Abdalla El-Badri, Opec secretary-general (right), Jose Maria Botelho de Vasconcelos, Angola's oil minister and Opec president (centre), and Hasan Qabazard, Opec's director of research division. Opec cuts have created an overhang of six million barrels of capacity

When has an economic recovery been fuelled by expensive energy?


Never is the answer. Energy markets have been hijacked by financial speculators – galvanised by dollar weakness. Their volumes dwarf legitimate hedging by real users. Fundamentals suggest a lower oil price.


We still suffer fallout from burst credit and property bubbles.


Yet policy-makers seem tolerant of an emerging com­modities bubble. We regulate stockmarkets rigorously but are reluctant to interfere with futures markets. Have we learnt nothing? Crises teach us to look at evidence, think for ourselves and be wary of vested interests.


How reliable are analysts? Typically their forecasts are accurate when past trends continue. But they are poor at predicting really important sea-changes.


The financial priesthood re-writes history to justify what actually happened. They 'back-fit' data to 'explain' what occurred whether there is causation or not. We feel that the world works logically though we neither called it right nor learnt from our mistakes.


The consensus is that world recovery pushes commodity prices up. This demand story is about hope rather than evidence. As with the rallying stockmarkets, much hype is priced in.


World demand for crude, diesel and jet fuel is still slipping. Weekly US data is weak. Far Eastern and European refiners' margins show depressed demand. Inventories are at record highs. Tanker-freight rates are at six-year lows. (This should be a real-time indicator of marginal demand.)


Meanwhile, there is ample supply: new projects and Opec cuts have created an overhang of six million barrels of capacity.


The recent correlation between stock indices and energy prices shouldn't occur: higher energy prices should reduce growth and profits. Speculators' logic is that financial markets anticipate recovery, which will boost demand. But this ignores the Opec capacity overhang – enough to cover the loss of two major exporters or four years of normal demand growth. This cushion expands as new projects arrive. Saudi Arabia alone plans another three million barrels of capacity.


Another pillar of the boom is growing acceptance of peak oil theory. Hydrocarbons are finite and can only be burned once. Cheap, onshore supply peaked in 2001.


But the oil supply curve is more elastic than peak oil theorists maintain: supply grows steadily as we develop offshore fields and unconventional fuels. The world as a whole does not peak and decline like individual fields: we face a long undulating plateau in supply as technology and oil prices squeeze more oil out of reservoirs.


There are ample geological reserves but extracting hydrocarbons is complicated by resource nationalism. Unconventional developments are capital-intensive and longterm: investors need stability and incentives to justify development.


Traditionally three to five barrels were traded for every barrel burnt. This ratio soared to 24 during the 2008 commodities bubble. When this bubble burst the speculative ratio fell temporarily – but has since surged again.


The oil market is now driven by financial flows rather than the actual balance of physical supply and demand. Financial speculation is easier to manipulate by rumours.


Being 'right' about the real world may not help you make money if the financial markets are stubbornly 'wrong'.


Americans see oil and gold as a strong dollar and hedge against inflation. The Chinese prefer hard assets to soft currencies. Producers are always unhappy at times of dollar weakness – but like the yen and euro less.


Traditionally there was no correlation between currencies and the oil price. That changed in 2007 and the link has endured: measured American speculative positions are now 88 days of US oil demand. Open gas speculation is 459 times daily US gas demand! There is no plausible justification for such hedging by 'legitimate' buyers.


Longer run prospects for energy prices remain positive: unlike past price surges there is now limited scope for demand de­s­truction. The easy substitution of oil, by say gas, is already done. Biofuels and other renewables are only competitive at high prices. Economic growth remains energy intensive. Most new supplies will come from within Opec, which is increasingly disciplined. Outside Opec, there is limited net new capacity. But prices should follow, rather than lead, an economic recovery.


Regulators are ideologically opposed to interfering with futures markets. But this ignores the role of hype: long-only investors only buy – they don't liquidate positions. This debate was settled decades ago over the stockmarket, food and medicine – so why not futures?


The core problem is that speculators can bet with as little as 2% cash. They should report positions fully and put up 20% in cash.


Commodities speculators use markets to inventory energy. Their punts have a geared effect on markets. There are few rules. This disrupts the real economy by increasing the cost of your energy and food. We need to impose rules. Speculators should not dominate markets on which citizens depend.


David Horgan is chief executive of Petrel Resources