Here's an article that places a large part of the current high prices on speculation. Condensed below.
"Supply and demand cannot explain the high prices," says Fadel Gheit of Oppenheimer & Co., a leading commodities analyst. Like many in his profession, Gheit believes financial investors are driving up prices.
Enormous amounts of money are currently changing hands in the business of oil contracts. With the American real estate debacle infecting ever larger segments of the capital markets, from stocks to bonds, investors are seeking alternatives worldwide. Oil, with its supposedly straightforward market rules and ever-rising prices, seems to be a perfect tool for spreading risk and maximizing profit. But many investors will have a rude awakening when they realize that an investment in oil, though it may look different, is no less a gamble than other types of investments.
"I trade in news," says Chris Motroni, 29. He earns his money as a small, independent trader on the NYMEX, with smaller trades and a lot of self-confidence. "The prices will increase to $115,"
The same holds true for the big players, the banks, hedge funds and pension funds, which all trade by computer nowadays. Business on the NYMEX has exploded. The world consumes 86 million barrels of oil a day, but trading volume is 15 times as high. The difference represents bets on future price developments.
The upshot of all this trading is that speculators now hold up to 45 percent of all oil contracts -- three times as many as at the turn of the millennium. "Prices are being distorted," says Senator Carl Levin, the ranking Democrat on the Permanent Subcommittee on Investigations, which is investigating the speculative trading of oil futures. If supply and demand were the only factors, the price of oil would be at least $20 lower.
One of the world's 10 largest energy trading companies, Mercuria, is headquartered on Place du Molard in Geneva, Switzerland...CEO Daniel Jaeggi, a former futures trader for Goldman Sachs, knows exactly how the business changed in the late 1990s. "The big pension funds began to diversify their investments, increasingly putting their assets in oil," he says. The pension funds, according to Jaeggi, became the "driving factor in the market."
Wall Street banks were only too happy to service this demand, and Goldman Sachs was at the head of the pack. "They invented a new commodities index that also included oil," says Jaeggi. The new index was wildly successful, and the more major investors put money into it, the more oil contracts Goldman bought and the higher the prices went. An enormous market force had been created.
Everyone jumped into the game. Morgan Stanley, Deutsche Bank and many other financial giants dramatically expanded their trading volume in oil contracts. Investment banks like Goldman even established their own oil reserves, acting as if they were energy companies like BP. They hoped to gain better insight into market events.
As a result, the trading volume in crude oil has almost tripled in the last five years, while demand for the liquid itself grew by only 1.9 percent per year.
Goodbye to Supply and Demand
Once upon a time, all that counted in the oil business was production volume and consumption in the industrialized nations. Those days are gone. Oil is now part of every well-structured portfolio -- as was the case, until recently, with those abstract securities meant to enable the investor to secure a slice of the American real-estate boom.
Strange price distortions are fairly normal. All the oil reserves of the United States have long run higher that the five-year average -- yet for historic reasons, prices on the commodities exchanges are based solely on the levels in Cushing and the type of oil stored in the tanks there, West Texas Intermediate.
"It's astonishing that a type of oil that is produced at a level of only about 300,000 barrels a day serves as the benchmark for the whole world," says Eugen Weinberg, an analyst at Germany's Commerzbank. He even believes that market players "attempt to influence" the key Cushing statistics "through their targeted actions."
"The traders use every excuse in the book to drive up prices," he says, "it's pure hysteria." On some mornings, when he arrives at his office in Manhattan, London traders have driven up prices by $4 a barrel overnight, perhaps because a pipeline burst somewhere in the world...The damaged pipeline was probably repaired even before Gheit found out about it -- but after the traders made their profits.
The question is, how long can these galloping prices continue without doing permanent damage to the US and world economies? Rising prices for gasoline, heating oil and airline tickets will increase inflationary pressures and stifle demand in the short to medium term.
"In the end it's a straw that breaks the camel's back," says Gheit, a native Egyptian. Or it's like a weightlifter hefting weights, he says, until someone places a pencil on top and he crashes to the ground.
"This is a bubble," he insists, "and it will burst."