Crazy Oil Prices Driven by Perceptions, Not Realities

02/24/2011 11:09 am ET | Updated May 25, 2011

Oil's been on fire in the last two days, gaining more than $10 dollars and $25 dollars in the last 3 months. That equates to a quick extra 62 cents a gallon at the pumps, folks, if you're counting -- and I know that you are.

But as I continue to point out in my blog posts and explain in detail in my upcoming book Oil's Endless Bid, due out from John Wiley and Sons in April, you're just being taken for a roller coaster ride. There has not been one significant supply shutdown nor has there been any overwhelming increase of demand for finished gasoline or heating oil in that time to explain these monster moves.

Instead, there have only been threats of supply disruptions from weather and Middle East unrest -- and bets being placed on those possibilities, fueled to insane levels of frenzy by commodity trading advisers, index fund managers, dedicated hedge funds and oil swaps dealers.

As I explain in my book, access to what was once a very tiny and closed oil market is now available to everyone - not just the actual producers and users of physical oil, nor even to the many professional energy traders. No - instantaneous access to the price of the crude barrel is now available at the click of a mouse to anyone with an internet connection through indexes, ETF's, ETN's and individual futures accounts and the world is buying big. Add to this avalanche of money from retail investors the further avalanche of professional hedge fund and proprietary investment bank swaps trading taking quick advantage of the panicked buying from the investing public hyped by a 24-hour frenzied media and you've got it - a perfect storm of trading without a seller in sight, driving up prices 15% in a matter of days.

The reality is that not one barrel of real oil has been removed from the global supply picture in the last several weeks until today, when it was reported that perhaps a half million barrels of daily supply was lost temporarily from Libya, a shortfall that Saudi Arabia could easily and will easily cover, if it becomes necessary.

Even more, the insane wagering on crude prices driving Brent Crude prices up more than six and a half dollars today alone is about the possibility of a protest contagion spreading to Saudi Arabia, where 10% of global oil supply is housed and where the leadership to OPEC is maintained.

But oil being priced on the futures market today must be delivered within the next 20 days. Someone explain to me how that (in my mind, tiny) risk of a real supply shortage at least several months away needs to be represented in $110 dollar prices for crude being delivered and used today?

It can't. It is instead the relentless drive of capital through an oil market that was never intended nor outfitted to receive it -- what I've been calling "oil's endless bid".

And for the consumer, it means higher prices: Not just for gasoline and heating oil, but for everything that relies upon energy to be produced - foods, drugs, metals like aluminum - well, nearly everything.

When we last saw an energy market streaking out of control like this in 2008, we needed the threat of a global financial meltdown to burst oil's bubble.

What will it take this time around?