First Oil

“A floral fever exploded into a full-blown economic frenzy … a rare, single bulb could be—and was!—traded for an entire estate. Then, prices plummeted. A tulip, worth 5,000 guilders before Feb. 3, 1637, sold for 50 guilders, soon thereafter.”—Paul Kupperberg, “Tulipomania, Netherlands, 1636” in You Did What? Mad Plans and Great Historical Disasters.

Speculation and herd mentality have led to market upheavals throughout world history. For commodity traders, there is potential for significant gain. But for every trader that has scored a big win, there are countless traders and investors on the other side of the deal, who’ve racked up significant losses.

Tulipomania. Tulips were first cultivated in Turkey before they reached the Netherlands in the 16th century. In the hands of the Dutch growers, exotic tulip varieties were created, which became prized possessions of every merchant’s garden. These merchants had amassed great wealth through the East Indies trade. As a result, prices of exotic tulips began to rise at a rapid pace. At the height of the tulip frenzy during 1636-1637, an informal network of futures markets was set up in taverns throughout Holland.

“Weavers sold their looms, farmers their lands and blacksmiths their forges, to get their hands on the money to dive into bulb trading,” wrote Kupperberg. On Feb. 3, 1637, the market reversed at an auction in Haarlem. An offering of tulips did not sell at all. Panic set in, and prices plummeted. Merchants and farmers lost millions of guilders and learned a lesson that countless other traders have learned, and will continue to learn in the course of human economic history.

Bubbles galore. The value of any property or commodity is only what a buyer is willing to pay. Every decade, there’s a real estate bubble that is either about to start booming or go bust somewhere in the world. We had the dot.com bubble during 1997-2000, when the internet was spreading its web around the world. Abandoning conventional methods of evaluating high-tech companies, such as the P/E ratio, traders chose their investments, based on the potential value of the new technologies.Many companies went belly up, but there were a few winners, e.g., Amazon.com and ebay. However, even these stocks lost 90% of their value, before achieving spectacular gains over the next decade.

Drawing bubbles. The art market is notorious for outlandish values. Recently, Christie’s auction house of London sold one of contemporary artist Cy Twombly’s “blackboard” paintings for about $30 million. Twombly has created a series of these paintings that have indecipherable letters scrawled in chalk on a blackboard. Art critics call these “abstract expressionism.” Art values in general, and Twombly’s paintings in particular, have been rising in value. It remains to be seen when a jolt of common sense will hit the art market.

Bubbling crude. Speculation is rife in the crude oil sector, so much so that we’re used to periodic boom-and-bust bubbles. With the decline in oil prices, some speculators are now storing vast amounts of crude oil in VLCCs on the high seas, as well as large storage depots at Cushing, Okla., in anticipation of a rapid return to high oil prices. Blackstone Group, which prides itself as an alternative-investment manager, has amassed a $10 billion kitty to acquire distressed oil and gas operators, and service companies. Meanwhile, some hedge fund managers have placed “bearish” bets that crude oil prices will continue their downward slide.

What is sad in all this is that Brent crude oil, which was priced at $115/bbl in February 2013 is the same crude oil that is being sold at $60/bbl in March 2015. There is no change in API gravity. Not a thing different. It’s unfortunate that we’ve created rational markets that behave highly irrationally. 

About the Authors

Pramod Kulkarni

World Oil

Pramod Kulkarni pramod.kulkarni@worldoil.com