There’s an interesting discussion underway on whether the current runup in oil prices - somewhat deflated this week - is a bubble. It’s a pertinent question: how many of us have asked ourselves, as gasoline prices have risen over the past year, whether this simply the way things are going to be from now on? In other words, the logistics and texture of daily life will change radically. We’ll be paying $10 or $15 or $20 per gallon, inflation will be in the double digits, petroleum-based plastic bags and Happy Meal toys will no longer exist, and I’ll be walking to the supermarket 3x a week instead of driving once. But only until that mass transit line goes in a half block from my house years ahead of schedule. There’s even a book in the er, pipeline (courtesy of Publisher’s Marketplace - subscription required):

Forbes reporter Christopher Steiner’s $20 PER GALLON, pitched as a thought experiment on the same scale as The World Without Us, looking at a very real future that’s already beginning to affect us all, exploromg how the rising cost of gas - from $6, to $8, to $14 per gallon and beyond - will radically change all aspects of our lives and culture, to Rick Wolff at Grand Central, in a good deal, for publication in Spring 2009, by David Fugate at LaunchBooks Literary Agency (World).

This may all be true: there are real-world reason oil prices are rising - demand is going up and supply is flatter than anticipated. These conditions will likely last a while, and while painful have the felicitious side-effect of changing consumer behavior, stimulating investment/innovation in alternatives and altering destructive, car-friendly public policies. If this continues for decades, the changes will be more dramatic still.

But we’ve seen so many bubbles recently that we ought to be skeptical of any “it’ll just keep going up” scenario. Nothing “just keeps going up,” even if the historic trend line points that way - there are always peaks and valleys. There’s obviously a kind of cultural craze underway, set off by high gas prices, and the current situation certainly has some bubble-like qualities mixed in with the objective conditions:

The amount of money dedicated to commodity index trading strategies is estimated to have increased from $13 billion at the close of 2003 to about $260 billion by this past March. In theory, money should be equally-likely to go on the long (“I bet prices will go up”) as on the short (“I bet prices will go down”) sides of this speculative market, but for a lot of practical reasons it is much more likely to go to the long side. This is the most plausible argument for the mechanism by which a bubble might currently be operating, and if history is any guide, there is probably at least some of this. What nobody knows is whether this is worth $1, $10 or $100 per barrel (though it seems very unlikely to be at either of these end-points).

Wait a minute. The value of commodity index trading has increased by a factor of 20 in less than five years? The link is to Senate testimony by portfolio manager Michael Masters, who recounts that institutional investors suddenly began sinking massive amounts of money in previously-small-potatoes futures markets. Those markets went way up, drawing in still more money, which in effect locks up a portion of the actual, physical supply:

Index Speculators’ trading strategies amount to virtual hoarding via the commodities futures markets. Institutional Investors are buying up essential items that exist in limited quantities for the sole purpose of reaping speculative profits.

Think about it this way: If Wall Street concocted a scheme whereby investors bought large amounts of pharmaceutical drugs and medical devices in order to profit from the resulting increase in prices, making these essential items unaffordable to sick and dying people, society would be justly outraged.

Why is there not outrage over the fact that Americans must pay drastically more to feed their families, fuel their cars, and heat their homes?

This is another example of how our various interlocking systems - financial, energy, food - have grown ever more complex and automated, and how choices made in one system ripple across all the others - with the causes often ignored or unnoticed.