Nick Pope used to work at the MoD in the UFO "debunking" department. But after investigating a major UFO incident in 1989-1990 over Belgium involving over 1000 military personnel, and 3 confirmed radar tracks, he became a believer and soon wrote the book "Open Skies, Closed Minds".

‘‘Leon Hess, whose oil company made more than $200 million by trading oil futures during the Persian Gulf crisis ... said he longs for the days when oil company barons could get together and decide prices and supply levels largely among themselves, rather than depending on the violent price swings created by traders who react to rumors and headlines.
‘‘‘I’m an old man, but I’d bet my life that if the Merc [New York Mercantile Exchange] was not in operation there would be ample oil and reasonable prices all over the world, without this volatility,’ Hess said at a hearing the Senate Committee on Governmental Affairs held on the role of futures markets in oil pricing.’’ —‘‘Oil Baron Longs for Past, Not Futures,’’ Newsday, November 2, 1990

I've tried to explain the crude oil pricing mechanism as best as I could and why I think it's broken. I'm not sure if I was able to make things clear enough.

A very good description of the flaws of the current pricing system of crude oil comes from Robert Mabro (a scholar and highly regarded consultant with 3+ decades of experience in the oil market, now retired). He explained the issues in his 2000 article:

http://www.oxfordenergy.org/comment.php?0008

which I think is a must-read for anyone who wants to understand the oil market (I've linked to it in the 1st post in this thread). Btw the situation back then (1998, 2000) was much less acute than today.

Here's an extract from the abovementioned article:

"As mentioned before, because of the lack of good information on production, stocks and demand, what rules the market is the consensus view about these numbers rather than the actual situation. This has an important implication for OPEC. When OPEC has to decide on a production policy in order to reverse a price fall as in 1998 and March 1999, it is obliged to reduce production by the volume demanded by traders and not by the amount required to restore the supply/demand balance. And the market has a tendency to believe in myths, such as the myth of the `missing barrels' in 1998. In that year OPEC, together with Mexico and Norway, reduced oil production twice (in March and June) to no avail. The oil price continued to fall. The market did not believe that the reductions were large enough. In March 1999 OPEC cut production by the large amount demanded by the market. This turned out to be too much as evidenced by the relentless price increase that followed throughout that year.

It is nice to say that markets should rule. The statement is however meaningless and indeed dangerous in its implications if one does not specify which market, and the conditions that qualify a market to rule. The oil futures markets as they exist today and for the reasons mentioned earlier on do not qualify. Yet, OPEC has to follow their whims to influence the course of oil prices and this seems to be an important cause of high volatility."

Mabro's CV, Awards (by OPEC, the Queen etc :-). He published several books and articles on the oil markets.

"In December 1991 Mr Mabro was awarded the International Association for Energy Economics 1990 Award for Outstanding Contributions to the Profession of Energy Economics and to its Literature.

In December 1995 he was awarded a CBE by HM the Queen in the New Year's Honours List. In 1997 the President of Mexico awarded him the medal of the Mexican Order of Aguila Azteca and in 2000 the President of Venezuela awarded the medal of Francisco Miranda, and in 2001 was promoted Officier des Palmes Academiques (France).

In 2004 he received the first OPEC award for contribution to oil studies."

PS: Mabro is retired. I don't know why more people in the oil industry don't speak up CLEARLY about this subject, considering the economic damage inflicted upon consuming nations ... (they do speak, e.g. Leo Drollas http://boinc.bakerlab.org/rosetta/forum_thread.php?id=1707#19322 but it's not always clear what the cause and effect is)

I'm just asking about the "How" of it all. What would you like people do to get this changed?

Write to your regulators / legislators / representatives.

That's it? That's the sum total of what you have to say about what we need to do about price disconnects?

The price is set by what price the Saudis would want to sell at. If there is no real demand, because most people are trying to cut back. It is not surprising that they can't find buyers at the current price.
Rather than the Saudis cut back their production, they should increase it and when their tanks are full they'll need to sell at a lower price say $40 and the buyers will come running.

Your argument doesn't hold up.

Um, I don't understand what you mean by the people should "revolt". Do you mean demonstrations at the refineries? Protests in the streets?

Saudi cut shows record oil defies market logic
Wed Jun 28, 2006 11:58am ET167

LONDON (Reuters) - Oil power Saudi Arabia has offered the most compelling proof yet that record high prices are divorced from the realities of supply and demand.
...
"There is absolutely no relationship between price and supply and demand," Saudi Oil Minister Ali Al-Naimi noted. He told pan-Arab newspaper Al Hayat in early June that crude oil was worth no more than $50 a barrel based on fundamentals.

What can be done?

There's tons of explanations of why the price is so high and won't come down. Listening to the radio, or reading the paper, I gather that the 'glut' of storage oil on the market has now affected OPEC so badly that they're storing oil in old tankers (and running out of them!). They're looking (begging) for people on the open (spot) market to buy oil.

Inflation, inflation everywhere!

Pretty soon, the producers are going to have to start ramping back, correct? And when that happens, the price IS gonna be pretty much set in stone, correct?

Most of the charts and articles you've referenced here reflect the month of April, and they mostly talk about the Western world (specifically the US). What's going on in China? And to a lesser extent, India? Things haven't changed much in three months. It's such a fast changing world, too.

I'm not an economist, but I would say those "orange" people have something to do with whats going on, too! Maybe these 'speculators' ain't so happy that the world is going flat without them?

Another interesting thing is that the European price for fuel has always been a lot higher than the US. I remember paying something like 4.50 a liter in Italy 10 years ago. Is that right?

So, my question is what mechanism could you use to artificially inflate the price of light sweet crude and sustain it, in order to develop new technology that will in the end, defeat it? And to further aggravate the question, who would be developing the new technology? Hate to be an outsider holding on to a bunch of light sweet crude when that happens, but either way, someone is always living behind a dumpster at a 7-Eleven.

Crude oil closed above $70 a barrel for the first time, highlighting a phenomenon reshaping the petroleum world: investment flows into oil futures are supplanting nitty-gritty supply-and-demand data as prime drivers of prices

In contrast to past bull markets in crude, this year's run-up has occurred even though oil inventories in the U.S., the world's largest market, have swelled to their highest levels in nearly eight years....

The answer to the puzzle posed by rising prices and inventories, industry analysts say, lies not only in supply constraints such as the war in Iraq and civil unrest in Nigeria and the broad upswing in demand caused by the industrialization of China and India. Increasingly, they say, prices also are being guided by a continuing rush of investor funds into oil markets. Institutional money managers are holding between $100 billion and $120 billion in commodities investments, at least double the amount three years ago and up from $6 billion in 1999, says Barclays Capital, the securities unit of Barclays PLC....

Since early 2005, the crude-oil market is in what traders call contango, meaning futures contracts for a given product are priced higher than that same good for near-term delivery. The price of oil to be delivered four months from now is about $3 more than oil to be delivered next month.

In short, it pays for refiners and other oil-market players to buy and hold oil now to sell it down the road. Making that trading opportunity possible, says Colorado-based oil analyst Philip K. Verleger, is the huge volume of new buyers on the other side: investors who he estimates have put more than $60 billion into U.S. crude-oil futures since 2004.

Indeed, San Antonio-based Valero has been operating with its crude tanks full since the start of the year. When the market is in contango, "you tend to operate at the top of your tanks," says Bob Beadle, Valero's senior vice president in charge of crude oil, supply and trading. Mr. Beadle estimates that in the U.S., the difference between the industry operating at full tanks and at minimum operating levels amounts to as much as 75 million barrels of oil, or about three days of supply.

Interview: Oil Expert Explains What's Driving Record High Prices
By Jeffrey Donovan
Azerbaijan -- Caspian oil derricks, pollution
(AFP)
Oil prices have climbed steadily since 2004, and today they rose again to new record highs of more than $74 a barrel. What's driving prices -- and can they be brought back down? Government officials and oil executives from more than 65 nations will be asking those same questions when they gather in Qatar on April 22-23 at a meeting of the International Energy Forum. Among the factors driving prices up are fears over possible supply disruption in major oil-producing states such as Iran, Iraq, and Nigeria, where a rebel offensive has cut off one-quarter of output.

PRAGUE, April 20, 2006 (RFE/RL) -- RFE/RL spoke with Leo Drollas, the deputy director and chief economist of London's Center for Global Energy Studies.

RFE/RL: The price of oil continues to climb to record highs. Analysts say fears over the Iranian nuclear crisis is one of only several issues driving up prices. Iranian President Mahmud Ahmadinejad only strengthened those fears on April 19, when he said oil prices are still below their true levels. What's your take?

Leo Drollas: The first thing we must say is that these high prices are really paper prices, in a sense for paper oil, they're not the prompt market -- that is, for real wet barrels, as we call them. So they're obviously driven a lot by news and by sentiment, and they refer to oil that is bought and sold months ahead through paper contracts. And these prices move quite quickly on news, and the news is bad at the moment for oil because of the Iranian standoff, because of problems continuing in Nigeria, and many other factors in the market.

RFE/RL: So you're saying that, beyond fears over Iran or supply disruptions in Nigeria, the futures market is driving up prices?

Drollas: There's a lot of money that has come into the oil market over the last few years. The money that is now tracking commodity indices has increased from about $8 billion in 2001 to about $70 billion today. So we've got a huge influx of money into commodity-tracking indices, and a large part of those indices of course refer to oil. So we've got a lot of speculative money or hedge-fund money or other kinds of investors coming into oil, thinking they're on a roll now and that oil prices will forever increase. And in a sense, this tends to fulfill the prophecy, as long as the money keeps coming in.

RFE/RL: How does that drive prices, exactly?

Drollas: What tends to happen is that the futures prices, especially for months further out, tend to rise, and they create a difference between future prices for outer months and spot prices for oil, especially for "wet" barrels. And this differential encourages people to buy physical oil, and therefore, the pressure from the futures market is transmitted to the actual spot market for oil.

RFE/RL: But isn't capacity part of the problem as well, both in terms of the actual supply of oil and the fact that, particularly in the United States, refining capacity is down, with some refining facilities still not fully recovered from last summer's Hurricane Katrina?

Drollas: Well, this is the huge, unanswerable question as to what component of this price run-up is due to speculation, as we call it, or due to real fundamental factors. My own gut feeling is that maybe $15 [per barrel] or so at the moment is due to these kind of pressures from the futures market, from speculation if you like. In other words, the price should have been quite a bit lower than that, because there isn't actually a physical shortage of oil at this very moment.

RFE/RL: So this gets us back, perhaps, to emotions -- to fears over possible supply disruptions due to crises in key producing countries, such as Iran, Nigeria, Iraq.

Drollas: Of course, the fear is there because of these factors: Iran and Nigeria in particular, and also Venezuela to some extent in the background. But one must bear in mind that there is a physical problem too, in the sense that the spare capacity to produce crude oil in the world is under 3 percent of global demand for oil. And a business that runs with such little spare capacity is vulnerable to all kinds of events that make people worry or fear whether the system is able to cope with the pressures that are put on it in, let's say, the autumn or the winter that we have ahead of us.

Have you studied the effect of oil price on the other commodities? I mean if price of oil goes up, it will cost more to run a tractor across a field and harvest sugar cane, or cotton or oranges... and electricity costs will increase which has a great impact on smelting of metals, precious or otherwise. I mean how much of the increase in the prices of these other commodities is directly attributable to the increase in oil prices?