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OIL BUBBLE WATCH….The latest on oil prices:

In New York, oil futures fell as much as 8 percent to $68.57 a barrel on Thursday, their lowest since June 2007. Oil has lost half its value since hitting a record closing price of $145.29 a barrel in July.

….Global oil demand is undeniably slowing, particularly in developed nations. Japanese oil consumption dropped 12 percent in August, while in the United States, demand has been cut by 8 percent in September.

Still, consumption is growing in developing nations, albeit at a slower pace. The International Energy Agency expects global oil demand to grow by just 400,000 barrels a day this year, to 86.5 million barrels a day. At the beginning of the year, the agency was expecting growth of more than 2 million barrels for 2008.

So does this mean that this year’s runup in oil prices was a speculative bubble after all? At first I didn’t think so, but by the middle of the year I was beginning to wonder. Still, even at the height of the bubble in June, the best I could say was that the price spike “had a bit of a bubbly feel to it” but that I didn’t really have any solid evidence to back that up.

I still don’t, really. The problem is that there were genuine supply and demand issues pushing prices up beginning in 2007. But as prices skyrocketed, demand eventually went down. Then the banking crisis kicked into high gear and everyone got afraid that we were headed for a global recession. Those are both perfectly normal reasons for the price of oil to fall.

On the other hand, the “Enron loophole” that the bubble pushers kept talking about got closed in June too. And a couple of months ago the CFTC discovered that “financial firms speculating for their clients or for themselves account for about 81 percent of the oil contracts on NYMEX, a far bigger share than had previously been stated by the agency.” So maybe it really was a speculative bubble after all.

Bottom line: Occasionally you get a massive, long-running thing like the housing bubble, which is visible (to some people at least) even while it’s happening. Most of the time, though, bubbles are pretty hard to identify. This particular runup is hard to call even in hindsight.

POSTSCRIPT: However, one thing is obvious: this kind of price instability is going to be with us for a long time as oil demand bumps up against maximum oil production. Full story here.

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