Lately, with crude oil hovering near $100 a barrel and setting record highs nearly daily, I have been wondering if all of these price increases are simply due to the economic principles of supply and demand or if a large part of it is driven by assumptions that demand is higher (or going to be higher) than it really is. Or for that matter an under estimation in supply could cause the same situation. At any rate, there could be a certain amount of panic being caused that is helping drive these prices higher.

Additionally, with crude being traded on the commodities market, it wouldn't surprise me if the demand is being created simply by traders and investors rather than actual consumers. Normally, with a supply and demand situation you would expect the price to rise if consumers were demanding more of the product. However, in this situation the product passes through a middle-man first. The middle-man wants to make a profit too. People have seen that oil is on the rise. When that happens, they think "Maybe I should buy into that and make some money for myself?" They think they can buy in at $90 and sell at $100 and make a profit. This causes extra demand, not by actual consumers but by people trying to make a profit by trading oil commodities.

So, does anyone else see how this might resemble another situation in the past decade. Let's think back to the late 1990's. Tech stocks were a huge boom. Any little startup company could get funded, go public, and have their stock skyrocketing. The reason is that people had seen the successes being made in the technology sector so they didn't bother to think about real consumer demand. So you had investors buying into a lot of companies that were losing money and had no customer base. What happened? The technology bubble burst around the year 2000. Stocks across the board fell.

Now if we apply the same thinking to oil trading, we could expect to see a peak point before a bubble burst. The bubble burst will be caused by some big holders selling off or some bad news about actual demand. Once some people sell off others will follow suit and prices will fall.

Again, this is one of my things that is totally up for debate. I'm no economic wizard so this seems feasible to me. Let me know if you have other opinions.