Some Compare Oil-Price Surge to '90s Dot-Com Rally

The rally that drove oil to a record $139.12 a barrel recently surpassed the gains in Internet stocks that preceded the dot-com crash in 2000.

Crude, which has reached 28 record highs this year, rose 697 percent between the beginning of its rally on the New York Mercantile Exchange in November 2001 and its record intra-day high June 6. The last time a similar pattern was seen in equities was eight years ago, when Internet-related stocks sent the Nasdaq composite index up 640 percent to its highest level ever, according to data compiled by Bloomberg and Bespoke Investment Group.

The Nasdaq plunged 78 percent from its March 2000 peak, erasing about $6 trillion of market value, as investors concluded that prices weren't supported by profits at companies such as Broadcom and Amazon.com. Billionaire investor George Soros and Stephen Schork, president of Schork Group, say oil is ready to tumble because prices aren't justified by supply and demand.

"There's nothing different between this mania, the dot-com mania, the real estate mania, the Dow Jones mania of the 1920s, the South Sea bubble and the Dutch tulip-bulb mania," said Schork, whose Villanova, Pa.-based firm advises OPEC, Wall Street firms and oil companies on the outlook for energy prices. "History repeats itself over and over and over again."

Investors have added about $250 billion to commodity index trading strategies since 2003, said Mike Masters, president and founder of Masters Capital Management, a hedge fund based in St. Croix, Virgin Islands.

"I don't know if you can classify it as a bubble or not," said Masters, who testified at a Senate hearing in May on the role of speculators in commodities markets. "But there is no question that investor demand is having an effect on price. Very little of it has to do with physical supply and demand of crude oil."

Gains in oil are the result of a "bubble" caused by speculation from index funds and a tight balance between supply and demand, Soros said in testimony before the Senate Committee on Commerce, Science and Transportation on June 3.

"The bubble is superimposed on an upward trend in oil prices that has a strong foundation in reality," he said.

Commodity index traders account for about 40 percent of the open interest, or outstanding contracts, in the 12 agricultural commodities for which the Commodity Futures Trading Commission reports data, according to Chicago-based Bianco Research.

"You've got speculation in a lot of commodities, and that seems to be driving up the price," said Robert Aliber, a professor of economics emeritus at the University of Chicago Graduate School of Business and co-author of "Manias, Panics, and Crashes: A History of Financial Crises." "Movements are dominated by momentum players who predict price changes from Wednesday to Friday on the basis of the price change from Monday to Wednesday."

Burton Malkiel, a Princeton University economics professor and author of "A Random Walk Down Wall Street," said the increase in oil prices may be justified because supplies are limited and demand in developing economies is increasing. That distinguishes oil from the market for technology stocks in the 1990s, where supply "could be expanded infinitely" and new stock issues helped push down prices, he said.

"The picture is fundamentally different than the Internet picture," Malkiel said. "I'm not saying we're running out of oil, but we're clearly supply-constrained. Five and 10 years from now, the price is going to be higher than $134."

Caroline Baum and Matthew Leising in New York contributed to this report.