A wise man once said that bubbles will only occur with Securities, Commodities and Art. Of course, we have seen him proved wrong with the current Sub-Prime mess. But while his prediction was wrong, his reasoning should not be discounted.

The reason he mentioned Securities, Commodities and Art is because these are bought and sold for speculative purposes (not always, but very often). Therefore, hype, mania, rumors or a craze can push the price of these speculative goods to astronomical proportions. This, however, will not happen with goods that are bought and sold for their intrinsic use.

As an example, if you like Colgate toothbrushes, you may pay more for them than Signal toothbrushes. If, however, the price rises and rises, at a certain point you will decide it’s not worth it and buy Signal toothbrushes. Everyone else will more or less follow suit, and the price of Colgate toothbrushes will have to fall back to equilibrium.

If, however, toothbrushes are bought and sold at auction regularly, and if there is a rumor that Colgate is going out of business, and its latest and greatest toothbrush will be of great value in the future, the price may keep rising and rising. More rumors can feed the frenzy until the price of a Colgate toothbrush bears no resemblance to its utility as a toothbrush.

Of course, toothbrushes are an absurd example because they are used and then thrown away, unlike Art (which is merely kept and admired, or flipped), Commodities (which can be used but are never used up) and Securities (which are made to be bought and sold).

So what happened with the Housing Market, and why did a bubble occur? Precisely for the same reason. People were buying houses not because they wanted to live in them for many many years, but because they seemed like a good investment in a world of ever-rising housing prices. The problem grew because a house, apart from being an investment, is a home that provides shelter and a place to live. If you speculate with that and lose, you lose much more than money in the stock market.

Regardless, this brings us to our subject matter (I apologize for the long introduction): oil. Right now oil has reached high prices which were unimaginable merely a year ago. The Saudi Arabian OPEC representative recently stated that the prices were crazy, that there was no immediate oil shortage, and that the price increases were entirely due to speculators.

We will not pretend to know if he was saying the whole truth, but if he was, or even if he was mostly correct, it stands to reason that we are now in the midst of an Oil bubble. This would be mean that at some point (no one can know exactly when), oil prices should come crashing down. Of course, an oil price crash can be mitigated by many factors (everyone may start buying Hummers and stop carpooling), but there should be a crash nonetheless.

Only time will tell, and prices may rise before they crash; no one knows for sure. But then again, that’s why people speculate.