Back in ‘92, Soros was so convinced that the pound sterling had to fall, he took a huge $10 billion short position in one currency trade. When the pound finally broke under the strain, Soros made a billion dollars in profit in less than 24 hours.

Soros had similar exploits in the Malaysian ringgit and the Thai baht, after which government ministers called him all sorts of nasty names. The thing is, Soros made money in all those trades for fundamental reasons — not because he was jamming the market. He was right… the pound did need to fall. So did the ringgit and the baht.

Point being, if Soros is so convinced oil is in a bubble again now, why doesn’t he just put his money where his mouth is? That’s how markets work. So what do you say, George? Are you planning to step up here or what?

T. Boone Pickens, another billionaire trading legend, did in fact step up. Pickens was short crude just a few months ago, and voiced the opinion it would fall. Boone had the good sense to change his tune and go long though, once he saw $100 a barrel give way like tissue paper. If I recall correctly, Boone now sees $150 per barrel in the cards.

Plenty of Reasons

There are plenty of reasons for oil to be trading as high as it is right now.

Not least among them are the big problems with oil production all around the world. There’s production trouble in Norway, Mexico, Nigeria and Russia. Venezuela is a powder keg. Indonesia just announced plans to leave OPEC because it’s now become a net importer of oil, thanks to growing demand at home. The big oil majors are getting less and less bang for their E&P buck. (”E&P” stands for exploration and production.) The list goes on and on.

Hello, Contango

Another interesting thing that’s happened is the historic shift in oil markets from “backwardation” to “contango.”

Backwardation simply means that further out oil prices trade lower than the current “spot” price. This is the normal and traditional state of the oil market.

The fact that the oil futures market has now moved to “contango” — where oil contracts years into the future trade higher than the present day price — suggests at least two things.

First, it suggests that traders no longer believe in the cost-lowering powers of technology. It used to be that resources got cheaper as technology to mine and extract those resources improved. No longer. Memory chips and iPods might keep falling in price, but not oil.

Second, oil markets in contango — again, where future dated contracts are higher than spot — suggest a rethink of the storage question. Normally, if long-dated oil prices get too far ahead of the spot price, traders can buy oil here and now and hold it for later delivery at the locked-in higher price.

With demand tight enough and supply restrained enough, however, this storage factor gets canceled out. (Falling dollar concerns play a role, too.)

So basically, if oil futures stay in “contango” for an extended period of time, that could be the clearest evidence yet that Wall Street is finally accepting the reality of peak oil.

Finally Having an Effect

The other reason why oil prices feel right — as opposed to feeling like a bubble — is because the pain of high-priced oil is finally having an effect on end-users. That is exactly what’s supposed to happen.

There is a saying in the commodity biz: “The best cure for high prices is high prices.” (It also works in reverse for low prices.) The idea is, when the price of a commodity stays high for a long period of time, it forces change on the market. It makes end-users do things differently, or induces new supply to come on line, or both.

With oil trading where it is, we are seeing real change for the first time. We are seeing Americans ditch their SUVs and give up long driving trips. We are seeing companies rethinking their travel and shipping costs. We are seeing outcry over $4 a gallon gas in the U.S. and $9 a gallon in Europe.

This is exactly how the market is supposed to work. This is how change happens. For those who think the price of oil should collapse from here instead of just dip a little, how much sense would that make? If oil collapsed back to levels where it didn’t hurt anymore, the change would fall by the wayside, too.

The point isn’t that markets are some benevolent change-inducing force. It’s that the current price of oil matches up with a world where demand has expanded and expanded until finally the supply limitations got to be too much. Oil is trading where it is because we’ve finally hit the edge of the pain envelope… not because traders are propping it up.

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