Another interesting read on "why" oil price is so high...one can take
their pick(s) from the choices. From Sat's NewYawkTimes.
BR,mD

Why Is Oil So High? Pick a View
Farmers protested record oil and gas prices in Brussels on Wednesday.

The price for crude oil settled at $134.62 on Friday.

By JAD MOUAWAD and DIANA B. HENRIQUES
Published: June 21, 2008

People who have spent their careers tracking the ups and downs of the global oil markets say their compasses are spinning. Oil prices rise for reasons they cannot quite fathom, and where prices will be a year from now has become, literally, anybody’s guess.


Those uncertainties have left regulators, oil companies and suppliers uncertain whether increases in supply or declines in demand will affect prices as they have in the past. Some wonder whether the market is broken in some way, creating a bubble of artificially expensive oil.

“This whole industry has absolutely been turned on its head,” said Stephen Schork, who edits an energy newsletter.

In a sign of rising concern about the impact of high prices, King Abdullah of Saudi Arabia has called an impromptu global energy summit in Jidda on Sunday.

A major factor behind the steady price rise, virtually everyone agrees, is that energy consumption is surging in high-growth countries, and oil supplies are not growing fast enough to keep up. But what confounds many experts is that the price of oil seems to be changing much faster than the world is changing.

For example, it took five years, from 2002 to 2007, for oil to go up by $60 a barrel. In just the last year, it galloped another $60 higher. For the first time since oil drilling began in the 1850s, the price has climbed for seven consecutive years.

Old rules of thumb and assumptions that once helped traders foresee the direction of prices no longer seem to work. For example, since the oil shocks of the 1970s, a weak American economy used to mean lower prices. But during a period of sluggish growth in this country the price of oil has kept rising, to about $135 a barrel. Energy experts offer radically diverse predictions for the coming year, ranging from $60 oil to $200 oil.

Beyond that, however, there is broad disagreement about the role of speculators in oil markets — particularly a new breed of financial investors, including pension funds and hedge funds, who view oil and other commodities as just another way to make money, like stocks, bonds and real estate.

The evidence of their impact is mixed, but consumers and lawmakers nevertheless are furious, saying these new financial traders are driving up prices.

The impact of speculation on oil prices will be at the top of the agenda in the Jidda summit, and pressure is mounting for domestic regulators to act. Congress has held at least eight hearings on energy prices this month alone, and four more are scheduled for next week.

One proposal would ban institutional investors from taking any stake in commodities, a move historians said would be rare for any global market.

One of the guideposts that no longer seems to provide much guidance is that the price of oil on any given day was usually higher than the price of oil delivered at some point in the future. But, with increasing frequency, the future price is higher than the spot price.

That development usually signals concerns over future supplies, encouraging refiners to stockpile oil, which has not happened yet. It also typically signals that prices are likely to fall, and that has not happened, either.

Of course, contradictory signals are an accepted part of the global oil market, which provides a third of the planet’s energy needs yet is largely governed by regional or local events — falling demand for gasoline in the United States contrasting with climbing demand for diesel fuel in China, for example.

Also, no two countries — indeed, no two fields — produce the same kinds of crude oil, and refineries typically specialize in specific grades. As the lighter, more easily processed oil runs low, the world is slowly relying more on gooier, sulfur-rich varieties. That is straining the ability of refineries to produce more gasoline, diesel and jet fuel.

In the face of torrid demand, Iran has struggled for over a month to sell about 25 million barrels despite the steepest price discounts on record.
The oil, stored in tankers in the Persian Gulf, is the sulfur-heavy variety. According to news reports and industry estimates, Iran has offered to cut its price by as much as $13 a barrel but still has not found buyers.

Many economists see a straightforward explanation for rising prices: Global oil supplies remain tight and there is a deep-seated fear that demand will outpace new production growth for years to come. In that climate, they say, the price will rise until it reduces global demand. But demand is still rising, even with oil at $134.62 a barrel.

The high price “doesn’t mean we have a shortage today, but it means there is a serious worry about a shortage three to five years from now,” said Adam E. Sieminski, the chief energy economist at Deutsche Bank.
That view — that market fundamentals are responsible for the price rally — is widely held among energy analysts.

But it still does not fully explain why prices have risen as fast as they have. On June 6, for example, oil futures jumped by $10.75 a barrel, the biggest single-day increase in history. Even analysts who do not see an oil bubble still say predicting oil prices is becoming a hopeless task.

“There are a lot of cross currents making it almost impossible to say where prices are going to go, or where they should be, based on demand and supply,” said Dan Rice, a portfolio manager at BlackRock, a large asset management firm.

As analysts have looked for new explanations for recent oil price gains, one popular theory is that a falling dollar has driven investors to commodities as an inflation hedge. On Friday, for example, oil prices took a big jump as the dollar fell.

But Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, said there had been little correlation between the dollar and oil prices over the last 30 years.

Another theory is that energy subsidies are distorting the market, by shielding a large swath of the world from the impact of high prices and thereby encouraging high consumption.

Developing countries are beginning to address that problem. This week, China unexpectedly cut some of its subsidies, effectively raising the price of gasoline and diesel. But other subsidy cuts by India and Malaysia have been met with street protests.

Some experts who see today’s oil market as a bubble point to the record-setting stake that institutional investors have taken in the commodity markets in the last several years, variously estimated at $140 billion to $250 billion. A growing portion of that stake reflects rising commodity prices, not new money flowing in.

Michael W. Masters, a hedge fund manager who will testify at one of the Congressional hearings next week, argues that index-tracking investors, who enter the market only as buyers, are swamping the relatively small commodities markets.

“Institutional investors are one of, if not the primary, factors affecting commodities prices today,” Mr. Masters told the Senate Homeland Security and Governmental Affairs Committee last month. George Soros, the billionaire investor, echoed his views.

But their opinion is disputed by other recent market studies.

One, from Barclays Capital, noted that index investing represented no more than 2 percent of the worldwide energy market. And most of the new money flowing in this year went into various types of funds that were as likely to sell commodities as buy them.

Another study released this month by three academic researchers cited a “paucity of hard evidence” that speculators were inflating commodity prices. The study’s authors also found that speculation levels over the last two years were well within historical norms.
And Bernstein Research noted, in a new report, that oil prices had actually not kept up with the prices of iron ore and coal, “two markets that are entirely closed to speculation.”

These arguments are carrying little weight with distributors and marketers selling retail gasoline and heating oil, who are adding their complaints to the consumer fury descending on Congress.
Like Gerry Ramm, a senior executive at Inland Oil, a fuel retailer in Ephrata, Wash., these battered business executives say financial investors are to blame for recent price increases.
Mr. Ramm said, “Prices are becoming completely disconnected from the real market.”
http://www.nytimes.com/2008/06/21/bu...pagewanted=all

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Ol'UncleMotor
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good read, mD.
My "block" consists of a bunch of financial planners and investment bankers, so I definately agree with that.
I think that this proposal makes complete sense, but rather than banning it (since it would make too many people start bitchin') would be to force those who buy these futures to take delivery. There is no reason for John and Jane D down the block to buy $30G's worth of light sweet crude. I look at myself as a bit of a contrarian. While everyone is running in circles, I see buying opportunities.
And my useless, not-yet-educated $.02 say that oil will be $60 a barrel at the most by the time I come home next summer

On that note, the average price of a gallon of HiTest in not-yet tourist infested coastal Maine is down from $4.49 to $4.20. About 2 bucks too high still, IMO, but a step in the right direction.

was just reading this article and thought it would be relevant...$2 gas within a month if oil speculation is limited according to energy analysts......let's pray.

http://www.marketwatch.com/news/story/gas-could-fall-2-if/story.aspx?guid=%7B2673C102%2D68E0%2D41D9%2D9C9A%2 D10EE2E723948%7D&dist=MostReadHome

Greed...

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Does anyone know what percentage of oil supply trades in the futures markets? I'm really curious to know the answer to this.

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Oops, just came out that of the 90M acres big oil is already allowed to drill in the gulf, they are only drilling 30 M of it.......oopsie...Explain that one.

BigR,
There was a good art in recent paper, (have to dig it out when I get home to the Mtn),
that talks about the "lease vs use" deal. Leasing from the Fed is one thing; actually finding
petro reserves and drilling for them is another...the wacko side of the legislature, (not sure which
"side" that is, lol!), tend to wave their arms over the "fact" that companies have the lease, but
aren't "using/drilling" all the leased acreage. Well, having a lease on umptyseven acres doesn't mean
anyone has found drillable oil and the drill operations are big bucks when they do start; thus, they will
not drill "for fun".

And, the offshore rigs, often rented/leased from the oil rig service co., are huge bucks...not defensive,
just trying to 'splain.
BR,mD

"[MD]..you got some splainin to do!"



Appreciate it. Because this is the EXACT point that Dems are trying to make to defend their "we love the polar bears, don't drill because Al Gore said it was bad" mentality.