Bubblicious?

One doesn't like to hear that oil is hitting new intraday highs even as there are reports that the Saudis are preparing for a production increase.

I'm still trying to pin down in my mind how much of this is speculative. Obviously, part of it is simply the fall in the dollar, and part of it is demand, but prices shouldn't be climbing this quickly with essentially no new information. When changes in prices last a long time--upwards or downwards--they start feeding on themselves; people begin to think of rising or falling prices as a permanent new norm. That makes bull marketers willing to pay higher prices now, on the assumption that prices will be higher still in the future. But I don't need to tell you this; you all know someone who's bought a house in the last five years.

Ultimately, of course, this is folly. It is not enough to think that prices are going to rise; you have to think that they will rise more than everyone else thinks they will. Otherwise, the future appreciation should already be fully priced into the current asset. Failure to understand this--the belief that you can actually make a profit based on a certain rise--is the root of all bubbles.

On the other hand, sometimes the speculators are right. Perhaps we've simply been underpricing oil for too long, and this is the correction. Only time will tell. Which is why you won't catch me investing in the commodity markets any time soon.

Presented by

Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Video

What LBJ Really Said About Selma

"It's going to go from bad to worse."

Video

Does This Child Need Marijuana?

Inside a family's fight to use marijuana oils to treat epilepsy

Video

A Miniature 1950s Utopia

A reclusive artist built this idealized suburb to grapple with his painful childhood memories.

Video

Why Principals Matter

Nadia Lopez didn't think anybody cared about her school. Then the Internet heard her story.

More in Business

Just In