Oil is a great lesson on the price of fear. Of course, supply and demand is the primary component of what traders pay for a barrel of oil and a declining dollar doesn’t help, but when you look at the rest of the price - it’s fear. It’s convenient to blame the trading pits and hedge funds for speculative premiums in West Texas Intermediate Crude. However, I look at this one layer deeper - what is fueling the speculation?

In the spring, the hurricane “fearcasters” provide the anxiety so let’s blame them for $10. Why $10? Because it’s as good or bad as any other number that people throw at problems that are not quantifiable. My point is that the traders are only speculating based upon the opportunities they are given. They do not create the weather. They do not create the fearful weather forecast. Furthermore, they did not create the hype around the Katrina disaster and they did not disseminate it or perpetually remind us of it. You can blame the media for that - say $5 per barrel. In the spring, we start the gluttonous US driving season and for that, you can blame American consumers and of course, the media once again for reporting how much we continue to drive around the country all summer long. How about $2 per barrel for that one. For most of this year, geopolitical events have not provided a base of fear for the traders to speculate about. So now that the Dems have perfectly timed a 90-year late Turkey genocide resolution with the administration’s failures in Iraq, the traders have an opportunity to profit from fear. Again - the traders did not piss off the Turks, the Dems and Republicans did. So you can blame the politicians for the $7 per barrel that has been tacked on in the past two weeks. And of course, you can share some of that with the media once again for making this even more sensational and fearful than the real impacts Turkey’s threats would have on actual oil supplies.

Just add up all my SWAG on that fear speculation and you come to $24 for the price of fear. You might say that things like the driving season are over and the hurricane season is almost done so if you want you can cut down the current fear premium to about $15. But this is an important argument - there is no opposite to a fear premium. There are always remnants of fear. Even in peace, we fear the loss of peace. Even in perfect weather, we fear the oncoming storm. So you can take the temporary event away, but the fear is also real and it persists to build a base. While we may get pullbacks on the positive resolutions to dramatic events, the base keeps building.

In the end, global energy demand continues to rise and supplies are harder and harder to increase. But when it comes to fear, right now it’s only the supply side that is exploited. Until the emerging market growth slows and/or the US economy slows, I don’t see fear affecting the demand curve. We fear hurricanes because of supply disruptions and yet, we haven’t had any of those for 2 years, but we fear them anyway so the price goes up. We fear war in the MidEast because of supply and yet, the actual effects of all the war in Iraq has had little effect on worldwide crude supply.

Blame the traders and hedgies all you want. The price of fear is provided by others and until the demand side of this equation provides some balance, supply worries will present themselves and they will be exploited. Pullbacks are not movements towards a lower price, they are just abatements to the fear of the day, week or month. Home heating season is the next new opportunity, soon after that it’s time to hear the 2008 hurricane fearcast, driving season will undoubtedly return and so it goes. In the words of FDR, “the only thing we have to fear, is fear itself.” I know he wasn’t talking about oil prices, but it certainly applies.