I’ll explain the inquisitive headline and tie it to oil prices later in this column. But first, let me summarize some numbers.

   The average price of unleaded regular gasoline is $2.98 gal today (visit www.fuelgaugereport.com for your local details). If U.S. motorists only bought unleaded “regular” we’d be on track to pay about $398-billion this year for gasoline. Since about 10% of us choose to select premium gasoline (I do not, but that’s a subject for another day) I would estimate the ultimate 2007 motorist gas bill will be at least $403-billion. That compares with a 2006 cost (same methodology) of $368-billion and a 2002 tally of $185-billion.  If one were to project current gasoline prices through 2008, you might expect a bill next year of $431-billion.  Right now, most of the investment houses and other predictive groups are targeting retail numbers that probably put $450-billion in play. I tend to believe that the Spring 2008 spike will take national retail prices to $3.25-$3.75 gal, but I have difficulty assessing the last six or seven months of 2008.

   And that provokes the $50-billion question: what did we all miss a year ago when crude oil was $30 bbl lower than it stands today and fuel prices (both gasoline and diesel) were about 60-80cts gal lower?

   On the fundamental side, everyone (this analyst included) overestimated the ability of U.S. refineries to operate at high rates. There were smooth weeks for refinery runs, but generally, processors stumbled through 2007 never reaching the levels witnessed prior to Hurricane Katrina in 2005. Secondly, very few veteran observers adequately anticipated that the world’s appetite for diesel, jet fuel, and heating oil would continue to grow at a very brisk pace. And finally, there were no massive geopolitical disruptions, but nagging problems popped up for crude oil producers in nearly every corner of the globe. And despite the record high prices, the companies that used to sell their production forward in the futures market (thereby acting as circuit breakers) shunned that strategy for fear of disappointing shareholders.

   But all of these fundamental items still don’t explain $90-$100 bbl crude. The explanation for those numbers that are nearly ten-fold the price levels of the late 90’s has to be attributed to a more secular change in oil’s valuation.

   The secular change?  For much of the last five years, and particularly in 2007, there has been explosive growth in investor and speculator interest in oil futures, options, and derivatives. Those financial investors and speculators have become especially comfortable in holding long positions in those financial instruments.

      I’ve looked at this retrospectively and introspectively. Accordingly, I’ll confess to a certain amount of anger by a paragraph summarizing a Commodities Futures Trading Commission (CFTC) study that was released earlier this week.

The quote:

    “Our study shows that the commodities markets are very independent markets,” said CFTC Chief Economist Jeff Harris. “The study reinforces the notion that it is the fundamentals, such as weather, geopolitical forces and supply/demand that continue to drive commodity futures markets.”

   Nearly everyone I know in the physical oil markets would beg to differ with that appraisal but their salty responses can’t be quoted here.

    Veteran traders believe that oil prices - - like some 90’s stocks - - have been swelled by the expectation that tight supply is inevitable and these very liquid assets will perform better than stocks, bonds, or real estate. (The last member of that triumvirate isn’t setting a high bar at the moment)

  That doesn’t mean that the investment is unwarranted, evil, or fatally flawed. But the growth in financial participation on the long side in crude and products has been explosive over the last few years, and it reflects an expectation of more price appreciation and strong performance ahead.

  If one recognizes the two extremes of investor endorsements in the last decade, one might ask the question this way:

  Will crude oil ultimately perform like Starbucks, or will it perform like Krispy Kreme?

  That is the $50-billion question that will be answered in 2008.