The Newest Bubble: Oil

The Newest Bubble: Oil

With oil prices flirting with the $100-a-barrel mark, it's natural to think this might be a reflection of fundamental market forces. You know the story: global supply that has peaked and is quickly depleting, with demand soaring thanks to the insatiable appetites of China and India.

Too bad it's not true.

The fact is that supply of known reserves is 1.4 trillion barrels, which is larger than it has been at any time in the last 30 years. And thanks to improved technology, the recovery rate from reservoirs has already increased from 20 to 35 percent, on its way to 50 percent. In short, the oil's there, if the people who own it would only be willing to spend the money to get it.

The other thing to know is that demand is not taking off. According to industry estimates, demand actually fell in the United States last year and is growing globally by less than 1 percent. Higher prices are a big culprit, encouraging conservation or a switch to alternative fuels.

So what's behind the soaring prices? Certainly not cost. The oil itself is God's gift, and the cost of pumping it from the ground ranges from about $4 a barrel at some of the oldest Saudi wells up to $30 a barrel to extract a barrel from tar sands.

No, the only explanation for this recent run-up is speculation. Since the summer, open crude oil contracts held by financial players are up 50 percent. And in futures markets, if enough people are betting that oil will be worth $100 a barrel, it can easily become a self-fulfilling prophecy.

GM and the Corporate Tax

General Motors last week announced a one-time write-down of $39 billion for tax credits it was carrying on its balance sheet because it concluded it would not earn enough profit over the next several years to put the credits to use.

That's a sad commentary about GM's view of its earnings prospects. But it may be an equally sad commentary about a corporate tax code that is so complicated, and creates so many tax dodges, that a company might have actually earned $39 billion and been able to pay no taxes on it.

Rupert's New Director

We now have the latest chapter of the melodrama surrounding the sale of the Wall Street Journal by the hapless Bancroft family.

Under terms of the merger agreement signed in August, the family had 30 days to nominate a candidate to serve on Rupert Murdoch's News Corp. board and protect the journalistic integrity of the family jewel. But what with summer vacations and the lingering divisions left over from the divisive decision, the deadline somehow managed to slip by. In the ensuing to and fro, the family suggested two respected journalists, along with several members who had been outspoken supporters of the sale, but all were rejected. Instead, Murdoch settled on Natalie Bancroft, a 27-year-old aspiring opera singer who has spent most of her adult life in Europe.

At first blush, it would look to be a curious choice. In an e-mail to fellow family members over the summer, Ms. Bancroft opposed the sale to Murdoch, arguing he was "not the right person" to own the Journal. When the final vote was taken, she was sailing off the coast of Corsica.

But it seems Ms. Bancroft has two other characteristics particularly valued by Murdoch. As a female, she will bring some much-needed diversity to News Corp.'s notoriously all-male board. She also has little familiarity or experience either with business or journalism. In short, the perfect choice for a domineering chairman looking for a pliant and charmable outside director.

"A fiasco," is how one family member characterized the episode in an e-mail obtained by Journal reporters. "No wonder we lost Dow Jones."