Oil: Breakfast of Champions

Oil bulls should wait a little bit before crowning 2007 as "The Year."

With spot prices reaching $93.80 a barrel Monday, oil certainly made a record record high—nominally. To truly reach Hall of Fame status, however, oil prices this year will have to average more than $94.80, 1980's inflation-adjusted zenith.

Taking that prize won't be easy. According to monthly data supplied by the U.S. Department of Energy, spot WTI oil at the Cushing, Oklahoma, terminus has averaged $66.17 a barrel through September. October's price will definitely skew high, but to pull down the old record, oil will have to soar further and sustain a mighty high price for the next three months.

Against the background of frenzy in the NYMEX trading rings, the Administration has been trooping out its flacks in an attempt to calm the waters, er ... oil slicks.

Nowadays we're told by these worthies that the economy and the energy markets are different. And they have a point. Energy's impact on our economy is more muted now. In part, that's due to us (that's a pretty broadly defined "us") getting richer and more efficient.

"Energy intensity"—the percentage of gross domestic product devoted to energy expenditures—has been falling for decades, from 17.4% in 1973 to 9.1% in 2005, says the DOE. The agency forecasts further declines to 5.8% by 2030.

To boot, we're not forking over as much of our incomes at the pump. According to both DOE and Standard & Poor's data, the average household is spending somewhere around 6 percent of its income on energy, well below the level of 1980s.

Still, that's not reason enough to be sanguine.

There's a lot of speculative froth in crude oil's price—$5 to $15 per barrel, by some economists' measure. And when the new year begins, speculative bulls, if any remain, will have the opportunity to try to capture the flag again.