Why oil is so expensive

Don't blame OPEC. The major factors are a weak dollar and speculation.

from the December 18, 2007 edition

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If that's true, then we're paying a speculative premium of up to $45 for each barrel, or about $1 for each gallon of gasoline.

If nearly half the price of oil isn't justified by fundamentals such as supply and demand, then sooner or later the price must fall.

In theory, that ought to mean that a trader willing to bet against the market by buying an oil futures contract for a lower price, should make a fortune. But in recent years, says Gheit, "anyone who has bet against the market has had their head handed to them" because the price keeps rising.

Why? The answer is complex. First, even with a speculative premium, the oil market is still out of balance. Demand for oil, especially in booming China and India, is rising faster than supply. And tight markets are prone to perturbations – be they caused by political events, hurricanes, or, more recently, speculators' bets.

What, if anything, can be done about the speculator premium? Various commentators have called on Washington to regulate commodity speculation or release some of the nation's Strategic Petroleum Reserve and thus flood oil markets.But motorists shouldn't hold their breath waiting for policy action. When it comes to oil, our lawmakers have an abiding faith that the markets will sort themselves out; that when gas prices get high enough, demand will fall, and so will price.

Meanwhile, Washington's free-marketeers should bear in mind that the cost of the speculator premium goes beyond angry motorists. Every dollar increase in oil prices represents a huge bonus for oil exporters, not all of whom can be trusted to use it wisely. Iran, for example, is now raking in roughly $5.5 billion extra a month because of the speculator's premium – cash that could be used to fund any number of nasty ventures, and that could offset whatever economic sanctions Washington manages to deploy against Tehran.

In the ultimate oil irony, even the merest mention by President Bush of sanctions against Iran is enough to push up oil prices – and thus to send even more dollars to Tehran.

• Paul Roberts is the author of "The End of Oil: On the Edge of a Perilous New World." ©2007 The Los Angeles Times.

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