High crude prices: Will they last?

Geology is also not helping matters. The oil fields available in the first world are maturing at a fast clip. There have been very few lucrative finds over the past many years. So the oil majors from the developed nations are forced to concentrate on the marginal and expensive off shore projects.

No, they will not last
Actual commodity vs. the financial derivative: While the financial derivative for crude oil is consistently touching ever-higher prices, the actual commodity might not be selling at those prices. According to Bloomberg, Iran had at least 14 very large oil tankers idling in the Persian Gulf around June 02, 2008. This might be an indication that the OPEC's second largest oil supplier is not able to clear the commodity at the current prices. The demand (and the price) for the derivative seems to have run away much faster than the demand (and the price) for the actual commodity.

Alternate sources of energy: Alternate sources of energy- ultra deep oil fields, Canadian tar sands, nuclear energy etc.- become viable at high crude oil prices. According to some estimates, the threshold price for the Canadian sands is US$ 60 to 70 per barrel. These alternate sources should indeed attract investments if the current crude prices remain at the current stratospheric levels. And such news should act as the safety valve in the pressure cooker like crude oil markets.

France produces around 75% of its electricity from nuclear energy. Most of the French nuclear power plants were built after the oil shock in the 1970s. The world might rethink the nuclear option on a much larger scale this time around.

Conclusion
Crude oil remains the most important source of compact energy. But the question is whether the fundamentals warrant the price. George Soros has recently said, "The answer is that the bubble is super-imposed on an upward trend in oil prices that has a strong foundation in reality."

A bubble can form in any market- equities, housing, currencies or commodities. Mr. Soros has explained in his book, 'The Alchemy of Finance', that bubbles arise from fundamental factors, which the market overestimates in a positive reinforcing loop thus taking it far away from reality. Given the absolute levels of the crude prices and rapidity of increase, this looks like a bubble to us.

Just as in the equity markets, bubbles in the commodity prices must eventually burst. As to when the crude oil bubble will burst- timing is as, if not more, difficult in commodities as it is in equities.