June 2nd, 2009


So why *is* the gas price going up?

Some time back, I was saying that I expected gas prices to stay lowish for the time being -- that the economy should prevent rises to the level that we saw last summer, at least for a while. That seems like basic supply and demand: demand has softened enormously, so prices *should* remain low. And yet, prices are rising fairly sharply. Why?

As usual, The Economist comes to the rescue: in last week's issue, they have an article largely on this topic. More specifically, it is talking about why we might get another sharp spike in prices sooner than expected.

The article runs a few pages, but the summary seems to be that everyone is anticipating supply problems, possibly serious ones, in the moderately near future. The oil industry is extremely dependent on investment: to maintain production at current levels, they need to keep finding ever-more oil in new places, and that process isn't cheap. (Even if you don't believe peak oil is nigh or passed, it takes real work to find it.) But at the moment, investment has been falling off, for a variety of reasons including the economy. So while current production is well above demand (and may yet cause prices to go down again for a while -- everyone is building stockpiles now, but that can only go so far), in the medium term there is a general nervousness that prices could skyrocket again, because there hasn't been enough investment lately to meet the demands of a more normal economy.

All of which goes to illustrate how the world economy is a *very* complex dynamic system, and there are a lot of feedback loops in it...