Rocketing Oil Price A Bubble

George Soros: Rocketing Oil Price Is A Bubble

By Edmund Conway, Economics Editor | 10 June 2008

Speculators are largely responsible for driving crude prices to their peaks in recent weeks and the record oil price now looks like a bubble, George Soros has warned. The billionaire investor's comments came only days after the oil price soared to a record high of $135 a barrel amid speculation that crude could soon be catapulted towards the $200 mark. In an interview with The Daily Telegraph, Mr Soros said that although the weak dollar, ebbing Middle Eastern supply and record Chinese demand could explain some of the increase in energy prices, the crude oil market had been significantly affected by speculation.

"Speculation... is increasingly affecting the price," he said. "The price has this parabolic shape which is characteristic of bubbles," he said. "We face the most serious recession of our lifetime." The comments are significant, not only because Mr Soros is the world's most prominent hedge fund investor but also because many experts have claimed speculation is only a minor factor affecting crude prices. Oil prices stalled last Friday after their biggest one-day jump since the first Gulf War earlier in the week.

At just over $130 a barrel, the price has doubled in around a year, causing misery for motorists and businesses. However, Mr Soros warned that the oil bubble would not burst until both the US and Britain were in recession, after which prices could fall dramatically. "You can also anticipate that [the bubble] will eventually correct but that is unlikely to happen before the recession actually reduces the demand… The rise in the price of oil and food is going to weigh on and aggravate the recession."

The Bank of England recently warned that soaring energy and food costs would push inflation above its target range for most of the next 18 months, making it more unlikely that it will cut borrowing costs soon. Mr Soros, who lays out his thoughts on the current crisis in his new book 'The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means', warns Britain is facing its worst economic storm in living memory, dwarfing those of the 1970s and early 1990s, with both a housing slump and serious recession.

He said: "The dislocations will be greater [than in the 1970s] because you also have the implications of the house price decline, which you didn't have in the 1970s." The warning undermines predictions that Britain will suffer only a brief and relatively painless recession, unlike the precipitous dives of previous years. Mr Soros also warned that the Bank of England's inflation report represents a "Faustian pact", obliging it to keep interest rates high to control inflation, even as the economy is starting to slump. "You had the nice decade," he said. "Now that is over and you are in a straitjacket."

ߧ

Normxxx    
______________

The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.
The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.