The Bubble that Must Pop

Oil has rocketed past previous highs. In the late 70's, oil peaked at around $70/barrel in inflation adjusted prices.

At our new high of $135/barrel, we are 2x higher than any point in history. This has translated into $4/gallon gas in the US, and $10/gallon in France.

When reporters ask the oil "experts", they justify these painfully high prices with the infamous quote:

"This time its different."

Sound familiar? The dot.com frenzy and the housing boom come to mind. It seems that when you hear this saying, it is time to head for the exits.

But... the weak dollar, the rise of China and India, the Iraq war, and oil supplies unable to match demand...

Another reason oil prices has jumped is due to speculators bidding up the price of oil futures. If these speculators sense weakness in oil, there could be a stampede towards the exits. No less an authority than George Soros has presented such a scenario.

Oil prices met little resistance at $100/barrel. However, at $135/barrel and more importantly $4/gallon in the US, most experts and consumers agree that these prices are unsustainable.

It wouldn't be surprising to see the oil market give back the recent gains as quickly as they obtained them. The question seems to be when will the market correct, and where will the prices settle down. I would guess that $70 to $80/barrel might be a more natural and healthy level.

For the sake of the global economy, the sooner this bubble pops the better.