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Q: Why is the price of oil shooting upwards when there is no supply shortage?

A: Speculators.

Developments in the Middle East have also helped to push prices up. Iran's defiant stance on nuclear power has raised the spectre, however remote, of military action. King Abdullah, the new Saudi monarch, is not known as a price hawk. But observers worry that his accession has come at such a politically precarious time that he may favour higher prices, to give him cash to buy off dissent. This view was reinforced by news this week that America shut its diplomatic offices in the country briefly, because of threats of terrorist attack.

All this feeds what may be the biggest force moving the oil price: speculation. On one estimate, $22 billion of net new investment has entered the oil futures market this year, $8 billion of it flooding in since the end of June. As a result, forward prices have risen by even more than spot prices.


My speculation: India and China's rising presence on the world stage. Two nations that cover about half of the world's population are starting to consume oil in the way that big economies do. So naturally, the base price is going to increase.

That's what I think, anyway.

If Matthew Simmons,author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy is right, we are already f*cked beyond belief, because our entire economy is based on cheap oil.

My heating oil budget payment went up this year from $55 to $130. Imagine how much it'll cost to heat homes when it's $300/barrel. And natural gas is no answer, because increased demand for that from people switching over will cause cost increases there as well.

We had a window during the 1970's oil shocks to wean ourselves from petroleum, and we didn't take advantage of it.

What astounds me now is that the very same people who screamed bloody murder in the 1990's when gasoline went to $1.30 are now quiet as a mouse as they pump 50 gallons of $2.59 gasoline into their SUVs.

I believe it's more than just rising demand, the current oil and gas industry has managed to keep supply tight, but not create a shortage or glut.

Exxon and Mobil merged in 1999, Chevron aquired Texaco and BP, Amoco and ARCO merged in 2000. I suspect this has created what amounts to an oligopoly which together with speculators will work to keep prices elevated. Perhaps I'll make this the subject of a new post if I can find some better supporting data.

Can anyone explain who the "speculators" are exactly, and their impact on oil prices? (besides the pay-only Economist article).

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