The Obvious Answer

There is lots of discussion about "speculation" in the oil market. One of my favourites is Paul Krugman who argues determinedly that there is no "speculation" because there is no place to hold the oil (here and here). Some people have slyly pointed out that the most inconspicuous place to hold that speculative oil is "in the ground".

Now, Theodore Seto, a professor of tax law and policy at Loyola School of Law, puts his two bits into the argument:

Why Oil Companies Don't Drill

U.S. oil companies are pushing hard to get Congress to allow the current Administration to issue more oil leases before its term expires. In response, skeptics have noted that three-quarters of the 90 million-plus acres of federal land already leased for oil drilling are not being worked. Oil companies deny this. Regardless of who is right, the number of operating oil rigs in North America declined across the course of 2007.

In the meantime, OPEC has raised its quotas by only 20% since 1998 – a measly 2% per year. World GDP grew by about 85% over the same period. The International Energy Agency reports that non-OPEC oil countries are also underproducing and predicts that they will continue to do so.

Everyone seems to be holding back.

Why?

The most likely answer is very simple.

Goldman Sachs has predicted that the price of oil may move past $200/barrel within the next 6 to 24 months. OPEC's chief and EU’s energy commissioner have also both warned that prices in excess of $200/barrel are possible in the near future.

Suppose you owned a source of oil. Would you sell that oil now for $140/barrel? Or would you wait for two years and sell it for $200/barrel?

Obviously, you would wait.