You are correct about point #2. Without that, what I propose would be a perpetual money machine driven by a perpetual motion machine. But point #2 has a long history – pump and dump is not a new concept, and this is but a variant. Furthermore, the markets of late have shown an increased sensitivity to bubble behavior – for reasons I don’t fully understand. It is possible that this behavior, which went from dot-com to telecom to housing has now moved to commodities. I hope so! But like Warren, I don’t know.

What I don’t know is whether we are near “peak oil.” Certainly we are not when alternative fossil fuel approaches are considered (one not mentioned for gasoline is goal gassification). At current prices, many of these approaches are feasible, but how long it would take to bring new supply online is a question. I think with a crash effort, it could be relatively quick. But that would require a political consensus that was strong enough to override NIMBY and environmental concerns, and I don’t know if the current prices can cause that. Also, given the appalling ignorance and bias of the media that informs many people, we could go many years with feel good socialist “solutions” before folks realized that they were being mislead.

I understand what you’re getting at but over any meaningful period of time it gets tough. The basic reason is that if buying oil makes the price go up then selling it makes the price go down. If as you say in 3) you sell more than you are long the price will and up even lower than where it was before. What you really seem to be saying in point 2) is that the speculator is somehow creating a speculative fervor which is prompting other people to pile in and he is then selling out to them and making a profit (the pump and dump strategy). This is certainly a strategy which has been used but the late arriving speculators will incur a loss equal to the profit this speculator made. The only way for a long-run permanent price increase to occur is through demand. If this is speculative in nature the prices will come down eventually.

1) I’m a producer. So I’m on both ends of contracts. But by going long, I drive up prices. To me, for the amount in the contract, it is net zero when it is ultimately unwound, because actually, as a producer, I am short (with actual hedge sales) a lot more than I am long.

2) In a speculative market, an injection of money may drive up the total value of the instrument disproportionately, so that the whole market, rather than just my contracts, goes up.

3)As a producer, I sell into that (either at higher spot prices or I sell futures into that market), and I sell far more than the amount of the contracts I go long in.

Over the short time, this can result in favorable price manipulation with a large net profit. I don’t have to corner the market (I do understand that – I know someone who once cornered a an agricultural contract, but he has a lot more money than I do).

The problem is – where is the next bubble? will it be in Bio-tech, or will it be in alternative fuels? Or is the gap between bubbles called a depression?

I noticed someone mentioned peak oil being the reason for the price! I would like to suggest that they read some history and note how often someone has mentioned peak anything when it came to commodities over the past 150 years. Coal was going to run out by 1890 while oil was going to run out in 1923, 1944, 1965, 1988 and 1997 – not sure when the next deadline for oil has been set – probably 2020 or so!

John, always do the math to see what’s really happening. Here is the math underlying your example:

1) Oil producer goes long 5mm barrels of oil in futures market driving up market price by say $5 per bbl over the course of his buying
2) Oil producer then sells oil 5mm barrels of physical oil (from where is a question you didn’t answer) – prices now drop $5 per bbl over the course of his selling (you assumed he was big enough to drive the price up in your example so he’s big enough to drive the price back down by selling). But he still makes money because he has a lower basis in this oil since he owned it before he drove the price up in 1)
3) Oil producer now says “Oh sh*t, I’ve still got all these futures contracts to unwind and they are under water”
4) Producer unwinds futures contracts and gives back all profits made in step 2.

The only was to artificially keep the price high is by cornering distribution and production which is what deBeers does with diamonds. There is a Harvard Business School case on this which you can get for $5 (I think) which will explain in detail what it takes to corner a market. Cornering the oil market is basically impossible. Speculation can cause short-run blips but look at demand coming from China and India – there is a massive new demand for oil and oil production is capacity constrained.

I’m the Iranian president. I expect to be attacked. I even ask for it, taunting the world (and especially Israel) by constantly announcing my nuclear progress and promising to nuke Israel.

So I drive up the price of oil by buying futures and spot oil (the Iranians are reportedly stockpiling oil in rented tankers), and due to the war premium demanded by intermediaries (speculators). When I am attacked, the war fears (and my threats, and maybe a few mines floated through the Straits of Hormuz) drive the price through the ceiling. Then I sell my stockpiled oil. Meanwhile I have been making profits on the general price premium that these actions caused before the attack.

And, of course, if I don’t get attacked, I end up with nukes, and use them to protect me from retaliation as I cause serious regional problems that, among other things, drive up the price of oil.

I have read that the money in oil contracts now is vastly higher than a few years ago. This may be partly shifted bubble money (I suspect), speculation on disruptions due to war (war premium), or even manipulation (or investment, depending on how you look at it) by the Sovereign Wealth Funds of the oil producing states.

Note also that futures markets can keep prices up for a long time, because contracts can be “straddled”, effectively extending their term.

Let’s see… if I’m an oil producer with zillions of bucks… I buy a bunch of long positions, driving up the price at which I sell oil (and causing speculators to jump in and drive it up more), and when the price ultimately goes down, if I still have positions, I “take delivery” from myself and then sell the oil at market. What am I missing?

If your statements were directed at my comment “People will pay anything to have it” — I’ll concede that’s overstated and incorrect in the absolute sense. If fuel is $30/gallon and a plane trip to the East Coast is $8000, I guess we’re all in deep you-know-what, going to live in the Stone Age. I was mostly thinking that if oil got really high, like that, demand would drop significantly and the oil producing countries would be left with lots of supply on hand. I’d assume prices would drop to compensate — but maybe I’m wrong.

Esox Lucius — assuming the abiotic oil concept is not correct, then of course we’re running out of oil. But that doesn’t mean there still isn’t a lot left. One is always going to run out of something that isn’t renewable. There’s still lots of oil to be drilled around the coast of the US and in it’s interior. Other parts of the world probably have similar opportunities. Of course, we better start putting different energy solutions in place in advance of the inevitable and final drop in supply.