The public is asking for an answer to two questions. The principal question is whether the sharp oil price increase is a speculative bubble or simply reflects fundamental factors such as rapidly rising demand from developing nations and an increasingly limited supply, caused by the dwindling availability of easily extractable oil reserves. The second question is related to the first. If the oil price increase is at least partly a result of speculation, what kind of regulation will best mitigate the harmful consequences of this increase and avoid excessive price fluctuations in the future?
Every sequence of boom and bust, or bubble, begins with some fundamental change, such as the spread of the Internet, and is followed by a misinterpretation of the new trend in prices that results from the change. Initially that misinterpretation reinforces both the trend and the misinterpretation itself; but eventually the gap between reality and the market's interpretation of reality becomes too wide to be sustainable.
It should be emphasized that curbing speculation in oil futures would be at best a temporary remedy. It could serve a useful purpose at a time when the parabolic rise in oil prices reinforces the prospects of a recession but it would not address the fundamental problems of peak oil, global warming, and dependence on politically unstable or hostile countries for our energy supplies. Those problems can be solved only by developing carbon-free sources of energy. The imminent onset of a recession, by reducing the demand for oil in the developed countries, is likely to bring some relief from higher oil prices, but that relief will be temporary. It should not divert our attention from the pressing need for developing alternative energy sources, and that will entail higher prices, at least in the early stages.
In the absence of alternative sources, the price of oil is liable to rise indefinitely. Only if we are willing to live with higher prices in order to develop alternative fuels can we hope to see an eventual reversal in the long-term uptrend in oil prices. In contrast to oil and other fossil fuels whose costs of production are bound to rise, the alternative fuels will become cheaper as we discover cheaper and more efficient technologies to exploit them, and will eventually bring down the price of fossil fuels as well.
