I wanted to mention a few things about longer dated futures. The futures curve plotted against time (1 thru 60 months forward) for oil has just turned pretty flat to slightly contango (meaning longer dated futures price is hgher than nearer month price such as month 2 is higher than month 1). This curve is generally in the opposite direction (in backwardation or M1 is higher than M2 and so on).

The recent flippping of the longer term curve is not necessarily a confirmation of the peak oil theory. We will not know for sure on that for a few more years after the fact. Instead, it just confirms my comment that the market now sees OPEC as NOT opening the taps going forward, thus in the longer term, it perceives a tighter supply/demand balance than in the more recent months. My takeaway from that is that at these prices, OPEC is either unwilling or unable to raise production. I would suggest the latter because they have NOT been reinvesting those profits at a big enough pace to replace the natural declines that happens in all oil fields. Just my take on things .... Anil

There seems to be a common confusion about resources "in the ground" and the resources here and now. The difference between them is the production capacity and availability of equipment, talent and skillsets to do it. Their is shortage of rigs, manpower & the right skillsets in the industry today. Rig rates have zoomed 400%. Is that "Reasonable" ... no. But economically justified - Yes. But without rigs and skillsets and manpower, resource in the ground does not get exploited.

Saudis supposedly have 250+ years of resource in the ground (at a rate of ~10 MBD or million B/D). However, their max production capacity is just 10.5 MBD. All that 200 years of production CANNOT come out at the same time. These reservoirs will permanently lose more than half the recoverable oil if production rates are not properly "managed" meaning kept at reasonable levels. Venezuela lost 400,000 B/D of capacity permanently because of Chavez directed edicts to produce at higher rates than the geology allowed. So, the problem is production available daily, NOT the resource in the ground ..... Anil

Anil - good questions and examples. But, while you may get a person to pay $8 a loaf, there will statistically be far fewer of them than those who bid $2 or $4 a loaf. So when the next shipment arrives, maybe the $8 a loaf guy doesn't need anymore. Prices should drop - unless the bread maker decides they don't want to make any more bread until the price he wants is met. Same with oil/OPEC. Is that a free marketplace? Seems a little monopolistic to me.

I don't favor government taxes, controls, or freezes per se. I do favor a fair trading environment, and regulations to preserve that. I do favor anti-monopoly laws. I also support a Fed that protects the value of the dollar and fights inflation. On the issues of energy, food, and water I support government funding and oversite of R&D and startup businesses, with the government(people) recovering a share of future profits.

Gary: Thanks for your comments. I think we are both in agreement ... added taxes are bad UNLESS they are directed towards specific Alternative energy projects. There is also no question that oil market is not fair, however, that is a global reality, unless developed nations decide to bulldoze their way into the OPEC cartel and destroy their oligopoly, there will not be a "fair" market.

The reality on the ground is that there are parts of the oil market that are "fair" ... traded markets in the west ... A futures market must have a buyer and a seller for every contract and thus as long as 2 consenting adults agree on that contract, who are we to decide what is "fair". If you are implying collusion among oil companies or brokers, that is extremely difficult in today's regulated environment where Oil execs can go to jail even for crimes committed by juniors. It is unfortunate that the abuses of a few bad apples like Enron have unfairly tainted this generally straight-forward industry.

On my bread loaf example, it was meant to illustrate a supply constrained world in which demand (3 people needing bread) exceeded supply. That is close to where the oil situation is - perhaps the following comments from a Barclays Global Analyst report might shed some light on the commodities & oil situation:

***** A snippet from Barclays report ****

First, there is no evidence that price rises have been less in commodities which are
difficult or impossible for investors to get direct exposure to. For example, some of the
strongest price rises have been seen in the minor platinum group metals and specialty
metals, steel and also some agricultural products such as rice with no or limited
exchange-based trading. Second, the diversity of price performance across
commodities has been so strong as to belie the idea that there is any rising tide of
investor money that is strong enough to raise all ships.

Over the past year, nickel prices have fallen by 53%, but tin prices have risen by 71%. Heating oil has risen by 100%, while gasoline has only gained 41%. UK natural gas, (which is not in the main indices), has risen by 167%, while US natural gas (which is part of the indices) has risen by 47%. That degree of divergence in relative price movements is so large, and so correlated to relative fundamentals, as to suggest that pegging commodity price rises to such generalised non-fundamental factors as investor flows or exchange rates does not have much explanatory power to offer.

****

Hope that helps ..... Anil

I'm not sold that "speculation" is adding any significant cost to the price of oil.  That is the line that we've been fed for the past 5 years now, and it's long since gotten stale.  What I see is a bunch of people frantically grasping for straws in an attempt to explain why things aren't really the way they are.  At some point this denial will give way, and at that point we can hopefully focus on real solutions to the real problems, and stop wasting effort in a pointless attempt to find a quick, easy and painless fix. 

I think it's clear that the vast majority of the increase in oil can be attributed to supply and demand issues.  If a lot more oil is not going to become available soon, then this is just going to keep getting worse going forward.  Once people and politicians start talking about real solutions, and we start to address the source of the problem, then maybe we'll see oil prices come back down.  As long as we're stuck spinning our wheels, blaming speculation, oil companies, and a number of other boogeymen, we're not going to get anywhere, and oil prices are generally going to stay high or keep going up. 

Agreed.  And one more point on speculation is that it goes both ways.  Speculators just follow trends and are perfectly happy going both long and short. 

I do think it's possible for speculators to exaggerate price swings short term.  But the futures market also helps growers, miners, airlines, etc - they can hedge some or all of their product / purchases in order to manage business risk.

I hope that McCain and Obama find the courage to tell voters the truth this year.  We have an extremely serious challenge ahead of us.  The Fed's effort to stimulate the economy with rate cuts is backfiring - look at the strong inverse correlation between the USD and WTIC.  America will came out of this mess a stronger country once it has solved its problems; but a dependence on oil is not fixed overnight.

Fantastic thread which I had somehow missed; thanks all  especially Anil.

I have only a few observations to add: first, I can see quite a lot of behavior change here in Ct already in response to the price rise; I would guess the same is at least possible elsewhere. Lots more commuting by train to New Haven and NY--the parking lot for the commuter train is more crowded every week. Noticeably increased use of golf carts, which are legal on the roads in my town, for local shopping. The boat industry--a big slice of the local economy--is going through the usual disruptions with zero sales of big gas guzzlers and increasing interest in sailboats. 

In the last few days I've seen a story on the great increase in repossession of big power boats as well as one on the dramatic drop in the value of second hand SUVs and pickup trucks.  So change is happening in response to the price rise.  I'm of the school that thinks we'd be a lot better off if we'd driven the change earlier with more taxes at the pump like the Europeans but there's no point in looking backwards and increased taxation now seems unlikely, to put it mildly.  Let's just hope we can avoid the WPT. 

To go back a week--there are LOTS of boats in Europe, Mike--try the East coast of Spain if you doubt me.  Smaller, it looked to me like there was a higher ratio of sail to power, and fewer of them being dragged around the roads for every use.  But still, lots of boats.    

I doubt we can get back to sensible energy policy until the campaign is over but Obama's refusal to back the gas tax holiday is a refreshing sign.  

As for me, I'm on my way to buy a comfortable bicycle with panniers for local errands.

DrH   

In Scandanavia, you have wind power making up a meaningful portion of their power needs and you have lot's of bikes on the streets... and you don't see as many over-weight (like me) people on the street.  Their standard of living doesn't seem to be suffering from a lack of arab oil.

The problem in this country is that we do what is cheap and most profitable too often, instead of having poilicies that lead us to what is right and sustainable.

How much wealth should a company that "discovers" oil in a tanker from the middle east have?  We should be rewarding those wild catters that find oil and gas here at home.  Let's open up all areas for looking for it... and enforce our envirnmental laws against those that don't do it right.  Let's tax the barriers to domestic production (cheap imports of oil that we can no longer afford because of what it is doing to the dollar).  A barrier to domestic production is cheap imports.  Currently, there is no price to pay for importing it.

We need more tax money for infra structure... we also need to help private enterprises develop alternatives to foreign oil... and we need to be smarter about how we do that (corn based gasohol is stupid)... it doesn't mean that we shouldn't do it, just do it smart.

The biggest disadvantage domestic companies have is subsidized (or no) health care abroad... it isn't decent wages here.  BUT we need to stop blaming others and start solving our other problems.  There hasn't been a lot of that happening in the last 8 years.  It is rediculous to say that the free market solves everything and to just keep going down this crazy road we are on.

erryl