Bubble Bursting

Bubbles Throughout The History

Credit: image source Bubble bursting

Throughout the history, there are countless of bubbles that burst in the financial market causing certain damages to people who were involved. The latest bubble that is happening right now that I am aware of is the oil bubble. And it is bursting.

Oil Price

Oil Price

In order for a bubble to burst, you need to first inflate it. Many people around the world were feeding the inflation of this bubble. They willingly overpaid for this commodity of oil. And these people were from the transport sector.

World Oil Demand by Sector 2012

World Oil Demand by Sector 2012

Why I say people were overpaying for a commodity like oil? Well, if they were not overpaying, then the bubble would not burst in the first place. Things that are not supported by fundamentals will collapse. I really think that people had been fooled buying expensive oil all these years. People had been overpaying for the oil. And people working in the oil industry had been taking unreasonable amount of profit all this while.

To put thing in perspective, the oil price went as low as $10-$20 in 1960s. With all the recent development in technologies and competitions, I wonder how the price of oil could $100 per barrel if it was not a rip-off.

Oil industry was a very lucrative business back in the day before the oil bubble burst. Many people became (multi-)millionaires working in this industry even as normal employees. Those monies were extracted from the people who paid a high premium for using the oil. They were mostly people who drive cars or motorcycles.

Oil Consumers Stuck in a Heavy Traffic Jam

Oil Consumers Stuck in a Heavy Traffic Jam

I personally don’t drive because car is fundamentally not efficient. Private vehicle is causing a lot of troubles like losing time finding car park, stuck in traffic jams, high maintenance cost, unoccupied car when not used, inefficient fuel consumption, wasted land for roads and car parks, etc. Most importantly, the oil price was “too-expensive”.

Sharing economy is more efficient. Therefore I like public transports a lot. I am also looking forward for the future driver-less car. But that is another story.

Most of the oil exporting countries are very, very rich (but not Malaysia even though we have oil supply, I wonder why). They can build world-class luxury hotels simply by producing oil. This is insane if you think about it. How can oil create so much value? I think, it is driven by madness.

The World's Most Luxurious Hotel

The World’s Most Luxurious Hotel

Bubbles throughout the history

Looking into the history, there is no shortage of madness.

Housing bubble 2007-2009

U.S. National Home Price Index

U.S. National Home Price Index

Dot-com bubble 2000-2003

Nasdaq Composite: dot-com bubble

Nasdaq Composite: dot-com bubble

Bubble is not a recent invention because there were mad people in the past too.

South Sea bubble 1720-1721

South Sea Bubble

South Sea Bubble

Even the great physicist, Sir Isaac Newton, could not get away from this South Sea madness.

I can calculate the movement of the stars, but not the madness of men. – Sir Isaac Newton

Tulip mania 1636-1637

Tulip Price Index

Tulip Price Index

Gold bubble 1492

Gold Bubble

Gold Bubble

Final thought

To be mad is human. I hereby predict that bubbles will continue to emerge in the future and the cycle will repeat indefinitely unless we are no longer human. By then, we could call ourselves superhuman.

To be a superhuman, I think one of the things you need to do is: do not buy something that you think is overpriced like a cup of Starbuck coffee (unless you are staying for whole day at Starbuck to reduce the overall cost over time). This is to avoid inflating another bubble that is going to burst.

Of course that will be almost impossible to do (never overpay for something). Instead, I think a more feasible way is to try to reduce the number of times you overpay like going less to Starbuck. Or if the oil was expensive, drive less. Overtime the bubble created would be smaller and thus having a much smaller impact if burst.