Petromania by Daniel O'Sullivan is an engaging account of how the financialisation of oil trading drove the speculative bubble of 2008. Crude hit $100 per barrel for the first time ever on the very first day of 2008. Just seven months later, black gold was fetching almost $150 per barrel - only to collapse back to around $30 by the end of the year. These were the most extreme price movements ever seen in the world's most important commodity, and punctuated a chain of events that wreaked havoc on economies, companies and the lives of individual citizens across the globe. And with the commodity currently trading at around $73 a barrel O'Sullivan warns that the forces that blew the bubble are once again at work.
A wealth of fundamental factors - supply and demand balances, inventory levels, geopolitical tensions and the costs of hunting down and exploiting resources in ever more remotes or technically challenging environments - influence the price of oil. Petromania documents them all, but more importantly it finds that in the final analysis, the pressure which drove the oil price into triple- digits-figures through 2008 originated far from the deserts, frozen steppes or churning seas in which our most crucial energy source is produced.
The oil price blow-out was instead a tale shouted hoarse across City trading desks and buried in the small print of pension fund returns - the results of the financialisation if the oil markets and a speculative fever led by financial investors which overtook all other factors. Against an entrenched establishment view, Petromania proves that the $100-plus oil prices of 2008 were indeed a speculative asset price bubble in the most classic sense, with striking and obvious similarities to other well-documented market bubbles. This diagnosis also forewarns us that the structural determinants of the market continue to encourage irrational oil price appreciation, and further outbreaks of Petromania.
This is an excellent primer for anyone who has more than a passing interest in how the price of oil has become detached from the real world factors of supply and demand. This impressive book is, however, not easy-going. O'Sullivan's energy and enthusiasm permeate every page in the form of some of the longest, unpunctuated, sentences to be found. Still, it's worth hanging in there despite, arguably, a touch of tedium as O'Sullivan builds his case through all six sides of the cube. A must read for anyone interested in the finance and politics of oil in the 21st Century. I highly recommend it.