The Perilous Price of Oil

George Soros in the New York Review of Books:

In January 2007, the price of oil was less than $60 per barrel. By the spring of 2008, the price had crossed $100 for the first time, and by mid-July, it rose further to a record $147. At the end of August it remains over $115, a 90 percent increase in just eighteen months. The price of gasoline at the pump has risen commensurately from an average of $2.50 to around $4 a gallon during this period. Transportation and manufacturing costs have risen sharply as well. All this has occurred at the same time as a world credit crisis that started with the collapse of the US housing bubble. The rising cost of oil, coming on top of the credit crisis, has slowed the world economy and reinforced the prospect of a recession in the US.

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?

More here.