This kind of goes along with John’s post yesterday about gas prices. This is from an investor newsletter, so take it with that grain of salt.

In the short run, psychology and entrenched beliefs can drive a market or the price of a commodity. In the long run, the laws surrounding supply and demand win out. No current market shows that better than in the market for a barrel of oil. We at Smead Capital Management (SCM) believe today’s price of oil is driven by belief in the “Peak Oil” theory, the perception of a very long-term transition to electric/hybrids cars and Oil’s use as a trading or investment vehicle to pursue international economic growth and diversification. At SCM we think the day is coming when supply and demand take over. The folks from Cameron Hanover, led by President Peter Beutel, shared on CNBC recently why that is.

The price of a barrel of oil would be closer to $10 if the commodity wasn’t traded as an investment instrument, given the record-high levels of U.S. oil inventories, Peter Beutel, president of Cameron Hanover, told CNBC Monday. “I honestly think that if there were no investors using oil as an asset that the price of oil right now would be $10 or $15 or $18, but it wouldn’t be anywhere near where it is,” Beutel said. “We have so much oil right now, more than we’ve had in 27 years. Why is it 27 years? Because that’s how far our records go back. It’s probably the most in 50 or 100 years,” he added. Part of the reason the price of oil is currently above $74 a barrel is because of a belief in the economic recovery, Beutel said.

[...]In his book, “The Prize”, Daniel Yergin points out that “Peak Oil” theory has popped up every ten to twenty years since oil was first discovered in Pennsylvania in 1855. Whether “it’s different this time” doesn’t matter to us because we see a dramatically quicker transition away from gasoline to electric and hybrid automobiles than the average portfolio management firm does. We believe the transition to electric/hybrid vehicles is a 10-15 year process. [...] If you cut demand for gasoline by 25-50% in twenty years, you chop off the “lack of supply” argument which “Peak Oil” is all about.

From a historical perspective, Beutel pointed out that the current level of inventories is even higher than when the price of oil was below $20 a barrel. “We’ve got 50 million barrels of crude more than we had two years ago. We have 176 million of distillate,” Beutel said. “When I started in the business back in 1980 we used to think to ourselves: “Gee, we would love it if we had 140 million barrels of distillates to start the winter.”