below the $3.04 peak reached in early September. Crude prices also headed down from the $70 per barrel level to $57, a six-month low.

Bear in mind the usual pattern of bursting bubbles and big oil could be in far more trouble than just having to answer to a Senatorial Inquisition. When bubbles burst, markets don’t usually just correct, they overcorrect. They typically stay overcorrected for a long time. As volatile as the oil market has been the last several years, with every weather forecast, planned refinery closing or tanker captain with a head cold resulting in big price moves, this market may not be done overcorrecting. Windfall profits tax? Maybe more like a bailout of domestic oil in the months and years ahead, especially as global production picks up as predicted by the credible forecasters (not the Malthusian Peak Oil religionists).

Stack on top of the usual overcorrection the fact that at least a few American consumers may just have changed their habits and you have a serious long term demand problem that could keep oil low even longer. Just as an example, though we use natural gas not heating oil, the temperatures here were 27 degrees and 22 degrees the last two nights and our furnace didn’t run. At all. Not a 10 or 15% reduction in demand, but on the coldest nights of the year so far a 100% reduction. This year our natural gas furnace is only running on nights that are too warm to start the woodstove. The savings that’s likely if our heating bill ends up lower than last years, as looks likely, is going to added insulation and/or a higher efficiency wood stove. I’m (obviously) not an envirofanatic, so if I’m doing this, I know other “normal” consumers are as well.

The length and depth of the slump will also depend on whether Detroit starts listening to the growing group of consumers who would like reasonably efficient small to midsize cars or perhaps even uses technology to do what they’ve refused for the most part and actually start producing reasonably efficient SUVs. Hybrids not necessary – bring back the Ford Escort – nearly 50 MPG in 1992 with a standard gasoline engine and a 5-speed transmission in a car that had a lot of “getup and go” for a non-sports car and cost under $8,000. Whatever Ford forgot how to do in the intervening 13 years needs to be relearned. Whoever discontinued what they were billing as the “bestselling car in the world” until the day they stopped making it probably had as much to do with Ford’s cash problems as anyone. But now I’m off on an entirely different rant.

PREVIEW: The Bubble Bursts and thanks to Kevin for emailing me the link.

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