Reader Peterk sends this excellent link to a lengthy post on The Oil Drum, explaining in great detail -- charts, graphs, the whole megillah -- why the cost of oil is so high, and why it's only going to get worse. Sit back and read the whole thing. Here's the conclusion:
We are now in the early stages of a full blown energy crisis that was predictable if not wholly avoidable. Politicians are awaking to the crisis now that escalating energy costs make its existence plain to see. It is highly unlikely that politicians will now grasp the gravity of the situation that the OECD and rest of the world faces and the responses will likely be ineffectual and too little too late.The principal reason for current high oil price is the proximity of a peak in global oil production. Politicians must understand this and then grasp that natural gas and coal supplies will follow oil down by mid century. Reducing taxes on energy consumption right now is the wrong thing to do. Taxation structure needs to be adjusted to oblige energy producing companies to re-invest wind fall profits in alternative energy sources on a truly massive scale.
Energy efficiency should be the guiding beacon of all policy decisions and this must apply equally to energy production and energy consumption.
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...it may be time to take Julie and the kids to that self-sufficient homestead out in the country, where they can have the last laugh
You can rest assured that Bush, Cheney, et al have their own "self-sufficient homesteads out in the country." Cheney understands peak oil better than anyone else. Peak oil is precisely the reason Cheney invoked executive privilege about his Energy Task Force meetings and peak oil is the reason we're in Iraq today. The Saudis are now our number two supplier of oil, and Big Oil knows exactly what would happen if the Persian Gulf were to fall into Iranian or other hostile hands.
I can only speculate (har, har), but many analysts believe the price of a barrel of oil should be somewhere around $60 today based on current demand.
Nobody in their right mind engages in the price forecasting business without deep reservations (other than to point out an obvious bubble). This is the main reason the Fed and other central banks should stop trying to set short-term interest rates.
many analysts believe the price of a barrel of oil should be somewhere around $60 today based on current demand.
Then you should buy all the $60 oil they will sell you. Speculation, among other things, is one of the essential features of capitalism. If the Fed didn't constantly tinker with the money supply we might indeed have $60 oil, or even $20 oil. But that's not the system we have. You can't print fiat money and expect rational behavior, particularly when the Fed won't even release M3 data anymore. The way I look at it, we're lucky we have $120 oil.
Speculators are not to blame because speculators take both positions, some buy oil and some short oil. In fact, much of speculation is on the short side, especially in the stock market, because most people are long. What's happening in oil is that average joes now have the same ability to invest in commodities as hedge fund managers, university endowments, etc. There probably is a bubble, but the better question is why are they all buying commodities? Why did they all buy real estate? Why did they all buy Internet stocks? Part of it is mania, part of it is cheap money. The mania will die and prices will crash, thanks to speculators on the short side and oil companies upping supplies. (Don't hold your breath waiting for Congressional hearings thanking oil companies and speculators for low prices.) But the cheap money will remain and there will be a new bubble.
Other Jim:
Whether professional speculators are net long or net short depends on the situation. They often ride and even amplify waves generated by amateur enthusiasm. That being said, I wouldn't be surprised if many are net short right now.
BTW, I went to school with many of the so-called "best and brightest" on Wall Street and consider most of them to be fools. Just look at the incredible damage they have done at investment banks with their structured finance instruments. The reckoning is still in its early stages. Most of the investment banks are still hiding their massive losses and are on an IV drip from the Fed (Term Auction Facility, etc.) to raise the capital they need to meet day-to-day operating requirements.
That's why half the Fed governors have quietly resigned. The rest are probably wearing Depends.
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