Researchers Didier Sornette and Ryan Woodard of ETH Zurich in Switzerland and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai, China think so:

In their analysis, the team gathered data on oil prices since 2005 in US dollars, euros, and other major currencies (to confirm that the results are not a consequence of the weakening of the US dollar). They also examined worldwide oil supply and demand data, specifically investigating the extent of increased demand from emerging markets such as China and India.

Then, the researchers analyzed this data using a method that Sornette’s group started to develop in 1996 that identifies bubbles as “transient superexponential regimes” – basically, areas of rapid growth that occur due to a source of positive feedback within the system. The scientists looked at the data in the context of three different models, and all three models revealed the existence of a “log-periodic power law,” in mathematical terms – in other words, a bubble. In economic terms, the researchers explain, a bubble refers to a situation in which expectations of future price increases cause prices to temporarily rise without justification from fundamental valuation.

…

A comparison of supply and demand showed that, most recently, supply has been exceeding demand by more than a half million barrels per day. Meanwhile, the price continues to increase. Since it appears that the supply-demand balance has only a small effect on the price of oil, the researchers suggest that a major effect lies elsewhere. They point out several reasons why speculation, fed on rumors of rising oil scarcity, may be the positive feedback causing high oil prices.

As one motivating factor, investors could be searching for a new high-return investment following the collapse of three recent economic bubbles in the US (communication technology, which peaked in 2000, real-estate in 2006, and sub-prime mortgage lending in 2007). Also, speculation may have increased due to the deregulation of oil futures in the US in early 2006, corresponding to the fluctuations that occurred shortly after that time. Investors may also be concerned about a weakening US dollar, which may encourage protective hedging against future oil price increases.

h/t instapundit

On a closing note I am going to plug Radio Free Moronsphere. It’s a new internet station I have set up. If you have podcast suggestions or a playlist that you would like to here you can contact me thru the station page.

This entry was posted on Tuesday, July 8th, 2008 at 9:30 pm by Chad and is filed under Brilliant, but uncategorizable. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.