I have been advocating for a while now that the vast majority of the runup in oil prices we have seen is nothing more than the result of rampant speculation in the commodities markets and not a function of deliverable supply/demand. Finally, I have some pretty good information to back up my contention.
As it turns out the oil market is incredibly small. The total open interest on oil contracts is approximately $65 billion dollars. This is a nothing number in the financial universe and that is at current (speculative) prices. To get an idea of the liquidity of this market, their are but 500,000 contracts outstanding (at 1000 barrels per contract). This demonstrates how easy it is to speculate and drive up the price, as there simply isn't enough liquidity to sop up the $500 million of new investments into commodity funds (thats just commodity funds) every month. Finally, the most telling point is leverage. We all now know what leverage can do to a market (see housing/credit crisis). Interestingly enough, the margin requirement for oil is only 7%, which means that $8 of actual cash allows you to control $128 worth of oil. To take that even further, it means that the entire current value of the open interest in oil can be controlled with only $5 billion.
I have real concerns that we are allowing speculators (which may include the investment funds of the oil producing countries themselves) to destroy the economy through the manipulation and speculation in oil futures. The margin requirements need to be immediately raised to 50% (which won't hurt the price of oil at all if there is no speculation) and then place a 90% profits tax on those investments in oil made by those with inadequate storage to take actual delivery (or those in excess of a businesses fuel use for a given time period to allow hedging). Peak oil may be coming (and may even be here, but the price increase we have seen is only justified by mass speculation not the underlying fundamentals.