My eyes popped out of my head two weeks ago when I saw that gas prices had topped $2 for a gallon of unleaded, 87-octane gas. "Man, there must really be a shortage!" I said to the chicken sitting next to me.

Not so fast, Jack. NPR reported last week that a good part of the increase in oil prices was due to oil speculators raising the price of oil. There is no shortage now, they said, but oil speculators are behaving as though there will be, and are increasing the price of oil to reflect a shortage. But there is no shortage. The same NPR report said that oil inventories were 15% higher in May than they were in January. A shortage is not to blame for increases in oil prices -- it's oil speculators who are driving up the price.

This is the same behavior that we've seen in the past with California, they said. There was a power shortage in California, but people who dabbled in energy (like Enron) hiked the price of energy above the equilibrium price. Why? Demand was inelastic, meaning that the consumer (or the state) would pay any price for the same quantity of energy. (If you're interested, elasticity is measured by dividing the difference between two prices and the difference between two quantities in a particular demand schedule. If the quotient is greater than 1, then the demand is elastic, meaning a particular percent change in price will yield an even greater percent change in demand. If the quotient is less than 1, then demand is inelastic, and a particular percent change in price will yield a smaller percent change in demand. The conclusion to be derived from the latter example is that people need this good and will pay any price for it, like water, oxygen, or, in the case of America, gasoline.)

Nevertheless, refineries are running at capacity and thankfully, George W. hasn't agreed to release oil from the strategic oil reserve. NPR predicts that the price of gas will go down after Memorial Day. Oil speculators are aware that if gas prices are too high for too long, people might actually stop paying those high prices and resort to public transportation, walking, or carpooling. Once they've made their money, they'll go home and buy a new Hummer.

Netscape Money & Business provides a link to a similiar story about high oil prices.