You are right that speculation (as in: those who manipulate the market to make a quick profit) plays a part in driving up the cost of oil, but not as much as you’d think. All my researches into this indicate speculation plays a minor part, at best. What appears to drive it far more is uncertainty.

Last year several things sent the price of oil spiraling upward: lost production from Kuwaiti oil wells, hurricane damage, political uncertainty, and Asian economic expansion. Of these, the last has had the most effect and is anything but uncertain. Asia is growing fast and gobbling up all the reserves. Asian growth has been squeezing the market for many months. Then, early last year, we began getting reports the Kuwaitis were having problems meeting their quota. Because the Kuwaiti wells are near sea level, they’ve been getting salt water seepage contaminating some wells and shutting them down. This is a situation that was anticipated but not corrected for by developing new wells or exploring for new sources. Later the same year, we had two hurricanes damage our own production, forcing greater reliance on foreign oil. Concurrently, Venezuela’s strong-man decided to take advantage of our dependence to hurt us. What advantage he thinks he’s deriving from this is unclear other than thinking he will turn a greater profit than did OPEC when they tried the same thing back in the 1970’s. This will net him a short-term gain, but long-term loss.

As always, two things drive the real price of any commodity: supply and demand. Speculation may cause some minor ripples (hugely profitable to speculators operating on small margins on high volume, but not really very big). Both supply and demand are going through a major adjustment just now, and that’s why we’re getting this huge spike.

On the supply side, we are getting a lot of panic and claims that we’re seeing the end of cheap oil. That may be true or it may be false. We’ve seen this kind of alarmist speculation before. The Kuwaiti development seems to tell us some of our key sources may be all but exhausted. But are they? And, if they are, are there no other sources that will serve to keep things going. Oil companies tend to explore for new sources only when driven to. Exploration is costly and risky, and is too often undertaken only when a supply crisis hits us. Twice in the past, we heard the well was dry only to find there was more oil no one had bothered to find. We’re at another of those crossroads now, and oil men and investors are deciding if now’s the time to explore yet again. I expect we’ll see the price climb until a couple of new sources are located and developed that will keep production meeting demand. Likewise, new refining capacity will be developed to meet the needs of Asia.

Barring new sources, we still are a long way from bottom. Oil-shale and tar-sand (sour) oil have lain largely undeveloped because they’re uneconomic relative to sweet oil. With rising prices, we can expect someone will take an interest in finally developing those assets to keep up with demand. Sour oil is harder (more expensive) to get out of the ground, crack, and refine to get the same mix of products; which is why it has remained relatively undeveloped. After the known sources, there is oil in the ground that is deeper, more compact, and under hard rock that we will surely extract before we truly reach bottom.

Until these other assets are developed, supply will remain tight and prices high. As they come on-line, prices will fall to something more in line with past pricing.