Will the Oil Bubble Burst?

Eleven years ago, after doing a lot of studying and a lot of thinking, Richard Rainwater convinced himself that the long decline in oil prices that had begun in the early 1980s was about to end. As a billionaire who had made his name and fortune steering the Texas oil riches of Fort Worth's Bass family into lucrative nonenergy investments like Disney stock, Rainwater had the wherewithal to act on his conviction. So he plunked down about $300 million of his own money on energy-company stocks and oil and gas futures.

For a while it looked like a boneheaded move. At the end of 1998, the price of oil fell below $10 per bbl. Regular gas sold for 90¢ a gal. While Internet billionaires were being minted to the right and left of him, Rainwater was getting poorer by the day.

You can guess the rest of the story. The dotcoms imploded; the price of oil climbed, climbed and climbed some more--and Rainwater's energy bet came to look like one of the better investment calls of our time. It has netted him about $2 billion, vaulting him from the mid-200s on Forbes magazine's 1999 list of the 400 richest Americans to No. 91 last summer (with $3.5 billion overall).

So guess what Rainwater did a few weeks ago, right after oil prices topped $129 per bbl. for the first time? "I sold my Chevron," he says. "I sold my ConocoPhillips. I sold my Statoil. I sold my ENSCO. I sold my Pioneer Natural Resources. I sold everything."

This news, disclosed here for the first time, is a big deal. Lots of Wall Streeters--loudest among them the hedge-fund legend George Soros--have been warning lately that speculation has inflated oil prices into a soon-to-pop bubble. But talk is cheap--this is something more. One of the biggest oil winners of the past decade has decided to get out.

As the nation struggles to cope with $4-a-gal. gas, what are we to make of Rainwater's decision? Is it a sign that the near doubling of oil prices over the past eight months is about to reverse itself? Does it mean we can all breathe big sighs of relief and go back to gassing up our Hummers with abandon?

This is the future we're talking about, so there are no certain answers. But when you've got Rainwater on the phone, it is at times possible to believe you're getting a sneak preview.

He definitely thinks oil prices are due for a fall. That's why he sold. But he makes no claim to having gotten the timing perfect. After he sold out in May and oil kept rising, past $135 per bbl., Rainwater briefly thought he'd made a terrible mistake. The price has since subsided a little, and he has calmed down a little. Still, he says, "It's a call that I've made, but who knows? Who knows if I'm early?"

The bigger question is whether the now nine-year-long rise in energy prices is at a definitive end, and to that, Rainwater offers a clearer answer: No way. He began formulating his big oil bet after reading the 1992 book Beyond the Limits, a wonky, statistics-driven--and extremely frightening--follow-up to the famed and controversial 1972 Club of Rome report on resource depletion, The Limits to Growth. Since then he's remained an avid consumer of the more apocalyptic visions (war, global economic collapse) of what could happen as oil production peaks. "This is the first scenario I've seen where I question the survivability of mankind," he told Fortune in 2005. He doesn't sound quite that gloomy now, but he has seen nothing to make him think oil supplies will become abundant again or that an adequate replacement for oil will be found anytime soon.

All Rainwater expects is a "little lull" in energy prices; after that, "I will reload, and then I'll go off again." He is vague about what exactly would prompt this reload. "I'd like to re-enter at a good price, and I'd like to re-enter at a good time, and I'd like to make another couple billion dollars," he says. Who wouldn't?

One of the things that prompted Rainwater's sell decision was a reader poll on the investing website Motley Fool--yes, even billionaires get ideas from Motley Fool. "What are you doing to deal with high gas prices?" the poll asked. Seventy-seven percent of the respondents said they were cutting back on consumption (by driving less, buying a hybrid, buying a Vespa, etc.). Rainwater, who was one of the 23% who clicked on "Absolutely nothing. I'm rolling in profits from my oil stocks," took it as a sign.

"I just felt that America was not ready for $4 gas and we would see a pause here," he says. "And we are seeing a pause." But even a sustained turn toward conservation in the U.S. wouldn't affect the main long-term drivers of higher oil prices--stagnant production worldwide and burgeoning demand from China, India and other emerging markets. So pay heed to Rainwater's choice of that word pause.

More Money? To read Justin Fox's daily take on business and the economy, go to time.com/curiouscapitalist

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