How high is too high?

We are living in a scary world. When I started to cover the crude oil market at Dow Jones about two years ago, if I remember correctly, Nymex crude futures were in the neighborhood of $60 a barrel. Goldman Sachs had been predicting crude prices would rise above $100 a barrel sooner or later, but a majority of other market watchers felt such a spark won't materialize easily; if it ever did, the world economy would be in serious trouble.

Fast forward to now, Nymex crude futures rose well past the $100 mark, breaking above $120 a barrel. In other words, crude prices almost doubled over the past two years. The global economy has been holding up relatively well - certainly better than people had expected, barring the impact of the subprime crisis.

But it is getting pretty scary. High oil prices are pushing up prices for literally everything, with rises in the prices of commodities, especially food, being the most visible. And poor countries are being hit the hardest by run-away inflation, which is seriously threatening their livelihood. In more developed countries too, increases in wages don't keep up with the surging prices, so unless you are a big commodities investor like Jim Rogers, this is becoming a hard time for everyone.

The scariest part is there seems to be nothing that can stem inflation driven by rising commodities prices.

People can blame high oil prices on speculators, but the hard fact is it is becoming harder to find new oil fields, whereas existing fields are aging, and production from the fields is declining as a result. Although it's arguable if the current supply and demand situation justifies the current prices, and how much premium is built in the prices by speculators, as long as traders see the imbalance in supply and demand, prices can only rise. Similarly, growth in food production is being outstripped by demand, and without a significant, revolutionary increase in production, which would take years, the trend won't be reversed.

People are already talking about $200-a-barrel oil, without being laughed at. If we get there, then what? Will people start talking about oil selling at $250 a barrel? Unlike stocks, it's hard to know what the appropriate values of commodities are, so for these monsters, only sky seems to be the limit. And when they finally land, perhaps we'll all have come crashing down.