Black Swan in the Oil Fields

Black Swan in the Oil Fields

Commodity prices are rising.

Fast.

Although this is happening across the board, we notice the pain of oil the most. I mean, how can you ignore a giant number sign that pops up every other block to remind you that you are overpaying for gas?

The most important question, imo, when trying to determine whether this is a bubble brewing or not is looing at whether the prices are black swan prone. That is, whether the price of oil is subject to gravity or not. Is it scalable? Has black swans happened before? How come?

These are the conclusions that I came to:

Oil themselves are not black swan prone - they are tied to gravity. It is not possible to all the oil reserves to burn up or vanish, due to its physical nature.

it is arguable that terrorist organization could take control of oil fields. How much can you take control? If they took over the largest oil producing nation in OPEC, Saudi Arabia, it will put significant pressure on the supply, but doesn't mean its going to vanish. Also, with the armed forces in iraq, America can help out. Also, Canada is the biggest net exporter of oil to US, not Saudis.

Oil prices are indeed black swan prone - This is a concept that is a little removed, but it somehow worked out. Let me draw some parallels.

Business themselves are not black swan prone. However the stock market, in which the papers representing ownership of companies, are black swan prone (such as the crash). Therefore, it would make just much sense for the papers representing the ownership of oil barrels to be prone to black swan.

This effect coems from the fac that money itself is black swan prone - money MUST be looked at as if it's a commodity. You don't BUY oil with money, you TRADE oil with money. It's just a ratio of two numbers.

This means that there is a chance for a oil price drop, or a spike. I'll let you be the judge of which is more possible.

Oil production may be black swan prone

Sadly, 1/3rd of world's oil supply are controlled by OPEC.

Happilly, prices are up, making other means of extracting oil (deep sea oil, oil shale just to name a couple) my idea is that this will remove our dependence from OPEC.

Just to put this into perspective, U.S alone has over ONE TRILLION barrels of oil in oil shale. The estimated cost of production is around 40 dollars a barrel, althuogh it does fluctuate wildly.

Overall Idea

It is definitely positive that the oil prices of today is inflated - weak dollar, high inflation (a lot higher than we would like or hear about) a lot of fund managers putting money into the speculative market, whatever it may be, ther eis no justification for the oil prices to do a triple fold in 3 years. Has the production gone down by 300%? has the deceleration of production gone up by 300%?

However, to care enough about it, we must know if this is black swan prone - or even grey swan prone. The biggest theme is "oil crisis" and how we don't have enough of it, and how we are using way too much although consumption has gone down "dramatically" within the past few quarters.

Don't get me wrong, all this Oil Crisis media is GOOD. It drives down consumption even more and gets people panicked, which makes black swan occurence even more likely. But although they do talk about alternative energy sources, there aren't many that are still predicting downfall in oil prices - they dropped off after investment banks up-ed their expectation. So, how far? We'll see about that.