The Fed is printing money to clean up the housing bubble, which was fueled by the money it printed to clean up the Internet bubble. The only question is what kind of bubble the new money will inflate.
Bet on oil and other energy.
Unfortunately for energy users, which is all of us, it may be years before the oil foam settles down. If this were the Internet bubble, we're probably closer to Nasdaq 2,500 in 1998 than Nasdaq 5,000 in 2000.
Every bubble needs a story. The Internet story was that the whole economy would shift to the Web. The housing story was that people don't trade Cape Cods and ranchers like penny stocks and that Wall Street knew how to lend to high-risk borrowers.
The energy story is that the planet is running out of oil, and we must pay $115 a barrel or more or return to the Stone Age. The "peak oil" theory, a fringe doomsday scenario a few years ago, is now an investment philosophy.
Like the other bubble stories, the energy tale contains substantial truth. It's just a matter of how much the truth is going to cost you.
Some energy analysts believe the natural price of oil, based on supply and demand, is $70 a barrel or less. This implies we're already into bubble territory.
There is no question that heavy speculation helped drive oil to $115. As with all good bubbles, leverage - investing with cheap, borrowed money furnished by the Fed - is a key inflator. Oil is the haven of choice for investors fleeing the dollar, which is the object of its own speculation.
Now taxi drivers talk about investing in Exxon Mobil. Exxon Mobil, The Wall Street Journal reported this week, is planning its future as though oil will return to $65. Maybe it knows something we don't.
With a slowing world economy, oil's price pop has outpaced increase in demand. The Energy Department projects that U.S. consumption will fall this year. Warren Buffett dumped his stake in PetroChina last year, although he later told Fox Business News that he "sold a little too soon."
You don't argue with Buffett. (See my columns three years ago pooh-poohing his bet against the dollar!) Surely this bubble is about to pop.
"Why do you think it's a bubble?" retorts Steve Hanke, a professor of applied economics at the Johns Hopkins University who has traded oil, metal, currencies and who knows what for years. He's betting oil will rise, and on closer examination the argument makes sense.
Much of the Fed's liquidity, Hanke says, is going into Treasury bills and other ultra-safe debt. Not enough of what's left is being efficiently deployed in the oil industry.
Exxon Mobil, sitting on $34 billion in cash, spent less on exploration and capital investment as a percent of revenue last year than it did in 2003, The Wall Street Journal reported. In Russia, Venezuela, Nigeria and other places with huge reserves, nationalism and other political factors hinder oil investment. The Mexican legislature recently rejected a bill to modernize its oil industry, Hanke said.
At least the Internet bubble bought hard assets - fiber-optic and other Web capacity that eventually became greater and pricier than the market needed. That set the stage for letting the air out. Same thing for houses in the housing boom.
But the oil barons aren't perceived to be drilling enough new wells. As long as that's the case, oil will stay high - even if fundamentals say it should sell for $70. Futures markets, for what it's worth, say oil will be $100 five years from now.
It's not that there isn't plenty of stuff in the ground. This week, there are reports from Brazil about what might be the biggest discovery in three decades.
"This is the fifth time that the world is said to be running out of oil," energy consultant and historian Daniel Yergin said last fall. "Each time - whether it was the 'gasoline famine' at the end of WWI or the 'permanent shortage' of the 1970s - technology and the opening of new frontier areas has banished the specter of decline. There's no reason to think that technology is finished this time."
Until technology develops and frontiers open, however, oil stays expensive. Until oilmen drill too many wells or the Fed and other central banks turn off the money spigots, this bubble has further to go.
Someday again we'll see the likes of John Connally, the former Treasury secretary who bet on continually rising oil prices in the early 1980s and lost his house in a bankruptcy sale as a result.
But it could be some time. Maybe Buffett sold a lot too soon.