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Who was it predicting oil prices at $150 a barrel by July 4th?

We may have missed that deadline, but no matter. With oil touching $147 a barrel this morning, according to the Associated Press, we may not have missed it by much.

What's causing the latest gyrations? A combination of saber rattling by Iran - it has been firing off long range missiles this week to demonstrate its ability to hit Tel Aviv - and the ongoing rebel strife in the oil-producing bayous of Nigeria.

It is impossible to gauge the mind of Iran's President Mahmoud Ahmadinejad, but he clearly wants to create some sort of crisis with his constant threats against Israel, his efforts to promote nuclear energy (and possible weaponry) and now his demonstration of fire power.

There is no way Israel can be expected to stand by and wait for something to happen. But does it want to be the instigator of military action? It took out the Osirak nuclear plant near Baghdad in 1981 on fears that Saddam Hussein was using it to develop nuclear weapons. It could possibly do the same sort of surgical strike against Iranian nuclear facilities at Natanz and Arak.

Hawks in Washington such as John Bolton, the former American ambassador to the United Nations, cite the possibility of some sort of strike between the election and the end of the Bush's term in office.

And the Israeli Air Force last month carried out exercises over the Mediterranean that were seen as preparations for strikes against Iran.

None of this is good for oil prices.

Meanwhile, the continued rebel activity in Nigeria has affected oil production in the West African nation which total about 2.5 million barrels a day. The main Nigerian crude oil, Bonny Light, is very high quality in terms of lightness and lack of sulfur content and Nigeria, being just across the Atlantic from the Gulf Coast, is the fourth largest exporter of crude oil to the United States - 1.1 million barrels a day - after Canada, Saudi Arabia and Mexico.

Why do these geopolitical developments have so much influence on crude oil prices?

For two reasons. First, with the increased demand from developing economic giants like China and India, the balance between supply and demand is much tighter than it has been in decades. There just is not a lot of margin room any more, so when supply goes down, the price goes up. Economics 101.

Second, any commodity that increases in value attracts speculators. I don't care if the commodity is fine art, pork bellies, real estate or dot.com companies. Rising prices attract speculators, who are just investors who gamble. So let me see, shall I put my money in the dollar, which is falling, or in oil, which is rising? Ummmm ...

There has been some growling about the role of speculators in the runup of oil prices and they have definitely played their part - but I doubt it is much more than 30 percent of the overall price.

At the same time, speculators are easily spooked and so the war of words and gestures currently being exchanged between Iran and Israel presents the possibility of a show down - and if that happens, oil prices could go off the charts. In other words, that Goldman Sachs projection of $150-to-$200 a barrel might easily come to pass.

So with reduced margins and continued turmoil - and the threat of real turmoil - the price of oil is now on an upward tear that could quite possibly come off the boil next week if things settle down.

But as far as fuel prices are concerned, don't look for much relief any time soon, if ever. And as we all know, those prices percolate right through the economy.

- Peter C.T. Elsworth

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