I found an excellent article today on why the price of oil is so high and why this will soon end:

As detailed in an earlier article, a conservative calculation is that at least 60% of today’s $128 per barrel price of crude oil comes from unregulated futures speculation by hedge funds, banks and financial groups using the London ICE Futures and New York NYMEX futures exchanges and uncontrolled inter-bank or Over-The-Counter trading to avoid scrutiny. US margin rules of the government’s Commodity Futures Trading Commission allow speculators to buy a crude oil futures contract on the Nymex, by having to pay only 6% of the value of the contract. At today’s price of $128 per barrel, that means a futures trader only has to put up about $8 for every barrel. He borrows the other $120. This extreme “leverage” of 16 to 1 helps drive prices to wildly unrealistic levels and offset bank losses in sub-prime and other disasters at the expense of the overall population.

That’s impressive leverage right there - right before the Great Depression, margin on stocks was 3 to 1, which was considered “loose” and, depending on who you ask, is considered a big factor in why the stock market crash of ‘29 was so severe.  Nowadays, it’s legally fixed at 2 to 1.  16 to 1, needless to say, is highly extraordinary.  It also means that, when this bubble pops, there are going to be a lot of people in a lot of debt.

Think about it for a second.  Let’s say we pick up some oil at current market prices ($126.84/barrel, according to Bloomberg).  Using margin, we can purchase each barrel at $7.93, owing $118.91 for each barrel.  Now, let’s say the price of oil goes down by half - not unreasonable since, a couple of years ago, $63/barrel was considered rather high.  That means that, on each barrel of oil purchased on margin, we’re going to have to pay back $55.91 that we’ll have no hope of recouping.  If we’re being cheap and buying oil at $7.93/barrel and losing $55.91 for each barrel purchased at the price, guess what?  We’re losing a lot of money.

Guess what’s going to happen when this bubble pops?  That’s right - the same thing that happened when the housing bubble popped.  A bunch of lenders are going to get screwed because there will suddenly be a bunch of people that way overextended themselves on margin and now have nowhere near enough collateral to ever pay it off.

There’s a phrase that comes to mind here… “Fool me once, shame on you.  Fool me twice, shame on me.  Fool me once every two to three years and I’m a forgetful dipshit.”  I think that’s how it goes, anyways.  I just hope the government doesn’t bail them out again - considering how the bailout would be paid for by borrowing from the very banks that need to be bailed out, and considering how our government is spending more than it receives in income, it’s only a matter of time before the government lending bubble goes boom as well, no?

(Feedback loop, anyone?)

(I need sleep tonight.  Oh, dear God, do I need sleep tonight.)

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