Get real!

Oil vs. Natural Gas

Oil prices haven't fallen as much as natural gas because oil still has geopolitical risk, which natural gas doesn't have. Oil supplies face risk of disruption by violence in Nigeria, Iraq, and the ever present saber-rattling between the U.S. and Iran, and the war of words between Bush and Venezuela's Chavez.
If Israel or George Bush bomb Iran, then Iran can cut off 40% of the world's oil flow by blocking the Strait of Hormuz, and we'll see $300 oil. If McCain becomes president, he's even more likely than Bush to "Bomb bomb bom, bomb bomb Iran," as he has sung about himself!
On the other hand, most of the natural gas used in the U.S., comes from North America (USA, Canada, Mexico), which avoids the geopolitcal risk that oil has.

Oil's Gains Are Due to Fundamentals, Not Speculation

Junkyarddog thinks that $200/barrel oil means $10/gallon gas, and thinks "it's ludricous to think the economy can support a $200 oil barrel." Don't you remember that just a year ago, everyone thought it was ludicrous to think the economy could support $100 per barrel oil? And back in 2001, the first peak oil book I read predicted that oil at $40 per barrel would destroy the economy and lead to "demand destruction." Well, it turned out that $100/barrel oil barely caused a hiccup in demand, because in industrial (or industrializing) nations, oil is as much of a necessity as water. Here in NJ, the roads are just as clogged with SUVs as ever with gas at $4/gallon. Now there is even more traffic congestion with gas at $4 than there were when gas was $0.75 ! It turns out that gas demand is not elastic over the short term (meaning the 10 year lifetime of an SUV), and neither is heating oil demand.

As even Bush admitted, "We are addicted to oil," and when your pusher doubles the price of a fix, an addict sacrifices everything else to pay for that fix. If oil rose to $200, gasoline might hit $6 per barrel (not $10, see below), and Americans would cough up the $6, and sacrifice in other areas, because we're all addicts (except the Amish).

Your second mistake is assuming that if oil prices nearly doubled (from $135 to $200), then gasoline prices would actually double. FYI, even if it actually doubled (which would mean $270/barrel oil), gasoline prices would not double, because the price of oil is only one part of the cost of gasoline. Other parts include refining costs, pipeline costs, tanker costs, gas station overhead, federal taxes, and state taxes (which do not double when oil prices double, because voters would not allow it, so instead, taxes would actually fall by 50% as a percentage of the gasoline price).

Energy Sector Is Approaching Negative Seasonality

Babak wrote, "I don’t buy into 'Peak Oil.' We will either discover more oil, better extraction methods for existing reserves or move to alternative energy sources."

FYI, Babak, we would have had to "discover more oil" twenty years ago in order to start bringing it to market today. But that's not going to happen, because FYI, annual oil discoveries have been declinining each year for over 30 years! Of the three largest oilfields in the world, two are in steep decline (including Cantarell in Mexico), and the world's largest, Gawar in Saudi Arabia, is in its old age, after over 50 years of extraction, and is now producing more water than oil. Just to make up for the declines in production in Cantarell, the North Sea, and other mature fields, we need to discover new oilfields totalling the size of Saudi Arabia EVERY YEAR!

As for new extraction methods helping -- the U.S. uses the world's best, most technologically advanced extraction technology, but yet our oil production peaked in 1970 and has been declining ever since, despite Alaskan oil and deep sea oil brought online since then. Likewise, the British use the latest technology in their North Sea oilfields, but North Sea oil production is declining rapidly.

This analogy may help: think of an oilfield like a 16 ounce slurpee (drink). Better extraction technology is simply a "super straw" that sucks up the liquid FASTER, but it does NOT increase the amount you can drink, does NOT turn your 16 ounce slurpee into a 32 ounce slurpee! Or you could say better drilling technology is like giving an extra straw to your friend to share your slurpee drink -- two straws will sucks up the liquid twice as fast, but doesn't change your 16 ounce drink to a 32 ounce drink!

Economists are eternal optimists, however.