Why New Oil Price Highs?

West Texas Intermediate closed Thursday above $115/barrel. Does that reflect changes in the fundamentals of world supply and demand? My answer is no.

Let me acknowledge first that there has been some interesting news about world oil supplies. Nate Hagens noted that, although global oil production has stagnated over the last several years, the January 2008 data finally show a new all-time high in terms of the quantity produced worldwide.

Source: Oil Drum

Phil Hart had an informative graphic showing how the stagnant oil production for 2007 represented a balance in which gains in production in some countries were just about matched by lost production from others.

Source: Oil Drum

And there were some important additional new developments just this week. On the positive side, Brazil announced the possibility of enormous new oil reserves. And for the pessimists, Russian oil production, whose increase has been a critical factor in world oil supplies up to this point, fell 1% in 2008:Q1.

Both of these stories are potentially huge developments. If both Russian and Saudi production have in fact peaked, the global peak cannot be far off, even if the Brazilian find is borne out. But I nevertheless am not persuaded that any of these news items is the primary explanation for the recent highs in oil prices. (Chart at right: WSJ)

The reason is that we're seeing similar increases since the start of the year in the price of virtually every storable commodity. The 12% increase in oil prices this year is in fact just the median for the group of 15 commodities graphed below. It seems to me we should be looking for a single explanation behind the common behavior of the group, rather than try to develop a separate theory for aluminum, barley, coffee, cocoa, copper, corn, cotton, gold, lead, oats, oil, silver, tin, and wheat. Click to enlarge:

You can't attribute much more than half of this increase in commodity prices to the decline in the value of the dollar. The dollar price of a euro (the bold red line in the graph above) is up only 7% for the year, which is less than the price increase for all but 3 of the 15 commodities shown. Another way to make that point is to recalculate the above graph in terms of the price of the commodities in euros rather than in dollars, as is done below. We're seeing significant relative price changes, not simple depreciation of the dollar. Click to enlarge:

I also find it implausible to attribute the commodity price increase to a surge in demand. The economic news over the last three months has been very convincing that output is slowing, not accelerating.

Instead I believe that the price of oil, like the price of all the other storable commodities, and for that matter the dollar cost of a euro, is primarily responding to the Fed's decision to move the real interest rate strongly into negative territory.

But once again the Fed has a golden opportunity to prove me wrong. Fed funds futures prices currently reflect an expectation that the Fed will make one more cut to 2% at the meeting at the end of this month, and then stay there. Here's a prediction for you. If the Fed surprises the markets by holding steady at 2.25%, all those commodities will begin to crash within hours of the news.

If I'm wrong, well, the Fed can go ahead and opt for an intermeeting cut the following week, and I promise to quit carping about the havoc they're causing.

What do you say, Ben? Do we have a deal?

Comments

[Chall74440]

I agree! Rates should go no lower. The economy is recovering. Leave things alone.

[eyeswideopen]

Hmmm, that seems to make sense, but for me the reason gas prices are so high is because they can charge as much as they want as long as the Bush administration is in office. Cheney set the energy policy, and the gas companies know once he's out, the good times are over for them.

[User 179796]

Yep!
the bush/cheney favorable oil merger/bigbusiness/tax breaks fo rthe oil companies (remember his energy bill) policy started it...
Then the extremely greedy WALL Street Hedge Hogs had to all jump in and they have taken it to the limits "as a game"....But, alas, they are killing the goose that lays the golden eggs...and in the meantime more families slip into poverty and starvation with each dolar rise in the price.add to this the completely inept economic polcies of this admin and voila, you get oil that is price now, according toeh Sauis, $40 over true market fundamentals...everyon... call teh white house and tell them to open the spigot to the SPR. Also call Goldman Sachs ...(212-902-1000). ..( the brass there) and ask them to call off their greedy oil traders -they manage a large portion of this oil trading mess. ...These high prices are causing people to starve worldwide. Further, our foreign debt is taking us over the brink... big problem...course the admin doesn't want to talk about that or the fact that inflation, in all areas, is at least double what they are telling us...
Things are serious at the aggregate level and at the household level.
Y

[Fanning]

If all the world leaders limit all passenger automobiles to a three cylinder cars and shorten the hours of work by one hour daily as high tech. makes things move faster. Oil price will come down, saving the environment at the same time and no more wars in the Middle East.

[Philippe]

There is a simple solution for all this. Raising the tax on oil substantially, since the US is the main oil consumer, would in fact reduce consumption, bring over time the price of oil at almost the same level before the increase because of less demand, and enrich our government instead of foreign dictators. In turn our government could reduce taxes by eliminating the lower brackets, by keeping only one high income bracket. By the same token, global warming would be reduceed. If we can convince other developped nations to do the same (which most of them already do much better than US), it is a win-win-win situation.

[spaceaid]

There seems to me to be some element of "bubble" in the current price of gold and oil. Do you think so? The housing bubble appears to have been based on lenders over-advancing to borrowers with insufficient income. Are low rates from the Fed the equivalent in the commodities surge?

[Peakoil]

You need to read up on the issue of Peak Oil, read Simmons' book Twilight in the Desert, and generally accept the fact that oil is a finite resource, while demand increases. Or take a class in Econ 101.
BTW, the Brazil giant field discovery turns out to be premature. The Brazilain oil minister was misquoted; they have no idea how big or small the field is.

[Tactical01]

The problems that we are experiencing with enviornment , high gas prices and our trade deficit can be solved almost overnight if we can accept some changes as to were work is performed. Through the integration of computer and telecommunications technologies, it is now capable to productively work from virtually any location. The majority of the population uses their vehicles within a 30 mile radius from their home. Imagine the benefits to eveyone if just 10-20% of the workforce were allowed to telecommute. Gas prices way down, Green house gases reduced way dow, trade deficit reduced etc. etc

[iThinkBig]

On all points I read above. Point one: Conservation. Energy conservation happens when the price spikes. See declining demand. Arguing against this point means your arguing against how a free market works.

Point two: It's all Bush's/Cheney's fault. Big oil didn't get the $14 B tax breaks, it was never implemented and it isn't going to be in the foreseeable future. This President has been screaming from the rooftops about the necessity to kick the oil habit and attempted to pass a solid energy bill when Republicans controlled the House. Truth is, politicians get inside information we only dream about, never mind lobbyists from big oil and environmentalists. Laws must be passed that prohibit policy makers from investing in energy during term and two years afterward. To do that America must go through much pain and elect good government.

Point 3: Iraq cost too much money. Yes it did and why this occured is another matter, but every U.S. President since 1946 has oil as a number two national security issue priority behind right direct defense budgets.

Point 4: Inflation/Bad monetary policy - This is what the author was saying and pinpointing the Fed lowering rates. This is indeed very true but add printing trillions is also the problem. Again the Fed and Helicopter Ben has kept his word. Fed should stop lowering rates and now decrease printing money. Let it dry up, there is a principle called survival of the fittest, you see it's a concept of how we are actually made. Those with the brightest minds and drive get the money and the irresponsible and lazy have a poor quality of life. Amazing, isn't it? Less money means less government intefering into the free market and our lives.

Point 5: Until Washington changes (in other words responsible leadership) we will have much pain. However, necessity is the mother of all invention and there is no other real choices but to create competing products against big oil and the good news is we have the technology and brains to accomplish this goal. Bad government and greed can only prevent it now for so long in the information age and billionaires who see business opportunity. Oh yeah, it wouldn't hurt to lower cost of food and energy to give the global consumer what it wants. Globalization for better or for worse DID create massive demand, and slowdowns and shortages because of bad monetary policy/energy policy temporarily decreases demand for a better way of life across the globe. Now that many have a taste for it, demand will only go up so I do agree with commodities guys that demand for raw materials only has one way to go over the long-haul.

[AmesTiedeman]

Demand will go up to such a point and price will follow, that new technologies will emerge. The end of oil is not the end of man. It is the beginning of new man. The Hydrogen Economy is upon us. We will get closer and closer to this reality as oil heads to 1,000 in the next 50 years...

[OilBaron]

I had to check my calendar after reading the responses, I thought it was April 1st (April Fools Day) again, not the 18th.

When will people wake up to what is going on in the economy and stop blaming the administration, the oil companies and everyone else and start thinking about what is causing the problem.

First, and as unfortunate as it is, the entire world's industrial infrastructure is based on oil, not just the gasoline that is produce from it (only about 20 gallons from a 42 gallon barrel of oil), but all the other products as well. These products include petroleum gas (not gasoline), kerosene (for jet fuel), gas oil (used for diesel fuel), lubricating oil and fuel oil.

Worldwide demand is up, with China leading the year over year percentage increase, supply is becoming more and more unpredictable with everything from the decrease in new finds, to acts of violence against production facilities. (Remember supply and demand from school). The simple fact that people in congress are talking about suspending the gasoline tax for the summer shows how little control over the price they really have. Bush asked OPEC to increase production, they laughed.

The sub-prime mortgage crisis, combined with lower interest rates are both pushing the cost for crude up, and causing investers to flee from equities and into commodities. The exchange rate of the dollar, do to lowered interest rates, and the credit meltdown, makes all the imported products cost more, check the current trade deficit figures and the base products that we import and impact of the falling dollar on all those products.

The increase in the cost of oil, which is increasing the cost of end-use production costs, gasoline, diesel fuel, jet fuel, is increasing the cost of all products including food. (Everything from farmers costs, to harvest, to processing, to distribution, to retail (grocery store) costs. The entire supply chain is impacted. The problem is made worse by the shift to grow corn for fuel, reducing the supply of corn, increasing its costs, which increases feed costs for livestock, which increases the cost of all meat products. Land that was used to grow crops other than corn, has been converted to corn, reducing the supply of those non-corn products which in-turn increases the cost for those products. Additionally, in California, large tracks of farm land have been converted into fields of homes (which are now sitting half finished, are empty), reducing the land available for crops.

Focusing in on the cost of gasoline and its impact on transportation costs, according to the U.S. Dept of Transportation the average MPG (miles per gallon) for cars on the american roadway is 19.8 miles. Why not do something to really help the problem (and the environment), raising the average by 1 mile, yes just 1 mile, will cut at the pump consumption by 5%, do something wonderful and raise it by 5 miles per gallon and see a 25% reduction. If you want to see the price of gasoline crash, at least short term until China's consumption outpaces the U.S. cut at-the-pump consumption by 25%

Long term, America has to get the oil monkey off its back, in a few years China will be consuming more oil than the U.S. and we will no longer have the financial clout over the oil producing nations that we have today, and yes buying trillions of dollars worth of oil from the few individuals controlling it in those countries is co-dependant control.

Short term, we should be taking steps to avert the next looming crisis before it hits, if it isn't to late already, the Student Loan crisis, check out what Sallie Mae is saying regarding their inability to find investors in the student loans they are writing, and the negative cash flow it is creating.

Lastly, the real impact the sub-prime mortgage is yet to come, bankruptcy filing are up sharply everywere, in some areas up nearly 100% year to year, it won't be long until the next round of adjustable rate resets hit. Check out foreclosure.com on Jan 1, 2008, the total number was at 1.3 million, today 1.7 million+ and that number goes up each week.

It ain't over until the fat lady sings, and she is just warming up....

[prince]

stop future trading...
useless.....
only brockers making money....not the producers or consumers...
this brockers didnt see the oil anytime in their life(bloody fools)

[iThinkBig]

Well put 'Wake Up People'. Higher Ed will be a major story next year. That is the second market I am in (but paused early last year and put all corporate resources into consumer health/technologies in February of 2007). We are all going to get a temporary respite this second half of the year. It will be easy to think and feel that things are getting back to normal and forget until the crisis resumes in the second half of 2009.

Pressure must be applied to Washington this year to get the fiscal and energy policies we need. My guess, because I study human nature is that we as a culture will only do this when there are bread lines and massive economic pain. Unfortunately, since we are exporting our miseries overseas we'll probably see almost a complete parallel to the events of the Great Depression and World War 2. Thank Adolph and Emperor Hirohito for ending that depression. But let's not repeat this in a world of nukes, shall we? I don't want to be part of the second Greatest Generation by 2025 and have the task of rebuilding our entire nations infrastructure.

[prince]

WHO (WHICH FOOL) STARTED THIS FUTURE TRADING....????
DEMAND HAS GOT NO RELATION BETWEEN THE VALUE.
BE CAREFUL..ABOUT FUTURE BROCKERS....REAL KILLERS''
THEY ARE KILLING THE POOR PEOPLE INDIRECTLY....
THROUGH SPECULATIONS THEY HIKED OIL PRICE,GOLD PRICE...PRODUCTION SAME ALL THE DAYS
USELESS BROCKERS AND USELESS SPECULATIONS...
NOBODY TO STOP THIS BLOODY FOOLS...IMAGINARY SELLLING AND IMAGINARY BUYING....FOOLING ALL..
ANYBODY CAN SELLL OIL WITHOUT HAVING ANY DROP OF OIL....YOU KNOW THE COLOUR OF CRUDEOIL,BROCKER???
ALL THE GOVERMENTS STILL SUPPORTING THIS GAME.....STOP THIS FUTURES...STOP....STOP IT FOR MANKIND...OR YOU WILL REGRET LATER....REGRET....

[RichardMendales]

It's not just the decline in the dollar that's at fault--it's partly fear that the dollar will begin to spiral downward out of control, which could happen if we continue to run huge deficits and to print money. If some producers begin quoting prices in euros, the result could be panic. It's the risk of this spiral that tends to drive commodity prices up.

[TN Jim]

stop future trading...useless...on... brockers making money...

Prince, get a grip.

Futures are used by farmers to lock in end-of-the-season prices for their crops (in case, they want to buy new farm equipment, for instance), by oil production companies who want to guarantee they can cover the debt they incurred drilling the wells, and by miners selling forward their production so that they can afford to develop the resources.

But, hey, let's just do away with futures. That will certainly help the global economy going forward.

If you're still looking for the fool, check the mirror, Prince.

[flow5]

Maybe some day those graduates of Princeton, M.I.T., Harvard, Yale, Stanford, etc. will wake up. As Prince says, we should not encourage financial-investment, but we should encourage real-investment. Get out of Afghanistan, Iraq, and bring home the personnel from our bases overseas (multilateral claims on foreigners). Use the money from those black holes to build new or additional light rail cars/lines.

As for oil, as for every price, they are a function of monetary flows (MVt). Real-gdp & inflation have separate rates-of-change. The roc for the proxy for inflation turned up Dec 07. And the roc for the proxy for real-gdp turned down about the same time. This spells stagflation. And monetary flows (MVt) explains the surge in inflation. Monetary flows (MVt) are a truism.

[iThinkBig]

Insightful as always Flow5 and it was wrong for TN to crucify Prince. he has a valid point. We are exporting mass misery due to totally irresponsible economic policy here in the U.S. around the globe. Add Socialism as the initial catalyst and the final prolonging of misery at home and abroad. I say, let it all crash and let the new leaders who give a shit about mankind and avoiding WWIII step forward. Now let some smart ass tell me to calm down. This will be someone who works in Washington or Wall St. no doubt who is encapsulated to the misery of global Main St. We don't focus on the 70% GDP of Main St. and you get no Wall St!

[Thinkingahead]

Mr. Hamilton you are missing something important.

All of the commodities you list fall into one of two categories. Either 1) they are destroyed by use, but can be replaced (coffee, wheat) or 2) they are not destroyed by use and can be recycled (copper, gold). But there is one exception: Oil (and Nat gas, but not on your list). When we use hydrocarbons we destroy them forever. We cannot grow more of it and we cannot recycle it. The extraordinary money, effort and technology needed to replenish oil reserves is a hard fact to ignore. And finally, oil is an essential input to human society. We can devise substitutes for almost anything else now, but not oil. For instance, how would we power our airplanes without it? Yet we are helpless to stop destroying more of our diminishing supply every day.

[jstratt]

I believe that the present decline in dollar value has contributed significantly to the rise in commodities. Unfortunately the perceived future prospects for the dollar contribute most of the rest.

From the concern over the dollar large investors started investing in commodities. Some examples

1) endowment funds (Yale)
2) Hedge Funds
3) In the past couple years SWFs have risen up to help secure access to commodities

Finally the factors above have created a bubble. Instinct tells me the top of the bubble is still not immediate. In 1980 I remember scoffing at the idea of an oil glut. Everyone was aware that Oil was in short supply and could only go up based on the same arguments we hear now. We were all wrong.

In conclusion a free market fight for access to resources and rampant speculation can make a nice bubble. Slowing world growth will cause a reduction in use and the high prices will cause an increase in supply. Every little Oil well is being uncapped and restarted today as it is economically viable.

PS Observations just from today

1) fewer cars on the road this week as I drove to work
2) Rice hoarding as export restrictions put in effect, price soaring
3) Chinese considering BHP investment for access rights, my BHP soaring
4) I am still glad I joined the big players last year in hedging risk thru commodities. I better figure out how to handle the bubble.

[e2800]

Your article, in my opinion is correct, but some elaboration on the affects of the interest cuts are needed. In a nutshell this economy is flooded with easy moey which has no where to go. Banks can borrow at the ridicuously low rate, which has been engineered to promote economic activity such as construction or investment in capitol and equipment. But given the current economy the money is not being used for that. Businesses recognize that consumers are tapped and therefore are not willing, and /or able to invest in new projects, or equipment. This means that the money that is coming into the market via lowered interest rates at the FED is being lent to wall street funds which use it to purchase in commodoties futures contracts, driving up the prices unrealistically. You are also correct in that as soon as the rates stop falling, the false boom will come to a screaching halt.

[andrewh10]

Nicely put e2800 and interesting article by Hamilton which is dead on target in my opinion. The FED must put a stop on lowering rates here otherwise the consequences will only lead us to discussing how much of our economy is going to look like Japan's over the last lost decade. I do not subscribe to the Peak oil theory and the $20- $40 risk premium on a barrel of oil is absurd. Most energy analysts would agree with me that oil will be headed back to more reasonable levels say $80-90 in the near term. Slower economic growth in the US and Worldwide leads to lower prices. The recent boom in price is very much do to speculation and technical analysis, it is not based on supply on a demand what so ever. In fact I bet the Fed might have to bring back a Volker type character in order to raise rates quickly in the later part of 08 and 09. Afterwards, commodities prices will take care of themselves like they always do and return back to the mean.

[CrossMelon160]

Fed holds, COMODs down.....what about AG?

[RobertTrudeau]

Screw Ron Paul.

[RobertTrudeau]

I don't quite understand what you are saying. Are you stating that commodity prices are up because those accepting dollars in payment are getting a negative real return while holding dollars? I'm not sure what the price of rice in India has to do with interest rates in the US.

[RobertTrudeau]

You're right. It isn't entirely explained by changes in demand or the dollar. Speculation also seems to be part of the problem. But wouldn't negative real interest rates lead to lower prices not higher? Why save or hold dollars when they buy more today? Is this your point? Where are they storing all the rice, wheat, milk, corn, etc. I can understand leaving oil, gas, metals, etc. in the ground but not food. Are we suddenly eating more globally? Wouldn't this have more to do with all the money (yuan, dollars, euros) sloshing around than with negative real US interest rates? The answer can't be so simple. What would you have the Fed do, raise interest rates to bring down commodity prices? Good for me, but bad for the ecomony.

[msgtb]

I am embarrassed as an American citizen at the leadership given by the President and the Congress. We currently have a national security crisis and that is "the price of oil and who controls it". The extreme price of oil is a wake up call and we, as a nation must respond. We are in a war with radical Muslim Terrorists and states (Iran) whose intent is to destroy our country. Currently our use of oil, allows them have access to extremely large amounts of money. Our enemies use this to our detriment economically and directly by providing funding to terrorist organizations and states i.e. "Iran".

I just returned from living in Thailand for about a year. They are already converting cars and large trucks and large busses to use Compressed Natural Gas (CNG). Thailand is a third world country and they trying to address the problem in a significant way. They are also growing more palms to produce ethanol and bio-diesel? Why are they ahead of the USA? The best that I can tell America is doing very little to address this crisis which directly affects us all.

Brazil is 100% energy independent? They run their cars on 100% ethanol? Brazil is a third world country? The drive the same cars we do here i.e. Fords, Chevrolet's and Chrysler's. They use an electronic device (cost $100), which adjusts the engines timing to run on 100% ethanol? Why is it that third world countries can come up with viable solutions but the leader of the free world can't? We have huge reserves of coal, the South Africans another third world country have been using gasification of coal for fuel for power production "much lower pollution that burning coal directly” and for providing fuel for both air and ground vehicles? They have been doing this for over fifty years? How can they do that and we can’t?

Please remember the cost in human misery and death that high cost of oil is causing. We have got to stop using oil and find better alternative renewable sources energy. Just remember that the lower the price of a barrel of oil is the better off we are. It is in our best interest to drive the price of oil down to the lowest possible for the national security of the United States and the rest of the world.

Remember America we need less oil not more to protect our national security, country and way of live.

God bless America

We need it!

[Not WorthThe Extra]

Try Electronic Bullet Trains... how hard can it be... It is so shame that we always say that we lead other nations, but we are actually so much behind even for basic transportation technology.

[Not WorthThe Extra]

Use Biodiesel fuel that is made from recycled cooking oil and animal fats. For example Gushan (GU) NYSE.

[OJO Zafado]

This is a very good discussion. There are as many intelligent observations as there are the O'Reilly nut believers in Truthism. Less O'Reilly and more reality! It is not all big wall street pigs making money in commodities. There are those out there living off $45-60 K a year from their less than 1.5Million pension buy outs. If they bought out they probably under stood the consequences of long term inflation against a so called "safe" annuity. That kind of thinking would have them invested in oil and Nat resources like IEO,PXE,PSPFX and USMEX. They may have bought a large position in FSNGX. If they used Canroys forsaking the tax credit they would own the resources as part of their income generation. Perhaps they might have also thrown in some gold with GLD,GDX a PRPFX, MERKX as well as some foriegn bond funds like PFBDX and PSAFX. Throw in some Met Coal like FDG and GACHF and they are probably not down by 20% in this mess on their asset base even if they lost 10s of thousands in REITs,Mortgage Reits and Insurance stocks. I personally find it remarkable that by over weighting these kinds of investments my retirement assets are down by 0.5% since I began distributions @$45k/yr in Jan of '07. The small investor at least now has the opportunity to get into a position to trade nearly on par with the big boys. For many years PCRDX was one of the few commodities plays out there. It basicaly su**ed! As soon as DBA came to market I put 40% of the allocation into it. I quickly liquidated the rest shortly after and invested in MOO. None of these mutual funds and ETFs could work for small individual investors if not for a fully functioning futures market. If the market recovers half it's losses from the peak I will be looking at a nice fat cost of living increase in my distributions raising my payout to what my pension annuity would have been without a 100% survivor option.. My pension assets now will go to the successor trustees of the Family Trust and the fruit of their loins instead of up in smoke when my carbon units are exausted. Do not be too critical of the wall street insiders creating wealth out of political decay. Unlike corporations who must act in accordance with what is best for management, they must make money for their clients or perish. HJJ is a "derivitive" nearly anyone posting a comment here can "play" , invest in. Even the little guy might make some money off it, but not if derivitives were illegal and had less risk!

[OJO Zafado]

I have no opinion per se on the authors conclusion that oil prices have spiked due to the Fed's non-feasance in creating artificially low real interest rates. I do agree that it is the root of most of the US $ weakness against other paper currencies. If you agree with his conclusion, I would offer DUG and DXKSX as ways to advantage this scenario.

[BrucePile]

To see the primary reason oil is in a climb, you need only to look at a chart of global net exports vs oil price. The exported portion of oil production is only about half of the total (the producing countries use the other half) and exports peaked in late '05 with a serious decline setting in since then. Other things are bringing the investment dollar to oil and commodities in general like the weak dollar, etc. but it's mainly a bidding war for a shortage of exported oil.

[fxtrader07]

Always wonder how people arrive at statements like the "fundamental value of oil being 40$/bl lower than the market rate. Supply and demand are ALL that matters to the price of oil and BOTH are very inelastic in the case of oil. Oil prices have fallen for decades in real terms, producers thus had little incentive to increase production. Now that China and India are driving demand up (strong economic growth leads to an ever steeper demand for oil!) production simply cannot cope while exploration and drilling costs rise pretty fast. It's not a question if $150/bl are reached, it's just a matter of when. oil may decline at some point in real terms again - driven by technological solutions and substitutes which inevitably come into existence after -and only after!- the price for oil is high enough for them to emerge. but that is probably at least 5-10 years out. Now, I would like to hear a sound argument why the "fundamental value" of oil should 40$ lower than todays price, when in fact hard and very slow to change demand-supply dynamics speak for much higher prices at least over the coming 5-10 years?

[Ron2008]

"Supply and demand are ALL that matters to the price of oil and BOTH are very inelastic in the case of oil."

Demand of oil futures contracts by speculators is the reason that oil is at $116. Nobody is beating on OPEC's door because they don't have enough oil right now.

And if supply will be worse in the future, then why are oil futures in backwardation?

[scfranklin94]

I'm with fxtrader07; as everyone should know, the Canadian tar sands are a huge part of future US supply. Current new production is costing the companies involved $65/barrel BEFORE Alberta severance and Canadian income taxes (which is a deduction of about 60% of the profits).

So if you think crude oil is so overpriced, why don't more of you pool your funds and make a killing in the production of crude oil? Oh yeah, it costs a fortune to drill, and then you might not hit anything...

[techzone]

If you do some research, you will realize that Ethanol is a scam. And I won't go into the details. Ethanol related stocks are likely to rise in the short term, but I think will eventually crash very badly.
In my opinion, people are buying commodities stocks in general, becuase they can use them as a hedge against inflation. There is some speculation, but is it a commodities bubble? I don't think so (at least not yet). Oil realted stocks are good looooong term.

[ConsiderThis]

I don’t think I believe all the attacks on oil are true. I believe the rising gas prices has more to do with the rising exchange rate of Dollars-Euros. No one is discussing this issue. The rate is picking up pace quickly and has been doing so since the beginning of the year. The war is not on terrorism and only indirectly about gas. The war is really over currency. Before we went to war, Hussein was about to announce that he was going to start trading oil in Euros and no longer dollars. The next time we turn around we will have to pay two dollars for every Euro. It’s getting very close. Our economy is suffering and everything is about to hit the fan!

[UTK]

This is all very interesting, but I think a possible solution is.

1. Stop trading oil as a commodity, how can we say we are interested in human rights, when we allow one part (rich) to prey on another part of society (the rest of us) and allow their livelyhoods to go to nothing, while they get rich. NO commodities that are needed to sustain our lifes should be traded.
2. Stop money train to politicians (make lobbying illegal)
3. Enable Line Item Veto to President
4. Demand buy-ins for ecological and energy saving ideas from corporations.
5. Enact special taxes for corporate heads (greed tax), when making obscene profits from gouging their customers.

In all it takes a special kind of idiot to undo everything this country stands for. This country is dying. If you want this country to recover you will have to breathe the air of a new freedom from being victimized. Greed will be the end.

UTK

[stockguy]

Oil product hit an all time high of just under 86 million barrels a day and demand is at 87 million barrels a day. Nah, fundamentals have nothing to do with it.

[Ron2008]

US oil inventory is at the 5 year average. SPR is at all time highs. OPEC has spare capacity.

Who is being shorted oil?