I have been gently chided on the internets for not doing any Countdown diaries since the oil prices have started going down. While the giddiness and glee demonstrated by many in the traditional media and elsewhere invites little but ridicule, as demonstrated by this graph below, prepared for the Oil Drum, some serious questions have been raised and deserve answers.

So, beyond the semi-glib answer that nothing much has in fact happened in the oil markets in the past month (after all, the recent decline is still smaller, in percentage terms, than several others in the past couple of years), here are a few points worth making.

An installment of the Countdown to $200 oil series

As you may have heard, oil prices have reached a new high above $140. I can already hear the outcry against speculators and their out-of-control games to enrich themselves at our expense.

Never mind that speculators have been caught shortselling oil (ie betting on a fall in prices) more than a few times in recent months. Never mind that spot oil prices, which require actual physical deliveries of oil at the end of each month, have behaved the same way as paper futures. Never mind that oil storage seems to not be increasing.

Nope, it is just too convenient, too irresistible and, let's say it, too comfortable an excuse that speculators are to blame. It's not our fault, we have our scapegoat. Our price increases are temporary, we'll soon be back to "normal" lower prices, as soon as (take your pick) speculators have been punished/oil companies are taxed for their profiteering/"fundamentals" are left to set prices.

This is just denial.

There are A LOT of good reasons why oil prices are going up. Let me show you just a few.

A Countdown to $200 oil diary

Maybe the two most common explanations (or myths) about high oil prices are:

1. oil companies are manipulating prices
2. speculators are driving prices up

Of course, these two explanations are satisfying our natural impulse to find scapegoats rather than facing the depressing facts of fossil fuel depletion. Robert Rapier already debunked the first allegation, the second one is much more nebulous and has always troubled me since I got interested in peak oil. Stuart Staniford looked also at this problem (Is Oil in a Price Bubble?) by noting that price were following a clean exponential rise (at least until the beginning of this year) and not an upward quadratic model which has been observed in the real estate bubble. Last year, the Senate Permanent Subcommittee on Investigations has published a report supporting the speculative theory. Yesterday, the Qatari Energy Minister, Abdullah bin Hamad al-Attiyah declared:

"To increase by 500,000 or one million barrels, do you believe today it will bring back the price?" Attiyah asked. "I don't think so," he said, emphasizing his view that the price of oil had become almost wholly decoupled from supplies. Financial players "lost a lot of money on real estate, shares and bonds, and then they jumped to commodities," including oil, Attiyah said.
Herald Tribune