James D. Hamilton is an economics professor at Cal-San Diego who specializes in the economics of energy. In this excellent piece, Professor Sullivan summarizes the recent spike in energy prices and compares it to similar spikes of the past. The entire short piece is worth reading, and here is a tidbit to pique your interest:

The current behavior of oil prices is unlike the spike that preceded earlier recessions in two key respects. First, oil prices have gone up not because of a shortfall of supply but rather because of an increase in demand. The world is producing 3 million more barrels of oil each day relative to last year, nearly a 4% increase. But demand is up even more dramatically. . .
This is quite a different situation from other historical oil shocks that were caused by military conflicts that physically disrupted the production or delivery of petroleum, forcing consumers and firms to make less use of this vital input. The current situation is simply that we have to share the increased supply with other consuming nations. There should be no quarrel with the proposition that a booming world economy overall is good economic news, not bad.
The second way that the current oil price spike differs from those that preceded earlier U.S. recessions is that a good part of the recent increase is merely a correction to an earlier dramatic drop in oil prices. The current oil price of $41 a barrel is 45% higher than the $28 price we saw last September. However, it is important to remember that before those September lows, oil had been selling for $36 back in February of 2003, so that the current price is only 15% above what we saw just a little over a year ago. There were similar corrections (an oil price spike following an earlier downturn) in 1987 and 1994 with no apparently adverse economic effects.

For more a detailed analysis of price spikes in energy markets, review Professor Hamilton’s paper “What is an Oil Shock” that he published originally in 1999 and updated in 2001.
Hat tip to Professor Sauer for the link to Professor Hamilton’s work.

This Wall Street Journal ($) Holman Jenkins, Jr. piece lays the wood to John Kerry’s “energy independence” blather that he has been using recently in various campaign speeches and working papers. The entire column is a brilliant expose of the demagogury that commonly revolves around the issue of energy policy and the alleged need for “energy independence” from Mideast, and here are a few choice tidbits:

[Kerry] puts himself in excellent company here, since the same shibboleth has been paid lip service by every president since Nixon. It’s also a favorite of prominent newspaper columnists who, throwing up their hands about the Middle East and finding Americans more tractable targets for castigation, cite the urgent need for a “Manhattan Project on energy.” The idea never fails to elicit applause from audiences of ordinary voters and focus groups too, in about the same way that Mom, apple pie and stopping foreigners from “stealing our jobs” are reliable applause lines.
That is to say, as a goal, energy independence is neither desirable nor practical and, were it otherwise, would still not solve any real problem. But it provides a useful service as a vehicle of escapism and an emblem of personal virtue.

In fact, Mr. Jenkins postulates that Kerry’s plan to reduce dependence on Mideast oil would likely have unexpected consequences:

Oil is oil: We’d still be bound by prices in the international marketplace with all their unsettling volatility. Mr. Kerry proposes nothing more than a symbolic slap at the Arabs, his target accounting for less than 10% of total consumption. In fact, were his plan to have any effect at all, the U.S. would likely become more dependent on imports as high-cost U.S. producers were squeezed out; and more dependent on Mideast oil, as high-cost foreign producers were squeezed out.

Then Mr. Jenkins deals with several of the unspoken assumptions that underlie the escapist fallacy of energy dependence on Mideast oil:

We’d be able to wash our hands of military and security entanglements in the Mideast. No, we wouldn’t. Oil would remain a commodity in global markets, so we’d still be exposed to the international price of oil, including all gyrations caused by Mideast politics. Even in the improbable and bizarre circumstance that the U.S. swore off oil consumption altogether, we’d still have to live in this world. Notice that we invest heavily in the security of Japan, South Korea, Israel and Western Europe, though none has oil.
Our dependence makes us beholden to Arab oil states. This is similar to the argument put to President Truman by the State Department when it vehemently opposed his recognition of Israel. Yet it’s hard to imagine how we could make ourselves more irritating to Arab states than by supporting Israel, which we’ve done for 50 years. Somehow we still manage to keep buying all the oil we want.
We’d be freer to press for democracy and human rights in the Mideast. Huh? The U.S. is going to engage in campaigns of destabilization against unattractive regimes in which we no longer have an interest? On the contrary, their co-optation by petrodollars and consequent integration in the world economy is the main inducement to the Arab oil states to eschew antisocial behavior.
The Saudis spend our oil money on religious schools preaching hate against the West. The Saudis would continue to receive billions for their oil even if the U.S. weren’t buying. In any case, their support for radical Islamists has nothing to do with oil and everything to do with the Saudi regime’s domestic insecurities. We can’t fix this problem with energy policy; let’s hope we’re not so feckless as to evade the real fight against terrorism in favor of a fantasy that all will be well if Congress is allowed to spend billions on a pork-barrel scheme to wean industrial society off hydrocarbons.

Mr. Jenkins concludes by noting that the problem of high energy prices is a different problem than reliance on Mideast oil:

None of the above means we don’t have a real, workaday concern for “energy security — more accurately stated as a concern about price, price, price, and even more importantly, volatility of price.
But this problem is steadily fixing itself as oil consumption becomes a smaller part of total consumption, leaving the economy better able to withstand price gyrations. Per unit of economic output, we burn 55% fewer petroleum Btus than we did 30 years ago. As is the case with most historical dilemmas, we will overcome our reliance on Mideast oil by surviving long enough for history to give the U.S. new and different problems.

As readers of this blog have heard before, your demagouge antenna should go up every time you hear a politician advocate a policy that means that we should pay more for a product such as oil.

Don’t miss Arnold Kling’s analysis over at EconLog regarding the phenomenom known as backwardation energy prices. Arnold explains backwardation by using the example of current and future prices of oil:

As of May 20th, the June 2004 futures contract for light crude oil was at $41.66, while the June 2005 futures contract was at $35.58. When futures prices are below spot prices, this is known as “backwardation.” I believe that it represents a puzzle. Think of it this way. If you have oil, by holding onto it for a year, you are losing 15 percent. That seems kinda dumb.

Arnold goes on to explain that the various theories on why backwardation occurs all seem to be somewhat flawed, but then makes this observation and asks this very salient question:

Speculators buy low and sell high. The American and Saudi governments do the reverse. Which is the stabilizing force in the oil market?

Almost on cue, this NY Times article reports on Congressional Democrats calling for the Bush Administration to use the Strategic Oil Reserve to increase supplies of oil in the economy to ease the recent spike in energy prices. On a more thoughtful note, Arthur Kling over at EconLog points us to a Allan Sloan’s better analysis in this Washington Post article:

[T]he $41.55 price for oil today is much higher than the $35.50 it costs for a barrel to be delivered next year. This disparity inspired Loews chief executive Jim Tisch, whose company has extensive energy holdings and plays financial markets like a violin, to propose a trade. Let’s sell oil out of the reserve, he says — not for money, but for oil to be delivered next year. We could get seven barrels next year for six today. We’re now buying 160,000 barrels a day for the reserve, which has 660 million barrels. But by trading rather than buying, we’d save taxpayer dollars, reduce the demand that’s driving up prices today, and spook the speculators. I love it.

Meanwhile, this WaPo article indicates that the amount of oil going into the reserve amounts to less than two-tenths of 1 percent of the world supply, which is too small to have any more than a two to five cent price per gallon effect if the government’s current “buy” policy were changed.