Oil: The Long Goodbye

«It's Still the One, by Daniel Yergin

That frenetic daily trading has helped turn oil into something new -- not only a physical commodity critical to the security and economic viability of nations but also a financial asset, part of that great instantaneous exchange of stocks, bonds, currencies, and everything else that makes up the world's financial portfolio. Today, the daily trade in those "paper barrels" -- crude oil futures -- is more than 10 times the world's daily consumption of physical barrels of oil. Add in the trades that take place on other exchanges or outside them entirely, and the ratio may be as much as 30 times greater.
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Both the U.S. Department of Energy and the International Energy Agency project that, even accounting for gains in efficiency, global energy use will increase almost 50 percent from 2006 to 2030 -- and that oil will continue to provide 30 percent or more of the world's energy in 2030.
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Just because we have entered this new age of high-velocity change does not mean this story is about the imminent end of oil. Consider the "peak oil" thesis -- shorthand for the presumption that the world has reached the high point of production and is headed for a downward slope. Historically, peak-oil thinking gains attention during times when markets are tight and prices are rising, stoking fears of a permanent shortage. In 2007 and 2008, the belief system built around peak oil helped drive prices to $147.27. (It was actually the fifth time that the world had supposedly "run out" of oil. The first such episode was in the 1880s; the last instance before this most recent time was in the 1970s.)
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One part of the solution is not only enhancement of the already considerable regulation of the financial markets where oil is traded, but also greater transparency and better understanding of who the players are in the rapidly expanding financial oil markets. But regulatory changes cannot eliminate market cycles or repeal the laws of supply and demand in the world's largest organized commodity market. Those cycles may not be much in evidence amid the quiet tanks and rolling hills at Cushing. But they are inescapably part of the global landscape of the new world of oil.»

Daniel Yergin, Foreign Policy, Sept-Oct,2009