Since 2004, there’s been a lot of discussion about how much the price of a barrel of crude is related to speculation from traders rather than fundamental changes in supply and demand or other causes. Much of this debate is coming (of course) from the politicians, many of whom have spent their lives in public service rather than having expertise in professions such as economics, corporate finance, or investments. So consider the source, but don’t underestimate their intelligence.

In this case, I happen to agree that some of the oil price is related to trading speculation. That’s what traders do and it’s a bad rap to blame them. They may be exploiting a trend, but that doesn’t mean they created it. Let’s face it, most of the cost of oil is related to good old-fashioned supply and demand. Supply is tight, there are several legitimate risks for it getting tighter (Hurricanes, Iran, Venezuela, Nigeria, etc.), refinery capacity is constrained and global demand is increasing. For their part, politicians have done very little to help and the constant energy battle between the Republicans and Democrats since the oil crisis of the 1970’s has helped to put us in the danger we now face, not to mention the years ahead. I haven’t heard much debate about how many dollars in each barrel are related to political incompetence, but that’s really tough to quantify so I’ll leave it alone.

While I have heard figures as high as $25 of each barrel is blamed on speculators, I doubt that it is that high. I look at it in two components. The first is the geopolitical risk from something like Iran shutting off its own supply (doubtful), or disrupting Iraq’s supply (likely) or blocking the Straights of Hormuz (possible for a short period.) When many of those items became more prevalent in the news the past few weeks, oil has actually declined. So where is the speculative bump? Even the supply interruption from BP’s Alaska pipeline fiasco had little more than a one-day increase of about $2 that has decreased to a point where we are now $2 lower than before the shutdown was announced. Problems in Nigeria? Those hardly hit our headlines and it’s tough to see any speculative movement from them.

The second component of speculation (or at least an opportunity to speculate) is the fear of hurricanes. For the entire hurricane season, we haven’t had a chance to evaluate how much speculators would spike the price of a barrel. Thankfully, the summer driving season is largely over and that will help avoid a bigger problem. However, it now appears that we may have a chance to wake up on Monday morning and see how much play a hurricane will provide. It seems Ernesto has a chance to grow over the weekend and possibly break into the Gulf of Mexico. That would be spooky timing with the anniversary of Katrina! Anyway, if it happens, it should help quantify the portion of the speculative premium related to hurricane risk.

I do agree that there is a portion of spot oil prices relating to speculation. But I see these factors being very short term and the amounts to be grossly exaggerated. There are two sides to the trading pits - speculative buyers and speculative sellers. If oil declines, will consumers and politicians thank the speculative sellers as much as they blame the speculative buyers? Not going to happen, and it shouldn’t (and neither should traders be tagged with causing $10, $15, $20 or $25 per barrel.) I just cannot isolate a fixed dollar amount so I will leave it up to others to blindly throw numbers around.