The Kashagan field in Kazakhstan, a group of international oil majors led by Italy’s Eni SPA (ADR: E), is eight years behind schedule and approximately $80 billion over budget. The fact that the deposit is located in the icy depths of the Caspian Sea has forced contractors to build artificial islands to operate from. Kashagan’s crude also has high hydrogen-sulfide content, which makes it potentially deadly for workers on site, and which at the same time also raises unusually difficult environmental-engineering challenges.

According to government officials, the overall cost of the project has ballooned from $57 billion to $136 billion.

Brazil’s Carioca field is another reserve with tremendous potential, as it may hold 33 billion barrels of oil and natural gas. Unfortunately, the field is 170 miles offshore, more than 6,000 feet under the surface of the water, and trapped beneath a shelf of salt 500 miles long and 125 miles wide.

Technologically challenging, physically intensive and costly projects like these are the future of the oil industry. Drillers could access only 7% of known world reserves in 2005, down from 85% in 1970, according to the National Petroleum Council.

“The international oil companies cannot dictate the tempo any more,” Fadel Gheit, an analyst at Oppenheimer & Co. (OPY), told Bloomberg. They can try projects that didn’t work two years ago, but it’s not a question of money. They don’t have access to the resources.”

Oil companies also are beginning to search for oil in unstable regions of the world – geopolitical hot spots that may previously have been considered political liabilities. Countries such as Nigeria, for instance, lack the infrastructure and political support to produce oil efficiently.

The Movement for the Emancipation of the Niger Delta (MEND) has made life particularly difficult for oil majors in Nigeria by bombing pipelines and kidnapping workers.

“Our candid advice to the oil majors is that they should not waste their time repairing any lines as we will continue to sabotage them,” the rebel group said in a statement recently.

In 2007 alone, more than 200 foreign workers were taken hostage, many of whom were released after a ransom was paid. It’s estimated that bombings, kidnappings, and other terrorist incidents have reduced Nigeria’s total oil production by 25% over the past two years.

In its Monthly Oil Market Report for May, the Organization of Petroleum Exporting Countries (OPEC) cut its estimate for supply from such non-member countries as Nigeria, but refused to boost its own output. Instead, OPEC insists enough oil is on the market and that demand will fade in light of a U.S. economic slowdown.

But many economists now say that the prospects for an actual U.S. recession have all but disappeared.

Fundamentals vs. Speculation

OPEC’s unwillingness to pump more oil and relieve mounting supply pressures has helped propel the price of oil to its recent record levels.

“If traders feel OPEC is signaling it is comfortable with $100 [per barrel oil], then fundamentals are appraised from that new base. OPEC’s silence as we neared $120 raised perceptions of an even higher floor,” the IEA said.

Indeed, the IEA’s Lopez noted that “OPEC loves to argue that it’s all speculation, but we shouldn’t overplay that. It’s becoming a lame excuse … speculation is a factor, but it accompanies a trend, it’s not setting the trend. This is down to fundamentals.”

Lopez’s point is well taken, but there is a manic element to what’s happening on the NYMEX: Investment banks up and down Wall Street, and day-traders across the country have pile-driven their way into the piping-hot oil market for quick gains, which is fueling the speculative frenzy and helping push oil and gasoline prices even higher.

In fact, now many investors who were initially betting that oil prices would drop are shifting gears and betting oil will move even higher to cover their losses.

The number of outstanding futures contracts – known as “open interest”- fell 8.1% in one week to 1.36 million contracts, even as prices rose 2.6%, according to a recent report by Bloomberg News. Falling open interest and rising prices are signs that traders are buying to exit short positions, the analysis article noted.

The number of short positions held by traders hit a record high of 123,194 in the week ended May 6 – 47% more than the number of long positions, which pay off if the price moves higher.

A Possible Bubble

The climbing level of investor interest in the oil market has many analysts anticipating a correction sometime in the near future.

“We were only trading at about $86 about three months ago and not a whole lot has changed to move us to where we are now,” Addison Armstrong, director of market research for traditional energy TFS Energy LLC in Stamford, Conn., told MSNBC. “There’s no doubt in my mind – and most other people I speak to – we are in a bubble. And it’s going to deflate at some point.”

The U.S. dollar gave oil a boost by falling to historic lows throughout the first quarter of the year, but has begun to show some signs of life as the U.S. Federal Reserve has signaled it will cease cutting the benchmark Federal Funds rate.

A sluggish economy and record high gasoline prices are also likely to blunt demand moving forward.

Besides, oil is a historically volatile commodity, anyway. In 1986, oil prices started the year at $26 a barrel – but by March, had fallen to $10.25 a barrel. In 1997, prices almost climbed to $23 a barrel – before falling below $11 a little more than a year later.

While some analysts are waving caution flags – and perhaps rightly so – others remain bullish on oil’s long-term outlook.

“When I hear bubble, I’m thinking of a technology bubble where we spike up and we just never come back to it again,” Chris Jarvis, an energy analyst at Caprock Risk Management LLC, told MSNBC. “I don’t think that’s the case. I think if anything you’re talking about more of a short-term pullback. What is short term? I don’t know, nine months to a year. But the trend higher is still intact. I would definitely not call it a bubble.”

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