“Oil hits a new record high!” We were getting used to that, weren’t we? But as the price of a barrel ticked up, whispers about a bubble grew until they became deafening shrieks.

“It’s all speculators!” was the cry. No less a speculator than George Soros said as much to the US Senate (which, let’s face it, was a bit rich of him, wasn’t it?).

The market seemed to be getting ahead of itself, as markets are wont to do. A correction was on the cards, or so said the naysayers.

Well, now the voices of caution seem to be having their moment. In the last two days the oil price has shed $10. This morning it was around $134.

Is this proof that the oil price surge was nothing more than a simple, common-or-garden bubble? Is said bubble now starting to pop? Should oil investors — so eager to get in over the last 12 months — now start a stampede for the exit?

We’ll get to that in a sec. But first, let’s take a step back and assess.

There are two ways of looking at this. We can look up. Or we can look down. Looking up is dizzying. Looking down is plain scary.

I’ll explain what I mean.

The bulls’ case (they’re the ones looking up… naturally) is fairly straight-forward. Oil is both essential and finite. The demand for it is set to rise as the people of the world grow both richer and more numerous.

Supply is constrained — not only by the fact that there’s only so much oil in the ground, but also by logistical considerations. There’s a shortage of rigs, for example, so even if you know where to get the stuff, it’ll be a while before you can.

Great! Buy oil then! Who knows how high it will soar?

That, at least, is the view looking up. But take a look down, and we see the ground is already far below us.

Hugo Dixon of Breaking Views reckons the long-run marginal cost of producing a barrel of oil is around $50. So producers could turn a profit at, say, $60 a barrel.

It’s a long way down — get on the wrong side of market sentiment and you’ll land with a splatter.

So, is it not time to be out? I’m not convinced, but then regular readers will know oil is not my patch.

Source: Has Oil Burst Its Bubble?