I keep hearing about these "speculators" who are supposedly driving the prices through the roof. Who are they? Where is their stockpile? Are there really tank farms full of crude being held back from the market? Is there a consortium of traders squeezing both sides of the market preventing access to consumers ala The Hunt Bros.? Or could it be that producers have seized the opportunity to make the most of a diminishing supply at a time when demand has gone through the roof?
I'm reading some ideological staining into your post, but Ill try to respond without any sort of 'anti-bias.'
To do so, we need to start at the bottom of what you wrote. The line regarding supply and demand. The statement you authored is a sort of incomplete/incorrect hybrid assessment of market conditions.
Firstly, you have not identified 'supply.' Supply of what? "Oil?" Light sweet crude? Conventional or unconventional? Extractable? I am going to assume you mean "oil" and, more specifically, light sweet crude, which is the most desirable from a refining perspective, and which is used to make gasoline as part of the spectrum of all products that come from refining a barrel.
In that case, the supply of light sweet crude is diminishing, from under our feet, only in a technical sense because, for all intents and purposes, barring another million years of geological 'cooking,' its a finite resource. That said, we're not exactly short on that resource. There is no danger of running out any time soon and there is no problem extracting from current reserves or newly tapped reserves. Realistically, buy time we "run out" of both conventional and unconventional oil, we'll probably be drilling Mars for the stuff so thats a non-issue.
Secondly, you cite demand. Demand has increased, yes. Its a steady progression. The demand for petroleum products has increased systematically for decades. Many people like to point to developing countries to support their argument for a lack of supply and demand equilibrium. Unfortunately, its not like China (for example) simply turned on the "Industrial Revolution Switch" in the past 12 months. They've been at this for 30 years.
Look at it this way. In rough numbers, light sweet crude is about $135/barrel today and it was about $65-70/barrel a year ago. Lets just call that a 100% increase in price.
For that price increase to be solely due to the dynamic between supply and demand, you would need a direct correlation. Thats means that demand would have had to increase 100%, supply would need to have made a similar adjustment or each would have to move half-way in the wrong direction from the other.
None of those things occurred.
What has actually occurred is that, over the past twelve months, both supply and demand have increased by typical historical levels. When Saudi Arabia says they wont increase production because there isn't a supply problem - they're right. Although demand has increased "more" than supply, we are still producing more oil than we are consuming.
The sum of all that indicates that the price increase is a bubble, just like real estate was, for example. The asinine price increase makes very little sense...
...until you look at the investing side of it.
"Speculators" are profit driven investors. I know your comment was designed to be sarcastic, but there you are.
These investment funds (generic descriptor) are constantly looking to maintain portfolio stability and protect against loss by hedging. What they seek is 'something' that can be driven upwards with purchase volume and can be manipulated into a steady increase in price. A guaranteed return, in other words. In recent history, the following 'somethings' have been used:
-Tech stocks.
-Financial stocks.
-Mortgage Back Securities.
-Real Estate
They all have a chronological progression in common. They were manipulated with speculation to protect against losses elsewhere, fueled by buying frenzies and, ultimately, crashed when investors lost confidence and moved to something else.
The only difference between the above examples and light sweet crude is that light sweet crude hasnt crashed yet. It will.
Look at real estate. Five years ago, real estate was it. Every middle aged, empty-nester mom got a realtor's license and every middle management father cashed in his mutual funds to play amateur land lord.
Know why? The stock market wasn't doing very well. Everyone was taking losses and needed to protect against them. What better "something" to use than an investment which could be assured to realize capital appreciation of record levels?
Snowball begins rolling down hill...
"Speculation" is being thrown around in the media, REIT's pop up all across the country, out of nowhere, and every 20 year old kid is trying to start a purchase fund, promising investors a 30% ROI.
Sounds good, say the banks - cant miss out on this! Lets give people interest only loans at 100% LTV's because - hey - we know value is only going to go up and we need to keep this going!
What a great investment, say the foreign capital guys - lets buy some of those mortgage backed securities the banks are putting together and put liquidity into the market to drive activity!
...snowball gets bigger...
Suddenly a $180,000 home is on the market for $750,000, people are up to their eyeballs in debt they intend to pay with sales proceeds they cant realize, banks are taking losses on charge offs and foreign investors leave the market once they figures out that scrubbed down, poop-paper loans packaged as a pot luck security is a garbage investment. Then the liquidity leaves the market, banks have no money to re-lend, "speculation" starts to go the other way, people cant sell their homes, give the keys to the bank and walk away and suddenly that $750,000 residence is listed for a more reasonable $350,000... that still no one will touch because its going to be worth $275,000 in another year.
Real estate is no longer adequate as a hedge. People flock to a new "something" to mitigate their real estate investment losses. All at once. Confidence is zero.
They pick oil.
...snow ball crashes into wall.
Oil is driven up 100% in 12 months. 100%.
There is no completely sterile supply and demand relationship on Earth which would result in such a meteoric increase in the price of a good short of an alien invasion fleet swooping down and sucking up all of the world's beer.
The market will correct itself. It always does. Legislation is NOT the answer.
Oil will fall when investor confidence gets shaky. Once it reaches a critical mass, everyone will try to dump the commodity at once, crashing the market, and will go about looking for that next "something."
The indicators that this is already beginning are all over. If I had to put my money where my mouth is, I'd guess oil stabilizes between $80-100/barrel within the next 18 months - with a strong probability of that dollar figure being a fairly significant over-estimation.
YMMV, but please dont spread end-of-days type oil predictions - especially not in the same post which sees you mock those suggesting "speculation" while "speculating," yourself.
