Many people wonder: why has oil gone up 800%+ since 2003? That's a mightly high inflation rate. Are China and India soaking up the stuff? Is OPEC stingy?
My theory is that speculators, just as they did when housing became an investment instead of a dwelling, are driving the price up through the roof. I don't pretend to be alone in this theory. Soros pointed out the blowup of asset valuation in the Financial Times on Monday. But as The Wall Street Journal points out, investors are taking advantage of the delay in credible information on the effects of skyrocketing oil prices on demand. The most recent report from the International Energy Agency (IEA) on Tuesday only reflects data on global supply and demand ending April 2008. There's generally a 2-month lag on information, and as Lawrence Eagles, the IEA's head of market analysis, said:
For a market to operate efficiently you need perfect data, and the data we have is far from perfect.
Adam Robinson, an energy analyst at Lehman Brothers, said that Friday's $11 jump in price per barrel was due to bullish traders cashing in their options at $120 per barrel. Instead of taking the profits out (which must have been considerable; I think the price closed on Friday at $138), they plowed it back into the commodities market, buying options at the strike price of $150. Wall Street traders that sell those options in turn buy futures to hedge against the risk of more oil spikes.
(Let's say that because of all the frenzied buying and maybe an accidental bomb dropping on Tehran, the price goes up to $160 a barrel. What a payday that'll be!)
A recent study on the economy's continuous roller coaster of bubbles/busts shows that the bull rush drowns ou the bleats of the bears. The law of supply and demand isn't working too well to lower prices, says Citigroup energy analyst Tim Evans, who expects the IEA to project further cuts in oil demand:
However, he notes traders have been ignoring such bearish estimates for months. "They think, 'It's not bearish enough for me to pay attention to, and bulls make all the money."
To hell with everybody else. As the WSJ reporter, Ann Davis, wrote, "High oil prices do to an economy what termites do to a house: Ruin everything."