The record surge in oil prices has sparked debate as to what portion of the actual rise can be attributed to pure speculation and what is due to fundamental demand and supply imbalances. It is clear from the rapid rise that speculation has been playing a role but part of the reason behind the difficulty in determining exactly what role speculation has been playing is because of the increasing opacity in demand and supply information. This, in turn, is partly due to the emergence of new players in the oil business, particularly countries like China where transparency is not really part of tradition. There is also growing concern that oil supplies have been overestimated and that the current rise is reflecting an adjustment to reality which is that existing fields have peaked (or are in decline) and that new discoveries are both less frequent and smaller in size (making the business of discovering oil fields a more costly undertaking).
In summary the price hike is reflecting imbalances resulting from the challenges of finding new fields to cover not only a continual drop in output from existing supplies but also to satisfy increasing demand coming mainly from energy hungry emerging countries. To this we can add what has become a perpetual risk premium in the form of geopolitical factors such as limitations in discovery due to war (as in Iraq, Nigeria) or regime change (as in Venezuela).
Although it is very possible that speculation is playing a significant role in the current pricing of oil and that we will eventually observe a large correction, the days of abundant and cheap oil is clearly a thing of the past.
