The oil bubble: bursting in slow motion

oil bubbleBubbles are created when buyers overpay in the hope of finding a ‘greater fool’ to sell to later.

This has happened lately in the Chinese stock and property markets. Apartments were built on borrowed money, bought and left empty as prices rose, in the hope they could be offloaded later on to a greater fool before the bubble burst. The same approach was applied in the Chinese stock market, but investment there has not been matched by the hoped-for growth in domestic demand and consumption, and this week that bubble burst. The effects have been felt in markets worldwide.

Meanwhile the oil market is at the opposite end of its lifecycle, not growing but shrinking. Still the principle of the greater fool applies.

Though still tiny in comparison with the overall energy market, generation of renewable energy and calls for fossil fuel disinvestment are both growing fast.

These, together with climate change, the finite nature of oil stocks (aka increasing costs of recovery), and the falling price of renewables make the switch away from fossil fuels inevitable. The only questions are how long the changeover takes to happen, and who will make how much money during the transition.

The Saudis seem to have decided they have more oil than the world needs simply in their own reserves. They say they are prepared to offer oil at almost any price: they would rather pump their oil at $40 or $20 per barrel than leave it in the ground where it is worthless.

While Shell moves to drill in the Arctic (“It’s just too big a prize. We can’t afford to leave it all there.”), at least one oil major, Total, agrees with the Saudis. This week it stepped up the sale of its North Sea assets, selling its interests in two pipelines and an oil terminal to a company that is better structured to manage them.

The deal is tiny (only £585m) but the FT says the deal could lead to “a wave of dealmaking” in this high-cost region, where a growing number of fields are now making a loss.

Total says its deal is not seeking a ‘greater fool’ but part of a strategy of “active portfolio management” to unlock value from a range of infrastructure assets. And to be fair, transferring ownership to a specialist company allows them to extract the oil more cost effectively.

But in the medium term, unlike the Chinese stock market, the world oil market is a bubble that is bursting in slow motion.


(Global property is following a similar pattern.)

Photo By Dan Brickley via StockPholio.com

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