Bubbles in the oil?

While I was watching the news tonight, I caught a comment that intrigued me. George Soros testified before the Senate last Tuesday that part of the run-up in oil prices was due to a speculative bubble.

I had always accepted what seemed to be the conventional wisdom about the high prices: that strong demand (economic growth in China, India, etc., Americans' refusal to drive more fuel efficient vehicles), and tight and uncertain supplies (instability/tension/war in Iraq, Sudan, Nigeria, Iran, Columbia, etc.; price manipulation by places like Saudi Arabia, Venezuela, Russia, etc.; our own government's ridiculous refusal to drill in ANWR and offshore despite the presence of known oil reserves) lead to high prices just due to the laws of supply and demand. Since oil is relatively inelastic--people can't stop going to work, heating their homes in winter, buying food grown using diesel-powered machinery and petrochemical-based fertilizer and pesticides, etc.--the price was destined to rise until something gave; i.e., supply increased because the price was too high to resist entering the market, and/or demand dropped because the gas or whatever was simply unaffordable.

However, if part of the equation is pure speculation, then it suggests three things: first, it means that prices could go much higher than they otherwise might--in part because it's not rational forces controlling the market, but rather simple greed. Second, it suggests that at least prices won't stabilize anywhere higher than they are now--if part of the price now is due to speculation, and the speculators give up, then prices should drop. Third, it means it's going to be a lot harder to predict where prices are going, since it'll be hard to tell when when the bubble will burst.

I'm not sure Soros is right about this, but I'm not sure he's wrong, either. We'll see what happens in the future. It is something to think about, either way.