Bear with me if I leave those aside in the interest of conciseness.

Let's compare yesterday's development in Alaska with something reported on Sunday about Iran.

Yesterday 3% or so of the U.S. daily supply disappeared. According to NPR, the US government got involved and by the end of the day an agreement had been concluded with Saudi Arabia to make good the short-fall for as long as it is necessary. Thus it is clear that overall there is no tight supply situation. The Saudis can find 400,000 barrels per day, on top of whatever they are producing. Saudi Arabia reduced its production by this amount back in March. Now, strangely enough, on the eve of an Arab League intervention at the UN Security Council on Lebanon, the Saudis find themselves compensated with the closure of Alaska production. It will take 30 to 40 days for the oil to get here. The government will draw down the strategic reservein the meantime I would imagine the U.S. paid a premium price to the Saudis to secure that oil. But it would not have been a price anywhere near $76 per barrel.

Sunday a deal was reported between China and Iran. China will buy 70 billion barrels of Iranian gas liquids, some of it in the form of reserves, over 30 years. There is a link to the wire service story in Juan Cole's Sunday blog. It was also reported in the Observer's Sunday edition in London. This deal would not have been made at anywhere near the $76 dollar price either.

There are many ways it could have been negotiated: barter would be one, to show that China is not so dependant on US consumers as some think, Euros would be another, dollars would be another, a combination of some or all of the above, another. Coming as it did as an announcement in the aftermath of the US French agreement on Lebanon, it sends a pretty strong message around the world. Buying the reserves gives China an interest in the real estate they are under.

Nationalized producers of oil, which hold the bulk of the world's proven reserves, negotiate long term agreements with customers like oil companies. Those agreements will be typically way below where the price is now, but higher than where it was a year ago. Those prices are not what we pay at the pump.

Let's take the $76 dollar approximate price. Pump prices do move in line with that price. But, that price is a commodity exchange price, not an oil price. It is the price quoted for "paper barrels" of oil, not physical barrels of oil. The $76 price reflects a bubble in these commodity markets, Ny York Commodity Exchange (NYNEX) and London International Commodity Exchange (ICE). This is documented at this link, http://dhatz.blogspot.com/2006/06/oil-to-38657-per-barrel.html which provides a number of other links to other sites where a selection of different views can be sampled. I think the idea that speculation is determining price is persuasive. If you want to pursue it, click on through and browse. Back in 2001, about $8 billion worth of contracts were traded in these markets per day. As of April of this year trading was going on at a rate of $70 billion per day. This is the amount invested passively in "long only" commodity funds. There is more in traded funds. The contracts in the months further "out" than the "near" one trade higher on the basis of the expectation of bigger troubles in the Mid East, or growth in Chinese demand for oil. The latter fear is probably exaggerated.

World supply involves around 84 million "wet barrels" moving around every day. Against that physical supply, the daily trade of "paper barrels" is 240 million, three times the volume. But the "paper barrels" can only be converted into "wet barrels" through the Light Sweet Crudes which are the benchmarks on the two exchanges, West Teaxs Intermediate at NYNEX, and in the case of ICE, Brent. In combination these two grades of oil represent a very small amount of the total supply. It is an illiquid market. There is not enough supply of WTI or Brent to back up the contracts. The market cannot be shorted because the speculators cannot move between "paper" and "wet" positions, therefore the market cannot provide the function that is typically used to justify speculative commodity markets, a hedge. Therefore "excesses" cannot be corrected routinely. So these markets keep going up, some people seem to think, because the Middle East situation can only get worse.

This price is affected by the continuing stampede of money into the commodity markets, not by the physical supply and demand for oil. There is a link within the link to a piece by Henry Liu on the economics of oil, and some older stuff by Andy Xie of Morgan Stanley on Chinese demand. Financial institutions have turned to these markets for profits, retirement funds have stashed some of the money they have fiduciary responsibility for into this casino. Money market funds are changing their rules so that their managers can deposit funds there too. It has become a $2 trillion bubble.

There was a previous commodity price bubble in the 1970's, the last time the price of oil seemed to take off for outer space. This was one of the ways in which the movement for a New World Economic Order was subverted. African nations, like Zaire, were told they needn't worry because their raw materials would permit them to borrow to do all kinds of wonderful things. Look at Zaire today. The same thing was done in Latin America. When the bubble collapsed in the winter of 1982, a process was launched in which debt re-organization resulted in the absolute transformation of those countries through so-called debt-for-equity schemes and swindles, like the ones associated with George HW Bush's Treasury Secretary Nicholas Brady. The financial world says those things were amazing successes. They ended up the owners, working through the broken shells of the countries they bubbled. The countries have different views about it. Ask the Argentines or the Mexicans.

So we've got four kinds of things to consider in the price: urgency of demand, or control of the marginal barrel, (Alaska North Slope), politics, (China and Iran),  the weight of finance in the commodity markets, and the crises in the Middle East.

Supply has been manipulated over the longer term in a fifth, very basic way. Iran, with about 12% of the word's admitted reserves has been embargoed by the US since the early 80's. Iraq with about 10% of world reserves has been prevented from doing anything significant with its oil for 16 years now, since Bush's father invaded to protect the free world, our way of life, and the oil supply.

If Iraq and Iran had been able to have their druthers, and the speculation and the crisis components were not present, I think the price of oil ought to be around $12-15 per barrel. Subtract from $70: say $15 for the effect of the commodity speculation, $15 for the effect of the escalating war scares, and another $15 for the 16-26 year suppression of supply from 25% of the world's known and admitted reserves. There may be more demand for oil at that price level, especially from places which can't hardly afford it at all at the moment.

There would also be draw backs. Morgan's Xie believes that some of the alternatives to oil, like the gassification and liquifaction revivals of the German programs from the 20's, 30's and 40's become economical at around $25 per barrel. And oil does provide a base for credit extension.

So if someone wants to demagogue it on the question of price manipulation the topics identified above are among the elements they ought to be taking into account if they are going to be credible. The details may not be right, but the different components of the price for sure are, in my view.

Where will it go from here? Like all questions of this sort, the answer will be brought to us by the passage of time which will make all things clearer than they are now. Asking it, is just a way of letting whoever organizes the passage of time know that some of us down here have got expectations. The heated speculation is considered responsible for a net annual transfer from oil consumers to producers of roughly $500-600 billion. Oil and related energy products is the largest component of the US trade deficit. The US is selling off its ports and other physical assets as part of this. Money is shifted from consumers to oil producers via the commodity market and comes back to buy hard assets like ports.

Bear this in mind though. Bush father, Clinton, and Bush son, worked for years, on a policy developed between 1973 and 1976, to take over the Iraqi oil. They were successful. They got what they asked for, and worked for. Everyone knows the saying "be careful what you ask for, you just might get it". One of the places people learn those kinds of stories is in the Arabian Nights, or 1,001 Nights, when every night Schehezerade had to tell a story to keep the Caliph of Baghdad from killing her. Remember the genie with the three wishes?

Well, the Bushes wished, and they got their oil. What can they do with it, now they have it? Not much, for the moment it seems.  It has become one of the bones of contention in a civil war, which is undermining the military potential of the U.S. army. Because of the chaos the oil majors don't want to participate in the privatization, why should they? Thanks to Bush the U.S. tax payer, and the buyers of its debt, are paying.

Do Bush and company have control of the oil because they have troops on top of it, being shot at, and blown up? Or, do those who can supply the marginal needs of the U.S.economy have control? For sure the Iraqi oil is not a contributor there. The government was not able to turn to Iraq on Tuesday for an extra 400,000 barrels per day. 13% of our daily supply has been knocked out recently (3% from Venezuela, 3% from Nigeria, 2% from the Gulf of Mexico unrepaired damage, more from Iraq, Now Prudhoe Bay), http://www.cera.com/news/details/1,,8089,00.html , and scroll down to the section  

In the meanwhile, the Iraqi oil has become some of the collateral against which this $2 trillion commodity bubble has been extended. Bush, like the Sorcerer's Apprentice, has to find ways to keep the price going up, or find a new bubble for the funds to move into, otherwise the bubble will pop, and this time it will not be Zaire or Mexico that will be brought down in the aftermath, it will be the U.S. This way of looking at the oil situation may be telling us Bush has caught himself in a monkey trap he can't get out of. The rest of us need to find ways of getting out from under him, quite quickly.

Where the price of oil can go, given all that, depends on how much money can be stampeded into those commodity markets, and how quickly. That though might well cause even more instability in the markets the money is coming out of. It won't be any help to Bush either.