Will the Olympics Mark the end of the Oil and Commodity Boom?

Like all bubbles, this one has been led by cries of "its different this time." Is it?

The commodity bubble.  You cannot discuss it without discussing China.  This emerging economy is craving commodities and assets from all around the world.  The same cries that drive every bubble are there - "this time is different".  The numbers support it.  Hundreds of millions of Chinese are moving from an agrarian world to the cities, from the village to huge Hong Kong-like cities, from being low income producers to high income consumers, from consuming 1/40th the oil of the average American to a level much higher. 

But, economies don't emerge overnight.  They don't change from one extreme to the other in an instant.   China has had tremendous growth as a result of a massive experiment - that of a free market within a totalitarian economy.  As such, the government has acted as a buffer between the economic realitiies and the wealth that local leaders have hoped to create.  At some point, the Chinese government will no longer be able to backstop the Chinese market, to subsidize oil and to maintain growth (or even the impression of growth) at such extraordinary levels. 

Markets always have cycles.  This cycle couldn't break before the Olympics.  China will certainly show its best face at the Olympics and those who visit or watch on TV will be amazed.  But, in the aftermath, everyone will realize that there isn't a second Olympics, and that the Chinese economy like every economy is cyclical.  Most importantly, we will realize that just a China has become part of a global economy, it is not immune from the current downcycle.

Our long term commodity, and obviously particularly oil problems, are real.  They are not going away, but will probably become more pronounced over time.  But, barring a supply disruption from Venezuela or Iran over the next few weeks, we may be about to get some relief.

 

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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Comments

  • soczie

    August 05, 2008

    It doesn't mark the end of the boom by any stretch of the imagination. There are plenty of factors at play here beyond the growth in China, many of which you allude to. If anything, we will get more volatility.

  • Sam Cass

    August 05, 2008

    There is no doubt that there has been a commodity bubble. You just need to see how oil prices move in the opposite direction of the dollar. This is not a supply and demand reaction.

    It's just like in California when Enron manipulated the electricity market. Then, everyone was screaming that they needed more power plants and that demand was outstripping supply. Turns out it was just a bunch of speculators making a run.

    Worldwide demand is not growing as much as you think. With the US in a near recession and growth slowing in Europe, oil consumption may take its first worldwide dip in quite some time.

    Longer term there are plenty of alternatives coming onto the market from Canadian oil shale, to biofuel, to nuclear. Energy efficiency will also help.

    In 2001, analysts said it was inevitable the Nasdaq would go so 10,000 in the next couple of years. Yeah, that really happened. House prices were supposed to go up forever also, remember. Limited supply of housing and insatiable demand. We're in an oil bubble and the question is not if, but when it's going to pop.

  • Sam Cass

    August 05, 2008

    My remark is true for oil but also for other commodities.

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