by Jerry Gordon, New English Review (June 2008)

“I can calculate the motions of the heavenly bodies,
but not the madness of people”
—Sir Isaac Newton, comment on the South Seas Bubble of 1720

Many Americans this Memorial Day experienced sticker shock on steroids at the gas pump. It now costs $4.00 a gallon for regular unleaded gas in many areas of the country. Here in Florida’s Panhandle, even with our economical four cylinder family car, it now costs $60.00 to fill up our gas tank weekly. By contrast in January, 2007, with an average price of $2.21 a gallon, according to the Energy Information Administration, it cost $33.15 a tank full. This is almost a doubling of gasoline costs in 18 months. The price of the US crude oil futures on the New York Mercantile Exchange (NYMEX) more than doubled over the period from May 1, 2007 to May 23, 2008: $60.00 versus $132.19.

Texas oil patch billionaire hedge fund manager T. Boone Pickens says that oil futures could soon hit $150 a barrel based on his estimates that daily worldwide demand of 87 million barrels per day (mbd) exceeds current capacity of 85 mbd. Goldman Sachs energy analyst, Arjun N Murti whose earlier prognostications have been on track, suggested that crude oil prices might easily reach $200. In many parts of the US, this spike in oil prices has caused major adjustments in family budgets and for the first time significantly curtailing driving and holiday vacation plans this summer. Clearly an oil bubble has rapidly emerged to rival that of the dot.com stock bubble of 1999-2000, and the housing bubble and subprime mortgage credit crisis of 2007-2008.

We got a peek at the emerging oil commodity bubble during a luncheon club talk by Walker Todd here in the Florida panhandle. Todd has been a consultant to both the Cleveland and New York Federal Reserve Banks and has done consulting for the World Bank. He writes periodically for the American Institute of Economic Research in Great Barrington, Massachusetts. Todd’s topic was “Oil, Gold and Commodities.”

Todd drew the luncheon audience’s attention to two indices: oil future prices using the US oil futures benchmark of West Texas Intermediate (WTI) and the exchange traded dollar index. He noted that the WTI crude oil futures had spiked over 35% in less than five months since the beginning of the year. While the exchange traded dollar index, which had depreciated in five years from a high of 120 to less than 74% at the beginning of 2008 had dropped less than one percent to 73%. The inference was that something other than basic Economic 101 supply and demand dynamics was at play. My wife a former university professor in international economics commented: “looks like speculation.”

She was not alone. AAA spokesman Geoff Sundstrom told CNN: “We have to wonder if the foundation behind these very high prices is nothing more than speculation.”

But there is something more afoot: the return of possible “stagflation.” This is a term we haven’t heard in years since the oil spike in 1979 to 1980 produced in the wake of the revolt in Iran that established the Islamic Republic with its rising nuclear terrorist threat to the West. (Continue Reading this Article)