Once again we are being hit by the high cost of fuel oil, which threatens our fragile economic recovery. The Obama administration is considering tapping the strategic oil reserve to help control prices and mitigate the negative economic impacts. The recent upheavals in the Middle East are causing this sudden spike in oil prices, we are told. But do you ever wonder why the price of gas at your pump or your home heating fuel goes up so fast with even the slightest disturbance in the Middle East. Can the global demand and supply of oil change so suddenly that from one day to the next, the price you pay for fuel skyrockets?

As crude oil prices rise above $106/barrel, are our friends on Wall Street just having another orgy of profit taking at our expense? The sad reality is that the price of oil “and other energy commodities are strongly influenced by investors playing the commodities market. Although commodities exchanges were originally created to help producers and buyers of certain products (like farmers and heating oil dealers, for example) hedge their risks in the case of unexpected price moves, they have become a major venue for financial investors (speculators) looking for profits. Through the sheer volume of money spent and contracts traded, hedge funds, pension funds, and investment banks influence the price of commodities like [fuel] oil. And while aggressive buying and driving up the price of … oil in one day may be a profitable enterprise for speculative investors, its effect on,” consumers is anything but.

According to F. William Engdahl, a Senate investigation in June 2006 showed that when oil futures were trading at $60 a barrel, at least $25 of that was due to pure financial speculation. It is estimated that as much as 60% of today’s oil price is purely the result of speculation. Establishment figures and the oil lobby argue however that the price is due largely to supply and demand.

‘There is conventional wisdom that speculators are having an undue influence on the price of crude oil,’ Rep. Mike Conaway, R-Midland, said in 2008 after House Agriculture Committee hearings … on oil speculation. ‘…We have been trying to figure out if that is an accurate statement, or if it is just a response of frustration aimed at high prices. So far, the only credible evidence shows that crude oil prices are being set by the simple laws of supply and demand and the devaluation of the U.S. dollar, which is why it is essential that we increase the supply of domestic energy production.’

However, Mark Cooper, Director of Research at the Consumer Federation of America, “testified at a recent Senate hearing that the cost of speculation in the energy markets amounts to a premium of ‘over $40 per barrel’. Others more sympathetic to Big Oil have speculated that the impact is less than half of that.”

Mr. Engdahl suggests, however that there is compelling evidence that the rise in energy prices is not related to the actual data on crude oil supply and demand at this time.

Over the past couple of years global crude oil production has increased along with the increases in demand; in fact, during this period global supplies have exceeded demand, according to the US Department of Energy. The US Department of Energy’s Energy Information Administration (EIA) forecast that global surplus production capacity would continue to grow to between 3 and 5 million barrels per day by 2010, thereby “substantially thickening the surplus capacity cushion.”

“For huge US or EU pension funds or banks desperate to get profits following the collapse in earnings since August 2007 and the US real estate crisis, oil is one of the best ways to get huge speculative gains. The backdrop that supports the current oil price bubble is continued unrest in the Middle East, in Sudan, in Venezuela and Pakistan and firm oil demand in China and most of the world outside the US. Speculators trade on rumor, not fact.

The increased speculative interest in commodities is also seen in the increasing popularity of commodity index funds, which are funds whose price is tied to the price of a basket of various commodity futures. Goldman Sachs estimates that pension funds and mutual funds have invested a total of approximately $85 billion in commodity index funds, and that investments in its own index, the Goldman Sachs Commodity Index (GSCI), has tripled over the past few years.”

For now, we can blame financial speculators for a good deal of the price volatility, but for the future, the actual supply and demand for all oil is going to be critical. As Michael T. Klare says, the recent rise is oil prices is “just a faint and early tremor heralding the oilquake to come. Oil won’t disappear from international markets, but in the coming decades it will never reach the volumes needed to satisfy projected world demand, which means that, sooner rather than later, scarcity [and high prices] will become the dominant market condition. Only the rapid development of alternative sources of energy and a dramatic reduction in oil consumption might spare the world the most severe economic repercussions.”

So whether we believe in global climate change, or not, as a good reason to change how we consume and produce energy, the realization that oil is a finite resource whose price will continue to climb over the coming decades, should be a compelling argument for greater efficiency in the way we use energy and for developing alternative sources of energy. This would be the rational approach, but rationality at this level seems in short supply in Washington and on Wall Street.