$100. And kept going. The oil fever that had struck Cushing, Oklahoma, after 1912 was coming back in 2008 in the form of a global epidemic that was sweeping the planet. 14
It was in the last part of 2007 and around the beginning of 2008 that the forces driving the oil price up shifted decisively from the fundamentals into something else—“hyperappreciation in asset prices.” Or what is more colloquially known as a bubble.
“GOING TO EXPLODE”
Even the biggest, most sophisticated institutional investors were embracing commodities. In February 2008, CalPERS, the California State retirement fund, the largest pension fund in the United States, announced that it now deemed commodities part of a distinct asset class. As a result it was going to increase its commitment to “commodities” as much as sixteenfold. “The actual importance of the energy and materials sector we believe is going to explode,” CalPERS’s chief investment officer had previously explained.
Gasoline prices in the United States finally broke through the $3 a gallon barrier in February 2008 and headed higher. By April 2008, 70 percent of Americans described higher gasoline prices as a financial hardship and blamed “greedy oil companies for” “gouging the public.” A month later gasoline breached $4 a gallon. The public was agitated and enraged; gasoline prices dominated the news; they looked to become an issue in the presidential campaign. They had already become a subject of a host of congressional hearings. In a deliberate replay of the political theater that had followed the 1973 oil crisis, oil company executives were summoned to congressional hearings, made to raise their right hands and put under oath, and then interrogated for hours. But now the executives were no longer alone. Fund managers and executives from the financial industry were also called to testify. The Commodity Futures Trading Commission, which regulates futures, was charged with assessing whether new controls on speculators were required.
Still the drumbeat of predictions continued, as though casting and recasting a spell. A Wall Street analyst predicted that the coming superspike made $200 oil “increasingly likely” within the next two years.
That forecast struck terror into the heart of the airline industry, which was reeling from the effects of the surge in jet fuel, made even worse by constraints in the refining system. “Scary” was the one-word reaction of David Davis, Northwest Airlines’ chief financial officer at the time. “We kept saying to ourselves that the price had to fall back, but it kept going up. The market was looking for any opportunity to take the price up.”15
“YOU NEED BUYERS”
In the middle of May—with oil prices now the top domestic political issue in the United States—President George W. Bush went to Saudi Arabia. There at a meeting at the ranch of Saudi King Abdullah, Bush talked about the risks to the world economy of rising prices. He urged the Saudis to lift output to help cool the fever. He did not get the answer he wanted. The Saudis had already upped production by 300,000 barrels per day but were having trouble finding customers. “If you want to move more oil, you need a buyer,” said Saudi petroleum minister Ali Al-Naimi. After the meeting, the president’s national security assistant Steven Hadley ruefully commented, “There is something going on in the oil market that is much more complicated than just turning on the spigot.” There was no relief after Riyadh. The price of oil kept going up. “One concern that has prompted traders to bid up oil prices,” reported the Wall Street Journal from Jeddah, “is Saudi Arabia’s long-term production capacity. Some analysts believe the kingdom’s best fields could hit a production peak in the years ahead.”
At almost exactly the same time, one of the most prominent Wall Street oil analysts added to the fever with a report declaring that a “structural re-pricing” of oil—reflecting long-term expectations for shortage of oil and “continued robust demand from the BRICS”—meant a “structural bull market” on top of the “super cycle” that would take prices “to ever-higher levels.” The surge continued. By the end of May, oil prices had hit $130. New cars sales in the United States were plummeting.16
“OIL DOT-COM”
A few contrarian voices on Wall Street warned that these prices had become seriously divorced from reality. Edward Morse, a veteran analyst, in a paper titled “Oil Dot-com,” wrote: “As during the dotcom period, when ‘new economy’ stocks became popular, a growing band of Wall Street analysts who are significantly raising” their forecasts were “partially responsible for new investor flows, driving... prices to