There is continuing talk that the cause of ever-increasing oil prices is the result of a speculative investment “bubble”. As an example, a Washington Post subtitle the other day read, “Trading Loophole for Wall Street Speculators Is Driving Up Prices, Critics Say”. This seems to be increasingly becoming the given explanation for today’s high gas prices.
But it’s a dubious assumption. Certainly, it might play some role in driving prices higher, but it’s doubtful to be all that significant a factor when there’s a much simpler and more obvious explanation–indeed, it’s hard to miss, the proverbial elephant in the room.
The Commodity Futures Trading Commission recently made the unusual announcement that they were investigating the matter. But it’s just a theory, not a matter of fact, as the same Post article cited above notes: “Even as record oil prices translate into staggering increases at the pump, some regulators, including Treasury Secretary Henry M. Paulson Jr., say investors are not to blame. These officials cite supply and demand as a far bigger factor. Since last year, this was also the position of the CFTC. But agency officials have recently signaled greater concern, saying they want to collect more data to determine whether speculation might be a significant factor.”
The New York Times reported that the “unprecedented surge” in oil prices on Friday “came as the dollar fell sharply against the euro and a senior Israeli politician once again raised the possibility of an attack against Iran.” The Times similarly noted “fed suspicions that commodities might be caught in an investment bubble”, but added further in the article that investors are “focusing on the perceived risks to future oil supplies and the growth in oil demand from emerging economies”, thus hinting at a simple supply and demand explanation.
Certainly, threats of war, such as Israeli threats against Iran, can cause price increases in the immediate term. But such uncertainties in the market can’t explain the long-term trend. Prices go up and down if one looks at the figures on a short-term basis, but there’s a bigger picture to be seen. After all, Israel has been threatening to bomb Iran for years now. Make no mistake, the threat should be taken extremely seriously. But the point is that singular events, like every time an Israeli official makes a threat of military action against Iran, can cause hikes in energy prices. This latest threat may very well have been a factor in Friday’s increase, but nobody argues that the threat against Iran from Israel has been a principle factor in the overall trend of escalating oil prices. In other words, such events contribute to short-term spikes, but do not explain the overall trend.
When one reads further into the Times article, one begins to see more evidence of a simple supply and demand equation, and none for the speculative “bubble” theory. At the very end of the article, one reads: “But many analysts say that fundamentals, no speculation, are driving prices.”
“I don’t know how else to say it, this is not a bubble,” the Times quoted Jan Stuart, a global oil economist at UBS, as saying.
“Jeffrey Harris,” the Times continued, “the chief economist at the Commodity Futures Trading Commission, who was speaking before a Senate committee last month, said he saw no evidence of a speculative bubble in commodities.”
“Simply put,” said Mr. Harris, “the economic data shows that overall commodity price levels, including agricultural commodity and energy future prices, are being driven by powerful fundamental economic forces and the laws of supply and demand.”
But notice the headlines don’t read, “Oil Supply Dwindling While Demand Increases”, and one doesn’t really get to the root of the thing unless one reads through to the very end of the New York Times article.
One could cite statistics and figures to show how oil companies are spending increasingly greater quantities to get the oil out of the ground, but it’s hardly necessary. Just look at where oil companies are willing to go today, where they are willing to spend on research and development, to get at the stuff where they wouldn’t have found it profitable to go even just a few years ago. Oil sands and deep sea oil are looking increasingly appealing these days.
Most extremely significant reserves of oil have already been discovered. Discovery peaked generations ago. And production is many, if not most, major oil producing regions is believed to at or near peak production. The US, for example, peaked in the early ’70s. These are simple facts, and it doesn’t take an analytical genius to connect the dots. And yet a state of denial persists in the social and political culture of the United States.
Of course, there’s an even larger picture to see, and that’s the effect the advent of Peak Oil will have not only on the US, but on the global economy, a picture The New York Times hinted at in a separate article appearing the day after the one cited above. It’s headline: “Oil Prices Raise Cost of Making a Range of Goods”. It’s not a coincidence that the rise in oil prices has been paralleled by rising food costs globally. The Times noted the effect on “materials derived from oil, like tires, toiletries, plastic packaging and computer screens”, then notes that “No business in America produces more of the oil-based ingredients that go into the nation’s products than the Dow Chemical Company, based in Midland, Mich. From Dow’s petrochemical operations come the basic ingredients of a wide variety of plastic bottles and packaging, including numerous containers once made of glass or tin. Indeed, paint, computer and television screens, mobile phones, light bulbs, cushions, paper, mattresses, car seats, carpets, steering wheels and polyesters are all made with ingredients that Dow and other chemical companies refine from oil and natural gas.”
But the Times doesn’t connect the dots for its readers between the one article and the other. One might be tempted to assume that the Times merely assumes it’s all too self-evident and requires no reiteration. But then, one might remember the age-old adage: Don’t assume anything.
The attacks of 9/11 were attributed to “a failure to connect the dots”. The 9/11 Commission called it a “failure of imagination”. The fact that there were no WMDs in Iraq despite government officials in the highest offices repeatedly stating as fact that they existed was attributed to an “intelligence failure”.
One can’t help but wonder whether any future global economic depression, a post-modern “dark age”–and should society as a whole fail to affect a change of course to avoid being swept into the abyss, this outcome is virtually inevitable–would similarly be attributed to such mythical “failures”.
 David Cho, “Investors’ Growing Appetite for Oil Evades Market Limits: Trading Loophole for Wall Street Speculators Is Driving Up Prices, Critics Say”, The Washington Post, June 6, 2008; A01
 Jad Mouawad, “Oil Prices Take a Nerve-Rattling Jump Past $138”, The New York Times, June 7, 2008
 Louis Uchitelle, “Oil Prices Raise Cost of Making a Range of Goods”, The New York Times, June 8, 2008