Rush of investors to oil costly for all

Special Reportfull coverage

Oil rises after supply report Oil falls 2% on GDP Forget $100 oil. $80 oil is a problem Oil rises modestly on softer dollar A deal on climate change? Not exactly U.S. gas prices dip as drivers cut back

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NEW YORK (CNN) -- The economy is stumbling, energy supplies are rising, yet oil prices are hitting new records. What's going on here?

Oil's surge to an all-time high of nearly $104 a barrel Monday is the latest evidence that speculative investment flows are driving crude prices more than physical supply and demand for the commodity.

"This has gone beyond reason," said George Littell, an analyst with Groppe, Long and Littell in Houston. He believes oil should be trading in the range of $60 a barrel.

"An awful lot of people with money who don't think much of other financial assets, they want to own commodities instead," said Littell, who has been tracking the energy business since 1966.

Investing in crude futures by those not involved in the oil business has more than doubled since February of 2006, when crude oil traded as low as $58 a barrel, according to data from the Commodities Futures Trading Commission, the agency that oversees futures trading.

The vast majority of players rushing into energy contracts have bet on crude climbing higher. And with shaky stock markets worldwide, debt markets in turmoil and the slump in real estate, commodity markets, particularly energy, have been a relative safe haven.

Furthermore, since oil is traded in dollars, the sinking greenback has provided foreign investors spending euros or yen another reason to invest. Now, even relatively conservative financial advisers are recommending clients put some of their assets into energy.

"I knew something had changed when my stock broker suggested putting money into an energy fund," said veteran energy trader Andrew Lebow of MF Global.

"The speculative money has come in a big way," said Lebow. "We're seeing non-traditional oil players coming into the markets, many pension funds have now invested in commodities."

That helps explain why oil is scaling new highs, despite climbing U.S. crude inventories and clear evidence of weaker economic growth both here and overseas, which should lead to a reduction in energy use.

Of course, there are factors beyond investment flows that have brought oil to triple digits, including a tight margin between supply and demand which aggravates the market's near constant fear of supply disruption (usually blown out of proportion by traders). Yet, the fact is that speculation is a prime driver.

"The largest financial institutions control oil prices or dictate the direction of oil prices much more than any oil company," said Fadel Gheit, analyst at Oppenheimer & Co., who has long pointed to growing speculation in the energy markets.

Financial speculation usually impacts only those who are direct players in the marketplace. But in this case, we're all affected. Rising oil prices are hitting us at the gas pumps, in our home heating bills and at the airport, where jet fuel expenses are pushing up airline ticket fees.

The prices we pay for goods and services are also rising, either due to higher delivery costs (Poland Spring has been tacking on $2 a month to my water delivery for an "oil surcharge") or because of higher prices for raw materials derived from petroleum (Home improvement mavens: Have you checked the price of paint, asphalt shingle, or driveway blacktop recently?).

Even the cost of basic groceries is soaring indirectly because of sky-high oil prices. Expensive oil triggered the push for ethanol, which is diverting a growing amount of acreage towards corn production for ethanol rather than for consumption, and thus reducing the availability of farmland for soybeans and wheat.

Let's hope that economic theory holds true in the oil market and that over the long term physical supply and demand do determine price. Otherwise energy speculation may become even more expensive for consumers who only want enough oil to heat their homes and ensure that they can get from here to there.