End of the Oil Bubble?

For those of us who've read Chris Farrell's thesis that multiple bubbles are good for the economy - get ready to have some fun!

Farrell says that multiple bubbles (tech, home prices, etc.) allow for low-cost experimentation that can lead to economic transformation. Other writers have argued as well that all our IRAs and 401Ks create a huge hedge fund that essentially needs a place to go...they all tend to go somewhere popular together, that starts to create a bubble, the bubble pops, and then they go somewhere new. After the popping of the technology bubble, money went into home prices, and most recently, some people think that all that speculation has gone into the price of oil.

Everyone thought home prices had nowhere to go but up, until...what? Until the economy was doing well enough for the Fed to start raising interest rates. Rates hit a level that started discouraging some buyers. Other rates on ARMs started resetting higher, making the now infamous subprime loans into a house of cards. The cards started falling - then watch out: money streamed out of housing faster than you could say boo.

The same thing may have started happening to oil prices this week. Some suggest oil prices may be significantly inflated due to investor speculation (hmmm, similar to home prices). So perhaps, now, we have a bubble that might get us to finally think about quitting our oil dependency: the "transformation" Farrell loves. But now, the economy and stock market has gotten weak enough that we may have hit another tipping point, and oil prices, which have started to fall, may soon have a route....

One big difference, though: we're building housing all the time, but no one's making any more oil. Oil prices may be inflated now, but as supplies dwindle and demand increases, they have no where to go but back up. And perhaps to Farrell's consternation, this bubble might pop before it's had any real time to do its transformational work.

But a bubble it may be, nevertheless. The immediate result may be a huge drop in the price of oil (for now), and a reviving of the economy (for now). Some say oil could blow out to $80/barrel pretty quickly. If that happens, all that money will have to go someplace new: the market, or alternative energy, or sunflower seeds. And our urgency to develop alternative fuels may unfortunately dissipate. This rapid run out of oil could leave our economy where? A sudden reprieve from our inflation, a gradual healing of the economy as the stock market starts to turn up. But where is the transformation that Farrell predicts? And wont the high prices already have done damage without having time to spur us to good? Oil at $80/barrel will hardly inspire us to be more fuel efficient or move our grid, as Al Gore wants, to renewable energy. And the next time oil spikes, it won't be due to speculation.

The problem could be that the bubbles are starting to come and go too quickly - like a wild night at a Vegas craps table. The only people transformed by this are those in the house, raking in a percentage. The bubbles might pick up speed, getting into one thing after another and blowing them up before they can truly transform. How will our economy handle that? Probably with its usual schizophrenic confusion. And where will the bubble popup next? If you can guess that, and how long it'll last, you probably stand to make some dough....before you lose your job.