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Speculation, indeed.

Thanks, David, for elucidating the link between the commodities exchanges and the prices of commodities. Speculation is indeed a large part of the price of oil. Most consumers do not understand this - nor do those offering overly simple explanations such as "supply and demand".

Speculation serves as a needed buffer between the producer and the consumer. Because the end product - say, gasoline - is better seen as a process, guarantees need to be made to the producer that a certain price can be had in the future (hence the term "futures"). Otherwise, he will not (cannot) expend the resources to bring the product (and the myriad processes needed to produce it) to market.

An analogy: I went to college not to fulfill a hole in my ego, but because I saw that were I to do so, I was almost guaranteed more income over a long span of time. Thus, I took on debt to finance my education, wagering I could pay it off soon enough and net higher lifetime earnings than had I stayed un-degreed. Who set the cost of my education? People outside my control, similar to the speculators moving the price of oil.

A sidenote: I used to trade commodities in the late 90s, to some degree of success (though some degree of less than success as well). At the time, I recall not trading oil futures simply because the margin requirements were so high. I typically traded units of corn, soybeans, sugar and the like, as their margin requirements were typically ~$1000 - $2000. Oil rather was something like $30,000 at one point. The margin requirements are usually increased when volatility enters the market - as a form of further buffering against wild price swings. To me, this seems to introduce inertia into the market. That is, once a market has wildly increased in price, margins are increased, thus keeping only people in the market who have the wherewithall to ride out blips, thus softening the spikes and slowing everything down. This is just my take through anecdotal evidence.

Something to consider on the positive: high oil prices will, if sustained, spur new resource development. Over time, as this new oil is brought to market, prices will drop and perhaps stay depressed longer the next time.