Oil Fundamentals

With all the debate over commodity speculation, it's also good to revisit the real story that got the bubble rolling. Jim Hamilton reviews the fundamentals for oil. Basically they imply consistently high oil prices. What price? I don't know that anybody has come up with a convincing way to say. But I do take seriously his point that there is simply not enough oil in the ground for China to consume as much per capita as the US.

To summarize, I think we will see some net production gains this year, and expect this to bring some relief for oil prices. But I cannot imagine that the projected path for China above will ever become a reality. Oil prices have to rise to whatever value it takes to prevent that from happening.

So yes, I do believe that speculation has played a role in the oil price increases, particularly what we've observed the last few months. But it's a big mistake to conclude that speculation is the most important part of the longer run trend we've been seeing.