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Is the oil bubble ready to burst?

(China Daily/Agencies)
Updated: 2008-06-25 10:48

The dotcom boom and bust shook the world economy almost a decade ago, last year the credit crunch seized up financial markets, now an oil price bubble may cause more havoc.

A rapid price surge, big investment inflows and a chorus of bullish analysts are some of the characteristics of the oil market that have echoes of the Internet boom of 2000.

In the dotcom era, securities analysts and strategists talked of a new economic paradigm created by the Internet and high tech companies. It didn't matter that many "new economy" companies had barely any revenues or profits.

This time analysts and economists point to a structural shift in the price of oil. Supply will struggle to keep pace with huge demand growth from China and India for years to come.

The word bubble has started to appear regularly in investment bank research and in the media, given oil's virtually uninterrupted climb so far this year.

"Bubblemania" was the title of a note published by Barclays Capital earlier this month.

If oil were to reach $150 a barrel, it would bring the market capitalization of oil and gas equity in the S&P 500 US stock market index to more than 25 percent, exceeding the valuation of technology stocks at the peak of the dotcom bubble, Deutsche Bank estimated in a research note.

"The obvious parallel in our mind is we think oil is overvalued where it is priced based on the underlying fundamentals, which is a parallel to the dotcom boom and bust," said Michael Waldron, oil analyst at Lehman Brothers.

Oil has doubled in price in the past year and has climbed 40 percent since the start of 2008 to almost $140 per barrel.

The NASDAQ stock market index, where many dotcom companies listed, hit a peak of more than 5,000 in March 2000. But by the end of that year it had halved in value.

Some predict a similar fate for oil.

"If there is a genuine downtrend in industrial growth, there is going to be a fall. If that happens then you can expect a fall as sharp as the rise has been, maybe even sharper," said Sunjoy Joshi, a former Indian oil ministry official now at the International Institute of Strategic Studies in London.