JAMES HAMILTON has gone out on a limb and declared that the long ride up for oil prices is over. A daring statement, but he has an

excellent analysis

Let me repeat here that I do not believe that speculation is the reason oil went from $60 to $120 a barrel. The biggest part of that longer term trend is due to fundamentals, not speculation. Notwithstanding, it does appear that speculation has gotten ahead of those fundamentals in the most recent developments.



For the bubble to continue, we would need to see ever-increasing volumes of investment money pouring into the futures markets, and continuing stagnation in global production to ratify them. Even if the former occurs, my best guess is that the latter will not.

backing it up. I couldn't do the piece justice in a summary; do read it all if you can. But here are his concluding thoughts:

Why doesn't he think global production will continue to stagnate? Have a look here, at a wikipedia page which tracks production developments, including the number and size of "megaprojects" scheduled to come on line. Producers, it turns out, have not sat on their hands while prices breached the stratosphere. New supply additions in 2008 may be twice as large as in recent years. While this new capacity is not enough to generate a paradigm shift in oil markets, the combination of these new sources with slowing demand growth should, in Mr Hamilton's opinion, deflate the froth atop the fundamentals.

The question, then, is just how much froth there is, and what kind of additional time the new supply will buy a world where the first response to a price dip is likely to be a resumption of old habits.