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What's Behind the Oil Bubble

Tech stocks, real estate... crude oil? Has the oil market become the latest of a series of financial bubbles, fueled by low interest rates and cash sloshing around in search of quick returns? Probably.

But even a bubble can keep floating for a while if enough people keep pumping it up, and it looks like that is what individual investors and financial wizards at pension funds are doing by injecting more and more money into commodity funds. Guessing when oil prices might fall back to earth is a treacherous business; Wall Street is littered with analysts who said prices would drop $20, $30 or $40 ago.

Crude oil topped $119 a barrel on the New York Mercantile Exchange yesterday, up more than 25 percent this year and more than double what the price was just 14 months ago. That's astonishing given that 1) there has been no new disruption in supplies, 2) the world's largest oil market - the United States - has been relatively stagnant amid economic slowdown, 3) the prospect of a U.S. military clash with Iran has diminished since last year in the wake of the National Intelligence Estimate downplaying Iran's progress in developing nuclear weapons, and 4) many hedge funds and investment banks are believed to have sold down their energy positions to raise cash to meet pressing financial needs as the sub-prime mortgage crisis spreads.

Yes, I know. China's oil thirst is growing and Nigerian pipelines were just blown up. But China was growing last year, too, and Nigerian pipelines have been disrupted regularly for years now. All of that should have been "priced in" before. True, the U.S. dollar is weaker, but even at $1.60 to the euro it has dropped maybe 10 to 15 percent since last summer, while oil prices have soared 75 or 80 percent.

So if this is only a temporary bubble, how long can it last? There's the rub; it could last a while. That's because investment funds, pension funds, hedge funds and maybe individuals are all diversifying their holdings by adding energy-rich commodity funds. That diversification process could take some time because some of the funds, especially pension funds, are very big. Also, while U.S. demand has leveled off or even dropped a bit amid high prices, a steeper drop in demand will be needed to put a dent in prices. That will take time too, as people seek more fuel-efficient cars.

Here's a February Harper's magazine piece suggesting that alternative energy could be the next bubble.

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I love the doom and gloom. Such scenarios are not borne out by history though.

A couple of points:

1. Following a steady 20-year bull market bubbles have successively formed in equities and housing, with the later enabled by the response to the former. Now, yet another round of accomodative Fed policy is shifting the bubble into hard assets. History shows this is a very typical business cycle.

2. Oil isn't going away tommorow. Sure, it may peak soon, but the idea of the world needing ever-more supplies of oil and suddenly not being able to find it is pure fantasy. We have lots of other sources of readily accessible and plentiful energy. The transiton will be orderly and occur over the span of several decades. To think otherwise is to ignore history.

3. I love how the market talks of India and China driving demand for oil. But what's in turn driving their demand? America. And we're in a recession folks. How can China keep buying Buicks if no one is buying chineese goods? At the end of every bubble there is always simple extrapolation that doesn't account for reversion to the mean.

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Step back and thnk about facts.
Canada's oil shales (sometimes called oil ands or tar sands) do not need $150 a barrel - take a look at a major producer: Syncrude's profitability or the Canadian Oil Sands Trust. While there is a 200 year supply at planned (expanded production volumes), they cannot provide all of the oil. There is an environmental cost to developing them, not as bad as the environmentalists say but still a challenge.

The U.S. is the largest consumer of oil and yet has the lowest price of gas in the G7 countries. The U.S. hasn't tried to practice serious conservation. Big cars, big houses, house built in places that need massive amounts of air conditioning etc.

Oil consumption is being heavily subsidized in the growing demand nations such as China and India.

The OPEC countries do not have the reserves or the production ability to place that much production onto the market and there is no vested interest in them doing so to lower gas prices for the U.S. consumer. Prior to the run up in oil prices, the OPEC countries experienced a significant loss of the wealth curve they experienced in the 70's - they have learned from that.

The use of military power to obtain significant oil production in the middle east is not a viable option (setting morality aside). While countries in the world fear antagonizing the U.S. to the point of an invasion, they have learned (again) that they can deny the U.S. any benefit with a low grade guerilla warfare.

No new oil refineries to produce gas have been built in the U.S. because nobody wants one in their backyard. They also cost billions to produce and are not always so profitable (check out historical crack spreads). Ironically, it was more profitable to create housing secured 'financial instruments' to be pawned off around the world - why invest in hard assets for 10% returns.

We have lived in time when energy on an inflation adjusted basis has become incredibly cheap. To bring alternatives on-stream is going to mean energy, as a component of cost to our lifestyle, will become a larger cost component. It will bring about change: many 'industries' have been reliant on low energy costs. Take fast-food outlets; they rely on low gas costs for 'drive through' customers, low gas costs to get their low paid labour, low oil costs to provide them with throwaway products (containing various petro-chemical products); low transportation , fuel and feed costs to mass breed chickens/beef, slaughter them and deliver them around the country. THere WILL be significant inflation in some industries costs.

The prices you see quoted for oil are spot prices. Most oil is sold on long term contracts at less than spot prices - it is the movement in that pricing that triggers speculation on spot markets and that trend is upwards.

Global demand is a reality. There are a number of newly built, and teetering on the edge of bankruptcy , Liqiuid Natural Gas plants on the East Coast of the U.S. who didn't factor in the bidding price for LNG which is sold only when the vessel is ready to leave port. The U.S. didn't get the LNG imports and natural gas rose as a result.

There is no conspiracy - business people are just not that smart -solely focused on profit perhaps but smart no - the laws of supply and demand are at work. The speculators are at work in the spot market for sure. They are betting that the U.S. consumer cannot change their behavior quickly, that the industries supplying them will not change quickly, that the US government will feel compelled to subsidize their energy consumption. They are also betting that China and India will also do that.

My predictions: when the spot bubble bursts and everyone says 'I told you so', check out the price for long term will be $85-95 oil (assuming no worsening of US dollar) and $10 Natural gas. The cost of a burger will have doubled; the cost of chinese imports will have doubled. There will be less disposable income. Texas will be well on the way to becoming one of the largest producers (and consumers) of wind power generated electricity; solar will be breaking new ground; the American economy and consumer will start a process of adjusting to higher energy costs as we move to an era of less disposable income.


Speculation is driving up oil prices. Speculators need to be reigned in to get a real feel for the price of oil.

If there's a hurricane, or a refinery fire, or shutdown for maintenance or any little sneeze, or potentially oil relevant news story speculators will ratchet up the price despite the key points made at the top of your article.


There's a small Oil refinery in Wynnewood Oklahoma, a town 40 miles south of my home. It isn't big enough to refine more than about a tea cup a day but when they had a small fire there it was on natoinal television and used as a reason for raising global oil prices. ONE MORE SLICE OF OIL CO. BALONEY!!!!


There's a small Oil refinery in Wynnewood Oklahoma, a town 40 miles south of my home. It isn't big enough to refine more than about a tea cup a day but when they had a small fire there it was on natoinal television and used as a reason for raising global oil prices. ONE MORE SLICE OF OIL CO. BALONEY!!!!


To Rashers101: April 23, 2008 8:12 pm

Did you ask the senior oil exec how much is his yearly salary, bonuses, retirement package, health insurance package, severance package, perks?

I agree w/Roy. "Greedy oil men".


To answer Joe, supply is being manipulated by the likes of our REAL enemy Saudi Arabia, Iran. Its already established the Oil Cartel of the Middle East along with PuttyPutes Russia is manipulating the worlds oil supply. IRAQ! Why aren't they using their oil money to support their countries needs instead of the American people paying for it? They have a surplus. How much oil are they selling America? The Bush policies and politics disgusts me. Will the nightmare NEVER end!


Ultimately? It's globalization. Those same corporations that scour the world for the cheapest labor costs, the fewest government regulations (for basic worker protection, environmental standards, etc.), the companies that had caused a disasterous downward spiral of wages and benefits and landed this country into the middle of a DEPRESSION, well they have depressed the dollar, and with their Wall Street and Commodities Exchange brothers, have scammed the cost of oil up. These swine, these treasonous cockroaches that should be tried and executed, are also responsible for rapidly rising food prices, for food and metal and other basic commodity shortages, that have led to people starving. It will come to this country, likely this Fall. As with any murderer for hire, someone who does it for the money or for the thrill, these "free traitors" are exhibit "A' for extending the death penalty to white collar crimes.

paul taylor:

The housing fiasco took a long time to materialize. And all relevant precautions were ignored until housing became a crisis and broke. In retrospect, all the experts were wrong, including the venerable Federal Reserve Chairman.

Oil prices are now suspect. Like housing, this industry is also benefiting from intentional lack of government oversight. The Bush-Cheney administration has deep ties to the oil industry. And this makes this government even more suspect in allowing oil prices to inflate.

Many people have noticed a certain trend in these recent years. Gasoline pump prices rise; public reaction sets in and prices fall back a little, so that the public resistance is mollified. And after a price pause, prices rise again; the same pattern follows: up and up go the prices, and, always, they stick, as the public becomes acclimated. And, always too, deja-vu the housing bubble, the experts are all agreed this is a legitimate market phenomenon.

So what's to say that oil is not a bubble also, based, again, on industry greed? This industry knows it can get away with it, if they are careful to conceal their machinations from the public. They have a sympathetic team in the White House.

The really terrible thing about this scenario is that, housing and oil are the building blocks of the economy. And if it is true that Bush has allowed these industries a free hand to pursue a particularly self-serving ambition, Bush is willfully allowing this nation to fall into recession, as his term is expiring.


There's a new discovery that would radically change the world.

Oil will be a goner. Although it's a blessing to many, it would be a curse to oil producing countries who did not foresaw this coming. They have not diversified well and it's them who are going to feel the brunt.

The Bible prophecy was right again.

Gregor the first:

Its all sad really. Its all about money and power and the little guy getting screwed. We live in the corporate age, when governments all over the world are controlled by corporations and their interests. Big money (hedge funds, investment firms, multinational corporations) are clearly a big part of the problem. These money changers care of nothing but making money. The tech bubble, the housing bubble, the credit crisis -- all driven by the money changers. Government is owned by big money figuratively. The fourth estate is owned by big money literally. Like in the final days of the Roman empire, the masses are kept "happy" by big events -- gladiators(football, etc), and by mass entertainment. Meanwhile, those in power and with lots of money get more power and money. The masses are let to eat cake, while they starve. A rather dire diatribe, I think. Something wicked this way comes -- an economic crash unless the money changers change their ways. But as with the blind power elite who ran the Roman empire into the ground, as with the French aristocracy before the revolution, as with the British before we sent them packing -- the blind money changers of today will ride the ride as long as they can; damn the consequences to everyone else.


The inflation-adjusted cost of fuel was flat or decreasing for decades. I thought the Left would be very happy to see oil prices rise like this. This will reduce gasoline consumption like nothing else. SUV purchases are way down finally, apparently because cash counts more than conscience to most people. Hybrid vehicle sales are up. There is much more interest and investment in alternative sources of energy. People actually care about conservation. Isn't this what the Left wanted?


Two years ago this week, the madam Pelosi pledged the dems would lower oil prices through the machinations of some sort of pelosinomics.

Gas has gone up 1.18.

Nice work, Nanc, you are doin a hell of a job.


For what its worth, I recently spent a few days in the company of a senior oil company executive. In our discussions of the recent spectacular oil price increases he emphasised two key points:

(1) Oil companies have little to fear from peak oil, and may have much to gain (When I said that I could see a day when oil was too expensive to burn, he said that that would suit him just fine).


(2) NONE of the corporate or national reserve estimates are reliable.


When dealing with commodities such as oil, demand includes both the end users and the investors who buy oil futures. Being that the stock market and real estate both performing poorly at the moment, investment capital is flooding into the commodities markets, thus increasing total demand for oil. Thus, even if oil production and consumption both remain flat, demand can still change and affect the retail price. If I'm not mistaken, this is what Mufson is talking about.

Yes, petroleum supplies are limited. And yes, we should conserve existing supplies and use other, cleaner sources of energy. But this is not what this article is about. This market is about the commodities market.

Next, how about an article explaining how relatively small decreases in grain supplies are leading to large and rapid increases in prices? I suspect that it is because cheap imports set the bar, price-wise, for domestic suppliers in every country. Most grain is consumed domestically. Grain imports, while making up a relatively small proportion of total consumption in many countries like the Philippines (~10% for rice?), nonetheless force domestic produces to keep prices down. When international surpluses drop, domestic producers are free to cash in. But I am not an economist, and I would appreciate having someone with real expertise (i.e. a commodities trader) weigh in here. For some reason, the media keep allowing people as ignorant as us to report on these issues when the task clearly calls for people with specialized knowledge.


Hello Monte Haun:

I suspect that "proven reserve" numbers are not worth the paper they are printed on. Do you remember how Shell-BP got busted a few years back for inflating their reserves in Yemen? They were bolstering their stock price by claiming to have an immense amount of oil in their wells in Yemen. It turned out to be a fraud -- they had a bunch of empty holes, and Yemen is finished as a big producer.

Likewise, ALL of the OPEC countries cheat and fudge their "proven reserves" numbers because their OPEC quota is based on their proven reserves number. So all of them exaggerate their reserves and give numbers that are complete fantasies.

Saudi Arabia has not published any real numbers on their reserves since the 1980s. All of their numbers for reserves and production are closely-guarded secrets.

Read "Twilight in the Desert" by Matthew Simmons. He is a Texas investment banker whose whole career has been financing oil projects. There is obviously very little that he doesn't know about the oil industry. He describes how the producers fake the "proven reserves".

Matthew Simmons also describes how Saudi Aramco is now bragging about how good they are at techniques like bottle-brush drilling. But that is a desperation technique that is only used when an oil field is near empty. Bottle-brush drilling is only used to suck the last bit of oil out of a depleted field, by drilling sideways and getting the oil that is between the gas and water layers, and it causes fields to fail suddenly and dramatically by joining all of the wells in a field together so that when one well starts producing nothing but sea water, all of the other wells do the same, all at once. And Saudi Aramco is using that technique in the Ghawar oil field, the biggest and best oil field that Saudi Arabia has. That is not promising news.

I don't have much hope for new techniques that will make wells that are producing nothing but sea water start producing oil again.


If the rise in oil prices is due to a bubble, then where are the inventories?

The current oil supply seems to be being used as fast as it is pumped out of the ground and there is little evidence of additional sources of supply. And with China continuing to grow at 10% a year it will soon soak up any decline in American demand due to recession.

In other words, there is very little evidence of imminent increases in supply, while continuing growth in demand is certain.

Of course, if the rise in oil prices is due to a peaking of global supply, then price rises will be continuous and permanent.

It'll be clear by the end of the year.


A previous poster gave a link that was in error: should really be

It's an interesting web site.
This page is especially interesting:
(add in front of this)

Here, the Dept. of Energy declares that the cost of producing a barrel of oil held steady in foreign countries (in 2006 constant dollars) from 1993 to 2003. But from 2004 to 2006 it more than doubled -- up 2.5X.
Likewise, domestic production costs doubled, and the offshore production costs totally went through the roof -- up nearly 7X.

What all of that means is simply that the remaining oil is harder to extract.

I really wish that the conspiracy theorists were right -- that the Saudi Arabians were just royally gouging us. I fear that the truth is that Saudi Arabia CANNOT produce any more oil than they already are. We are constantly entertained by Prince Abdullah assuring us that they will produce more oil and drive the price down. And then nothing happens. The price goes up some more the next day. I think the dirty secret is that Saudi Arabia is maxed out.


Harry Truman "The Buck Stops Here!"
George W. Bush "The Buck Stopped Here, there is a little change left."

Most are aware of the friendship between the Bush family and the Saudi Royalty. Now that oil has gone to nearly 6 times the price per barrel as it was in 2000. The US is sending hundreds of billions into the Saudi coffers as well as the other oil rich Arab nations.

I can't help the reminder that the majority of 9/11 terrorists that struck America were of Saudi origin. All of them were from Arab nations.

Many don't believe Bush can be held responsible for the cost of a barrel of oil, but I beg to differ with them. He is alone responsible for the destabalized nation of Iraq. And he said he was responsible.
""As President and Commander-in-Chief, I accept the responsibilities, and the criticisms, and the consequences that come with such a solemn decision.""
Now would be a good time to accept full responsibility and cease trying to blame previous administrations or the Democrats in the House and Senate. (Or was the above statement once again something other than the truth.)

Monte Haun:

"Hello Terrance,
Whatever the number of fields that have peaked, there is still a lot of oil in them. May I respectfully ask you to recall the definition of proven reserves, i.e., the amount of oil that can be commercially produced at current prices. With prices having more than doubled in two years, the application of methods that are both more expensive and more advanced raises the amount of oil that can be derived both from fields long under production and from other areas not yet developed"

An interesting notion. Do I understand that when all the oil is nearly gone and the price of the last barrels is soaring, the proven reserves will also be soaring?

Though,in all fairness, during the great gold bubble, and after all the old unprofitable mines were reopened and second tier prospects developed, I thought that nothing more could be done to increase supply.

But I didn't count on the success of acid leaching of old mine tailings.

Monte Haun


Hello Bill B:

You are quite right in stating that the rising prices have made it economically feasable to extract more oil from declining fields. It is even profitable to go back to dead fields in Texas and Huntington Beach to extract a little more oil. But that is just squeezing out barely enough to offset the sharp decline in production in fields like the North Sea and Mexico. And Venezuela. That is why the supply is just holding steady even though the price is way up. Under any other conditions, the supply would be rising sharply when the rewards are so high.

Yes, there is plenty of oil left in the ground -- probably enough to last the wealthier part of the world for a few more decades -- but it's the more difficult-to-extract oil, the bottom of the barrel -- like the stuff under Huntington Beach that nobody would even bother with until the price of oil rose so high. So we will have more oil, for a short while, but we will pay for it.


An excellent article from a few years ago in Rolling Stone that dispels the dilusions of the current author.

The Long Emergency
What's going to happen as we start running out of cheap gas to guzzle?

Posted Mar 24, 2005 12:00 AM

A few weeks ago, the price of oil ratcheted above fifty-five dollars a barrel, which is about twenty dollars a barrel more than a year ago. The next day, the oil story was buried on page six of the New York Times business section. Apparently, the price of oil is not considered significant news, even when it goes up five bucks a barrel in the span of ten days. That same day, the stock market shot up more than a hundred points because, CNN said, government data showed no signs of inflation. Note to clueless nation: Call planet Earth.
Carl Jung, one of the fathers of psychology, famously remarked that "people cannot stand too much reality." What you're about to read may challenge your assumptions about the kind of world we live in, and especially the kind of world into which events are propelling us. We are in for a rough ride through uncharted territory.

It has been very hard for Americans -- lost in dark raptures of nonstop infotainment, recreational shopping and compulsive motoring -- to make sense of the gathering forces that will fundamentally alter the terms of everyday life in our technological society. Even after the terrorist attacks of 9/11, America is still sleepwalking into the future. I call this coming time the Long Emergency.

Most immediately we face the end of the cheap-fossil-fuel era. It is no exaggeration to state that reliable supplies of cheap oil and natural gas underlie everything we identify as the necessities of modern life -- not to mention all of its comforts and luxuries: central heating, air conditioning, cars, airplanes, electric lights, inexpensive clothing, recorded music, movies, hip-replacement surgery, national defense -- you name it.

The few Americans who are even aware that there is a gathering global-energy predicament usually misunderstand the core of the argument. That argument states that we don't have to run out of oil to start having severe problems with industrial civilization and its dependent systems. We only have to slip over the all-time production peak and begin a slide down the arc of steady depletion.

Read all about it!

Bubble Popper:

Funny when there is a bubble like the housing bubble no one will acknowledge it. But when a fixed (and perhaps soon declining) supply meets climbing demand results in high prices everyone wants to call it a bubble. In both cases its denial, people afraid there housing "wealth" would evaporate failed to acknowledge the bubble. People afraid that there SUV will be too expensive to fill up now wish to deny that there is an energy problem. OPEC feeds this denial, they want us to keep on paying, and paying and paying until they run dry.

Bill B.:

Hello Terrance,
Whatever the number of fields that have peaked, there is still a lot of oil in them. May I respectfully ask you to recall the definition of proven reserves, i.e., the amount of oil that can be commercially produced at current prices. With prices having more than doubled in two years, the application of methods that are both more expensive and more advanced raises the amount of oil that can be derived both from fields long under production and from other areas not yet developed.
You are of course right that the fundamentals--the basic supply actually produced and the volume of oil actually consumed--have changed remarkably rapidly in the past few years. However, it is extremely difficult, for me at least, to see how the fundamentals could have changed enough to explain the price increases we have seen in so short a period as a few months.
A key indicator of the existence or non-existence of a bubble is a rise in inventories. Assuming accurate, global inventory figures, no increase suggests no bubble, and vice versa.

reality vision:

We (readers) should stop looking for conspiracy theories and expand your comments further as the flight from the dollar continues. Inflation looks to be a design of the current monetary policy and a possible cure for these declining housing values. While we wait for wages to catch up there is bound to be some negative fallout. This aquisition of commodities extends beyond oil or energy and is beginning to be felt in other areas as well. The question is: how do you invest billions each month in todays markets? I think your comments are on the right track only just at the surface.

Democrat (again):

So "IF" the supply is really leveled off and production cannot increase (have trouble believing anything from the crowd making record revenues) - then the only conclusion is that it would have been KNOWN by Cheney and Oil Execs in their infamous meetings. That just makes their policies that much more criminal. To know that and to wait another 7 years before "pronouncing" that we need to do something about alternative fuels - to spend $3B a year on alternatives while $2B a day on the pentagon ... Well we have been able to enrich Halliburton and the Oil Cos while in office ...


Let's hope the oil bubble lasts until next spring. This way Bush won't have an opportunity to fund a huge bail out for his friends.

What concerns me most about the housing bubble burst, and what I fear about the oil bubble is the whole time these industries get richer while we get poorer. Their only solution for high prices is to "drive less" or "don't buy more house than you can afford". But after they've made trillions off of us and when the market finally falls out from under them, they require more of our money to keep them afloat in the form of a bailout. All of a sudden it's "these industries are vital to our nation, we must do what we can for them". What happened to drive less?


what is really criminal is what the oil cos do about this. I downloaded the crude oil and gas price data from the Dept of Energy for the past 18 years. When you look at the graphs - they track pretty much on the same curve - until you look at the detail - every summer for at least the last 3 years, there is a bubble - a jump "claiming" that supplies are in excess demand. If you were producing lawn mowers, you'd produce more in the summer, like toys for christmas. But the oil companies do not do enough so that they can "claim" demand and make excess profits. In addition, when the price of crude goes up, they also get the gain there. This is not a free market. Now that the traders are here (and driving up food-commodity prices) the oil companies will make record earnings again in the next year. When will that part stop? Why do we continue to subsidize when they make record profits?

John Peters:

Without commenting on the relative reasons for the specific price per barrel we see today, something that is important to know is that the U.S. Department of Energy, Energy Information Administration ( shows that total worldwide oil production, including conventional and non-conventional oil, has been flat at 84.6 million barrels per day for 2005, 2006 and 2007. Only time will tell, but this may be the plateau before worldwide oil production begins a permanent decline. This at the same time that many nations are increasing development and demand for more oil.


Hate to say it but the federal government is going to have to step in and mandate offshore drilling overruling individual state laws and concerns. But also they need to oversee and build metrorails in the highly populated cities and speedrail links between the highly populated cities. Rapid transit is the only long term solution, but it has to be done right and built by the federal government since I think they fund a large portion of the project anyways.

I live in California and you wouldn't believe the lousy rapid transit system this state has funded. First they built some of the rapid transit in Los Angeles underground, WE HAVE EARTHQUAKES EVERY SO OFTEN what are these idiots thinking. Other cities were allowed to refuse to allow the metro rails to go through their city, WHEN DO CITY RIGHTS OVERRULE STATE RIGHTS? You need the Federal government to overrule such idiots.


I don't have time to read all the comments on this post, so this may have been covered, but here goes:

This Blog entry is simply contrary to the facts. Steve Mufson just repeats the accepted mantra that there is no real supply problem. IEA Data show that daily oil (total liquids) supply in January 2005 was 84 million barrels a day. In January 2008 it was 86.5 million barrels. This represents about a 1% growth. This is historically very low growth, especially with India and China's large new appetite for energy.

The even bigger story is that the amount of oil consumed internally by oil-exporting countries like Saudi Arabia, Russia, Venesuela, etc. is growing at near 6-8%. This oil is subsidised and NOT priced at the market value. This results in fewer exports. The amount of oil that is exported daily has actually FALLEN the last few years. This is the oil that is actually priced at 115$ and falling supply in the face of increased demand results in higher prices. Very simple. Jeffrey Rubin, cheif economist, CIBC World Markets and Jeffrey Brown, Petroleum Engineer have explained this fact widely.

The fact that the media cannot come to grips with the fact that we live on a finite planet with finite oil speaks to some type of mass self delusion that business is going to continue as usual with oil. This could not be farther from the truth.


Well, at least now we know what cheney and the oil barons talked about in their secrete meeting a few years ago...

Hallibush,Inc. will soon be out of office, less than a year to go... Yea!!!


Hello Steve,
Oil depletion is a reality. It isn't a bubble. It isn't just the work of speculators.

All of the major oil fields in the world, with the possible exception of Iraq, are in decline. Mexico's biggest field, Cantrell, is history. In two or three more years, Mexico will not be able to sell us any oil at all. They will use the remainder for themselves. Likewise, Yemen is dry.
Syria is dry. Kuwait has peaked. The Caspian Sea is a joke. Iran is past its prime. Matthew Simmons makes a great case in his book "Twilight in the Desert" that Saudi Arabia has peaked and can't produce any more oil than they are right now. And of course the USA is long, long past its peak, and is finished as an oil supplier.

That's why the price of oil is high. It isn't a bubble. It's simple supply and demand. The USA, Europe, China, and India all want huge amounts of oil, and the Earth can't fill the demand.

End of story. Get ready for the Post-Petroleum Age.


I don't know why the affect of the ongoing war and the defense spending is not being discussed. Is it because the subject is unpatriotic ? The war has weakened the dollar and we are paying more and more dollars for the same amount of oil. It is not China or India buying out all the oil. I don't think they are that rich.

Yuri Lipitzmeov:

Mr. Mufson has hit the nail right on the head.


What a bunch of useless comments. I read the article too and had some thoughts and ideas about it. I also had some more questions. I thought I'd find some intelligent and helpful answers in the comments, but instead I read a bunch of different agendas and bad-mouthing of America. Especially the comment before this one. That person is just an instigator. I can't even appreciate his input since he sounds like such a dumb jerk. Wanna know the problem with America? Ignorance and arrogance. So many people with NO answers, but can't wait to call other people wrong. Like a circle of stupidness. What's the problem with oil? Easy, America relies on some of the most immoral, mischievous, and/or unstable countries in the world for its most precious resource.


We must start moving to more electric type vehicles, not in 10 to 15 years, but now. Why hasn't the media picked up on Congress blocking all attempts to move to energy efficiency and independence in this country? This government seems to be stalemated on improvements in energy and the big question is why? Money?

Vic van Meter:

There is actually a very, very glaring reason for the US economic shock with rising oil costs that, outside of a very few individuals on this forum, has not been addressed.

The most important problem with American oil consumption isn't rooted just in SUVs nor is it to blame on alternative energy's slow advance. The entire way American society works, for decades if not a century, has evolved based on allowing more and more consumption for each individual. Nearing 2010, those infrastructural problems are beginning to collapse and leave us scrambling for solutions.

So though there are a large amount of problems, the most pressing problem is our reliance on the suburban way of life. Our biggest problem is, thus, zoning.

Suburbs are simply a corruption of ideals of the English countryside mixed with a utopian idea of Frank Lloyd Wright's. The idea of seperating your work area from your living space was meant to be connected by mass transit, however inexpensive oil and cars prompted the mass transit idea to be lost and replaced by the freeway system. But even before that, urban centers have divided residential from commercial and industrial areas in America. This was done with good intentions, but is one of our most distressing problems.

Unfortunately for us all, whatever source we use for energy is going to be largely wasted to maintain our current way of life. You can blame the government or society for saying that the best way to live is in an isolated house or to live as far from commercial needs as possible, but you cannot blame any one person. American society as a whole since the early 1900s has been built on the back of a fuel source with an expiration date.

What should we replace it with, though? Obviously, if we are going to do something, it needs to begin now. Immediately. Not only should renewable sources be realized, but electrical production would benefit well from nuclear facilities and an actual plan for what to do with the waste (outside of the current plan of, obviously, burying it). New fuel sources should be certainly realized but with a mind to their eventual expiration, if any. But the biggest change we, as a nation, can make is to finally erase the suburbs.

Much land is wasted in the building of vast personal land holdings which produce little food, house little industry, and is not often a seat for commercial enterprise. The government, through both parties and for many generations, has encouraged home building and ownership with a blatant disregard for the consequences. The government maintains laws and regulations on all levels which keep us inexorably tied to personal automotive transit by denying mass public transit to cities that lack it and by subsidizing the public's bad habits. Not to be outdone, the public have defended this vicious cycle while ignoring rising fuel costs, loss of farmland, the contraction of American industry, and all of the trouble associated with urban sprawl and the donut effect.

The only solutions are to either change our way of life to something highly centralized in urban centers, linked by more efficient mass transit systems (electric trains and their ilk would be preferable) or to decentralize into smaller, self-sufficient villages where everything is within biking distance. Either way, the net result must be the drastic reduction or outright death of the personal automotive industry as we know it from gas-consuming monsters to something more suited for the coming lifestyle.

We have little choice in the matter. Any potential fuel source at the moment that we are prepared to implement as far as personal transit goes has difficulties in vehicle range, price, opportunity cost, et cetera. Unless some great innovation happens along that changes the face of personal transit as we know it, American society must contract and begin contracting now.

Time will tell what comes to pass, but mine is the generation that will likely see it. Hopefully, now that the problem is becoming acutely perceived, an eventual solution will arise. But until that time, be prepared to pay for your gasoline in ever more hurtful sums. Until the government eventually regulates and allows another alternative to gasoline fuel, perhaps everyone can do themselves a favor and attempt, to the best of their ability, to move closer to work.


==During the Great Depression commodity prices crashed.==

Oil prices will also crash during the upcoming Greatest Depression. The difference with the previous one, is that when it was over there were commodities to be had, as there were adequate supplies.

For capitalism to work, open ended resources are required. Just because most economists appear to be ignorant of basic science, laws of physics have not been repealed by their ignorance.

Mark G.:

I'd like to see one journalist write a story about how the wekening dollar leads to higher oil prices (in dollars). There are of course other reasons, such as higher demand from developing countries, but just because the cost of oil is going up in dollars, does not mean that it is going up in Euros or Yen (at least not by the same percentages).

And a question: If Hillary or Obama will be elected, how many Bush haters will be on serious anti-depressants in 2010, and possibly suicidal, when they realize that just because your guy or gal is in the White House, every day life will continue, gas prices will remain high, the economic cycle will continue with booms and busts, and "bad guys" will still exist in companies, unions, and the streets?

TA Webster:

It is ironic that 'we the people' are some of the most manipulated on earth.

It is equally odd that even though we 'think' we're part of the greatest democracy the world has ever known - we do not actually participate in a democracy at all; nor do we recognize one when we see it.

These facts attest to how thoroughly the 'American people' have been propagandized by corporate media and govt. 'talking heads'.

Americans are slaves to a system that preys upon them and turns around and tells them how well they are treated.


During the Great Depression commodity prices crashed. Certainly, housing prices have crashed or fallen hard. As unemployment climbs, expect all commodity prices to fall.


You remember that economic stimulus package that was pushed through not to long ago. Ever wonder what the real driving force behind it was. OIL!!
Don't you find it interesting that all those federal dollars that will be soon disbursed are just in time to help the average American fill up his/her tank of gas. At $4.00/gal x 25 gal avg. you have just spent $100.00. If you do the math, over the course of the summer all of that so called economic stimulus package will be spent at the gas pump. If you do the research you'll find out who really got the benefit of this so called economic stimulus package worth nearly $150 Billion dollars.


Most people writing on economics seem to have missed most of their science classes in high school and certainly college.

Oil is a finite resource. It is currently about 1/2 or so depleated, at least the stuff that is relatively easy to get to. The pace of new oil discoveries has slowed to a crawl in the last decade and the places they are "finding" it are nasty and expensive to operate in. At the same time, demand for oil is being fueled by proliferation of cars, air-conditioning and generally a better life style in the developing countries. When you have plateau in supply and a rising demand, the price is going to go up. Since there isn't a lot of cheap or even inexpensive oil to tap into these days, the price will continue to rise. Since most of human activity today is impossible without massive influxes of cheap energy (and since oil is by far the engine that supplied that ener, the economic, political, biological and social impacts of very high oil prices and limited oil supply are quite negative and very difficult to manage.

Most people in the West, who are brought up with a rather strange idea of perpetual economic growth, with scientific solutions to every problem (but who mostly have no idea about either science or engineering behind the world they live in), are simply incapable of envisioning a future very different than the one promised to them.


A big part of the problem stems from short-term thinking about a long-term situation. Investors don't think beyond the end of the quarter, politicians don't think past the next election. Nobody with economic or political power is looking down the road 10-20 years.

This, coupled with the historic fact that major changes in infrastructure and technology have taken about 20 years to transition from laboratory curiosity to everyday commonplace reality, means nothing gets done.

We had a big oil shock in the '70s. If this nation back then had embarked on a policy of conservation, fuel efficiency and shifting to renewable resources like wind and tidal power, we'd be about at the end of the transition process and would be a much healthier economy and society.

But the shock dissipated and everyone with financial and political clout got right back to their short-term thinking, increasing our dependence on foreign oil. The attitude has always been, "If you take care of the short term, the long term will take care of itself." So foolish!

We're getting another energy shock, but will there be a shift now to conservation, efficiency and renewable resources? No. Instead we'll go to war to control the dwindling supplies and hog them for ourselves because we as a nation have lost the distinction between an inconvenience and a catastrophe.

Oh, another poster mentioned that drivers in Europe and Asia already pay three times as much for fuel as we do. But those countries are small and have extensive, government-supported rail and bus systems that can take people just about anywhere they want to go. The U.S. is big and sprawling, and public transit is pretty much nonexistent outside of our cities. (^_*)


Early in Spring 2007 when everyone was on the corn-to-fuel bandwagon, I mentioned to most of my relatives that I had grave concerns about food sources being used for fuel, recalling a quote I read many years ago that our entire civilization depends upon just six inches of top soil. Turns out that that corn-to-fuel push did indeed contribute to world-wide inflation in food prices, much more quickly than even I expected. But, looking at that issue in relation to this article, how can the continued increase in oil prices be explained given that we've recently given up our food crops to supplement the oil supply?

Oil royalty owner:

Great new blog! Our family owns mineral rights in hundreds of properties in OK and TX, and the oil companies come to us to lease them. It's interesting to me that we are receiving *more* offers to lease than ever, but the prices most oil companies are offering to us royalty owners haven't gone up in at least 4 years. As a result, we are now signing few leases, and what leasing we're doing is based on court orders ("force pooling"). Something is wrong with the law of supply and demand here, not sure what it is. Would appreciate anyone's thoughts on this.


OK, so the dollar has dropped since last year but the price of oil has risen even more. Normally, there's a connection. They debase the dollar and the price of oil goes up to compensate the sellers of the oil. But the oil market looks to the future. Speculators look at trend. The also look for any sign that the trend might be reversing. And yet with Bush as president and the clown Bernanke at the helm of the fed, the speculators are anticipating more of the same foolishness. And so the price of oil continues to rise - we don't hear a peep out of Bush and Bernanke only knows how to do one thing. He knows how to print money. So, looking forward we'll have nine more months of the clueless chimp and further debasement of the currency. Look for Oil to hit $150 - $200 sometime soon.

When you vote in November remember who made the mess. Do we really want McCain/Bush II??


Good point, Joe.


Look, gas is going to continue to rise in costs. The US Energy policy is a joke. If the US had followed Europe's lead we would be in a better situation. Europe taxes gasoline heavily (a lot heavier than diesel) and most Europeans drive diesel vehicles. Diesel vehicles get at least 25% better gas mileage than the same gas vehicle (compare the gas mileage of the Mercedes E-320 and the E-320 CDI for an example). We need to push our car manufactors to sell more diesel vehicles initally. Next, improve our highways like the Autobahn so most traffic goes through without stopping every 5 minutes at a traffic light. Phase 2 would call for moving to more electric type vehicles to build electric or hydrogen cars than can run for more than 300 miles on a tank. Thus moving away from gasoline or diesel vehicles in 10 to 15 years. Work to get solar panels placed on all households to power up the grid (power companies would have a fit), but during the daylight hours this country would be powered by solar energy. But, this government won't get things right.


I saw the writing on the wall in an article
in "W" Fashion magazine in Christmas 2000 after
Wuba was crowned. An article regarding a
Christmas party for 200 of the very privileged
oil movers and shakers--cost $12 MILLION for
3 HOURS. Party goer quote: "The $$$ keep rollin'
in just like the earl (oil)!" Now, was that
$12 Million for exploration? $12 million to shake
the "Greenies" loose and ruin every decent piece of clean land and sea left? $12 million to make new refineries (Oil Companies "WE FORGOT TO BUILD
THEM.") $12 million to increase oil reserves? It was $12 million to CELEBRATE Wuba bought and paid for by oil...he asks the Saudis to up output and gets a "NO". Cheney asks and it's "NO PROBLEM." There will be an oil miracle the first
week in November with a Democratic president--
prices will come down to $2.50 a gallon and we
stupid sheep will be happy to pay that!


What we have is a problem identifying cause and effect. The oil companies, almost all are based or owned by foreign companies now, know how to limit the supply and cause the prices to grow. In Europe the key problem is the number of refineries. Limit the available oil, price goes up. They have replicated the problem here and guess what, we are heading for a one price fits all across the globe for gas. Within the span of 3 years from now you will pay the same for gas here as you do in Europe. The fact that this plan has attracted investors is no surprise, in fact its the big oil's scape goat so people will not fault them.


The comment on biking may apply where there is urban density, but w/o addressing the effects of those price hikes on rural families and others who are barely making it, that comment carries a whiff of willfully-uninformed bicycle elitism.

Keep in mind that biking in big cities hardly scratches the surface of the problem -- you know, like rearranging deck chairs on the Titanic.

The REAL problem isn't spot prices, commodity traders, dropping dollar, or any of a plethora of symptoms listed here.

It's OVERPOPULATION -- period. Think that one through, and you'll hopefully understand why pitching your favorite transportation mode as a solution is merely putting a band-aid on a cancer lesion.

Think globally ... please.


Michael’s comments are on the mark and diplomatic. I also hope to be on the mark but will be somewhat less diplomatic.

It now appears that Cheney’s energy task force created a blueprint for US military domination of global supplies of non-renewable energy to power the “new American century.” To do that, the Bush administration bet that success would leave us able to dictate terms to our creditors.

One related strategy to this unsavory policy option—which has been advanced for some time, though only recently has it entered the public consciousness—has been the delay of the development and implementation of renewable technologies (hence “Who Killed the Electric Car?”). This leaves other countries also reliant on non-renewable energy, and as the Bush administration would have it, on US-controlled supplies. (Germany and Japan are the most notable exceptions in photovoltaic R&D.)

I write this simply as an interested citizen, not as a specialist, which leads me to ask, if this much is evident to me—with all that is implied—what are the more specialized truths, and what will the current economic system, reliant on a brittle energy system, do if the tug-of-war is not resolved in favor of renewable sources of energy, with the concomittant restructuring of our global human ecology?


Oil will tumble and many investors will be stuck as in the "dot com bubble"..but only after a period of time ..lets say 2-6 months... many will lose from this as did then...sorry oil greedy investors...


Gas needs to be at $8/gallon in order to force a change in habit for most people.


Joe, you asked where are the buildup in inventory if prices are being driven up by speculators.

Hmmm, here's a news article from today:

"Crude falls on inventories buildup"


Supply and demand is a small part of the problem. Oil would be at $85 per barrel if it was only driven by that.
The real culprit is tied to the subprime problem and the Bush Administration doing nothing to strengthen the dollar.
Since the sub-prime debacle has soured the stock market and pushed us into a recession, there are few places for money managers to put their money. Oil and other commondities is where it is going now. The only thing pushing up prices is greed.
The only thing that will stop this is more regulation in the financial markets that is actually enforced. The Bush Administration has, as have all republican administrations, enforced our laws selectively to help big business.
A change to a democratic administration will put congress and the white house on the same path and they will be able to turn it around.

Bill B.:

I think Joe has put his finger on a crucial element, inventories. Although speculation in futures prices does not immediately affect inventories, I believe we are discussing spot prices. Speculation in the spot market requires storing real oil, which raises the question whether we have reliable and timely inventory data. If inventories are actually rising significantly, we are developing a bubble.


The rise in price is mostly due to market forces, which is to say the amount of oil pumped out of the ground has plateaued and the demand keeps increasing. The short term problems of weather and politics in various oil producing areas create worry and speculative spikes, but the underlying problem is geology. According to the majority of oil geologists, we've probably gone through half of our 2 trillion barrel oil inheritance in the last 100 years. The second half of the supply is harder to get to and will be more expensive to extract, leading to a year to year decrease in daily supply of perhaps 3% beginning "soon" (within the next ten years for certain, perhaps earlier than that). The era of cheap and abundant oil is over. This is not a speculative bubble. The priority now must be to conserve and utilize the remaining supply to power our transition to the post-fossil fuel era while keeping essential services operating.


How is it that America is willing to pay $1.89 for a bottle of reverse osmosis water from the sewers, $60/gallon of Starbucks coffee and complain about a $3.50 gallon of gas?! The Europeans have been paying $6.50/litre for many years. Ten years from now, we will be paying $20 per gallon for gas. If more people could ride bikes and change some traffic laws for the safety of the bikers, you'll probably see a reduce in obesity and our environment will be a little cleaner and there will be less fuel demand.


I draw your attention to something most of the media missed, though it shocked the markets and triggered the current rises. The comments from market analysts of which I have included the first one, send a shiver down the spine.

"Saudi King Abdullah Drops Quiet Bombshell
By Jim Brown
Updated: Tuesday, April 22 2008 02:04:AM

I had another article prepared tonight but this crossed my desk from ASPO. I thought it was important enough to post it in its original form. Jim

Saudi King Abdullah drops quiet bombshell

By Steve Andrews and Randy Udall, ASPO USA:

On April 13, Reuters reported the following from Riyadh:

Saudi Arabia's King Abdullah said he had ordered some new oil discoveries left untapped to preserve oil wealth in the world's top exporter for future generations…

"When there were some new finds, I told them, 'no, leave it in the ground, with grace from god, our children need it'," King Abdullah said…

Saudi production capacity stands at around 11.3 million bpd, and is scheduled to rise to 12.5 million bpd next year.

The King's remarks seem to confirm a statement made last year by Saudi oil minister Ali al-Naimi who, when asked "How high can your production go?" replied, "We'll get to 12.5 million barrels a day and then we'll see."

If the Saudi announcement was a bombshell, American nearly newspapers ignored it. We decided to canvass experts we respect to see what they thought. Excerpts follow:

Tom Petrie, vice president, Merrill Lynch:

King Abdullah's quote speaks to the fast-emerging reality of what I call 'practical peak oil.' The Saudis and other exporters are placing a new emphasis on elongating the petroleum exploitation and depletion cycle. This stems from a growing awareness of the challenges of conventional resource maturity, as well as rising resource nationalism. This is likely to result in an earlier occurrence of global peak oil output than many consumers yet recognize." ...
Follow the link for the full story:

On the Supply side:

While peak oil is happening in Saudi Arabia, it is not happening in other key oil producing countries like Russia, Iran and Venezuela and there is of course the vast reserves in the Caspian sea.

The problem for the USA is that the Bush White House has p**sed off most of those with the easily accessible oil.

There have been reserves discovered between China and Japan but both those countries are likely to keep those to them selves.

There is plenty of oil in the oil shales of Canada but the cost of production and processing in energy used to get the energy out means Oil has to cost in excess of 150 dollars a barrel at current dollar rates, for that to be profitable.

Some have noted that various people closely connected to current White House have a vast amounts of their wealth stuck in Canadian Oil shale reserves from the last oil crisis and can only ever get their money back if Oil rise. This has caused some to smell a rat and may be why no one is buying oil shale shares.

While we have Middle East peak oil, it does not affect the whole globe. Other western countries are pushing fossil fuel use reductions and have kept gas prices artificially high via taxes; thus reducing reliance on cheap oil.

Also outside the USA cars on average use less gas as gas guzzlers are highly taxed. Again this reduces the need for lots of cheap oil.

The Europeans and former soviet block countries also have a better public transport infrastructure, the newer economies are moving that way so they will not be caught in the cheap oil trap.

Oil prices are going up in Dollars but the dollar itself is declining compared to the rest of the world currencies so high Dollar oil prices do not mean high costs in other countries.

So in the end much of the rest of the world are just not feeling the pinch as much as the USA.

The USA is the one stuck in the Cheap Oil Trap

Alan Browne:

In the 70's we got a sound warning.

We ignored it.

Here we are. Don't act surprised anyone. If you drive a SUV or other gas hog to work, YOU are the problem.

Gasoline engine: 25% efficient (on a good day)

Weight of a full sized: SUV: 4850 Lbs. (Ford Explorer)

Weight of single occupanct: 180 Lbs.

Energy efficiency to move that occupant : less than 1%

That is to say, for each 100 gallons used to drive that person to and from work, only 1 gallon of the gas counted in moving the occupant... the rest was wasted in moving the oversized vehicle (24 gallons) and as waste heat (75 gallons).

Since the 70's great strides in improving engines were made, however these were used to increase vehicle sizes and power rather than to enable a less horsepower oriented personal transportation system.

Trucks became prime cargo movers despite being 3 times less efficient in energy v. trains. (This is beginning to swing the other way... must be those $4.20 diesel gallons).

Why the price is so high?


All other arguments are consequential.


Some facts not mentioned by the author are:
1) weak dollar has contributed to 20-30% of the price increase in US; 2)artificial gas shortage created by lack of refining capacity in USA (no new refinery built in 30years!!); and 3)instead of pricing on their real costs of procuring oil from big-oil's longterm contract with suppliers (or from their own fields where actual cost is $25-$35); big-oil is making obscene profits at the expense of US consumers.. Great example of a country for the rich, by the rich and of the rich at work! USA goes thru the circus of electing reps in Congrss every couple of years: majority of these Congress people are paid agents of big-business.. With all that the Bush-Cheney regime can attack and destroy other nations to bring democracy!!

Gene Fisher:

So Hillary and Barak should shift their focus from oil gouging to oil speculators. Who are the speculators? The pension funds? Can someone report what return they are getting on their investments and what percentage of that fund mangers get to keep?

Maybe the fed should manage pensions instead of printing money.


Wow Roy... an equal opportunity (male/female, Republican/Democrat) basher! So, instead of piling on to everyone and everything, let's hear your solution? The world is full of people who criticize without an ounce of solution... separate yourself from the pack!!


Prices have absolutely NOTHING to do with oil companies and EVERYTHING to do with 1) Trader speculation in the NY markets and 2) Politicians refusal to allow oil companies to do additional exploration in the US. We have billions of barrels of oil available to us right here in America, but mostly liberal politicians have tied out hands. No matter how many billions of dollars are put into so called alternative engergy ideas and research, we will need lots of oil for many years to come. You "greenies" out there need to get your heads out of the sand and face the fact that we are an oil driven economy. The reason the dozens of congressional committee investigations have NOT found any price manipulation is because there is none. We are a market driven economy and thank God we are!

Andrew H:

I filled up my car a few days ago- and it hurt. I can now take my family out for dinner for less than it costs to fill up. This realization has me starting to use my small car more, and my SUV less. Up until recently I was not bothered by the price.
Multiply my feelings by 10 or 20 million, and I think you will see reduced demand in the next statistics.
Sudden reductions in demand are to bubbles as pins are to balloons.


If oil futures are being bid up by speculators and excess liquidity, then where are the rising inventories that you would expect to see?


Waiting for the market to correct itself will have the same result as the housing bubble. Human beings are hurt. Corporate America's greed is killing millions across the world. What a wicked system we have.


Oil prices are being manipulated by greedy oil men. Like the proverbial "pusher man" these ruthless people know the World and especially the US is hopelessly addicted thanks to neocon short-sightedness in their delusional disregard for alternative energy research. Americans are now "oil junkies" who suffer at the hands of the pushers who keep telling them there is no rehabilitation in sight.

One day, when food and oil prices get too high and the average person suffers too much, there will be a revolution. It won't be pretty. In the meantime weak-sister Pelosi can't do anything about investigating price manipulation because her unwilling, ancient and impotent hands are tied by partisan lemming Republicans in Congress. Hillary Clinton is more of the same and so is McBush.

PostGlobal is an interactive conversation on global issues moderated by Newsweek International Editor Fareed Zakaria and David Ignatius of The Washington Post. It is produced jointly by Newsweek and, as is On Faith, a conversation on religion. Please send us your comments, questions and suggestions.