I think they need to change the way that oil and gas are priced. The whole commoditization and charging the future price today really distances the market from actual supply and demand and puts it in the hands of those speculators and alarmists. It also factors out regional supply and demand and contributes to nimbyism with regards to refineries and pipelines and everything else.

You know, you’re absolutely right. The only thing I wonder is what system would work better? (And, yes, as an intellectual exercise, I’m very open to suggestions.)

I disagree.  The current system will actually tend (broadly) to smooth out the cost and supply of gasoline and other petroleum products.  Sure, there will be situations where the cost rises because speculators are betting that the cost will rise still further.  The alternative (all else being equal) is a much higher jump in the prices when the fundamentals have real problems.

Note also that drastic cost regulation will drastically limit supply.  Allowing people to charge what the market will bear encourages people to develop new supplies.  New supplies, in turn, depress the cost of the product.  Similarly, if costs are equalized across all regions, why should I shift the supply I have here to someplace that has a shortage?  Moving things around costs money, both directly and in opportunity costs.

If you can’t make a good-odds bet that you’ll make some money, or a poor-odds bet that you’ll make a lot of money, there’s no reason to invest.  This is Econ 101, folks.

I generally agree with you, but on this I’m not sure. This cost spike (which, although, in constant dollars, not nearly high enough to qualify it as the highest price ever) really wasn’t related to rational issues of supply and demand. I really do think that the current set-up has decoupled the price from the actual capacity to supply the good. I don’t think that we saw your smoothing effect over this last year and a half while the speculators jumped into the market in ways that I don’t think they ever had before (although I’m having a hard time finding a way to verify that). The speculators really did muck up a system that has generally worked the way that you would expect. My question is, will they have the same effect next spring by diving in and driving up prices from late spring and through summer?

The effect that a thirty or forty dollar bump per barrel has on the economy isn’t negligible. A lot of those people made a good bet in the sense that by diving in and bringing their friends, they successfully forced the market to spike over a pretty good period of time.

All that said, I wouldn’t suggest price regulations (although one thing that would help, obviously, is more refining capacity).

Your suggestion would probably be for me to be patient and let the market settle back (which I will do because I don’t really have any suggestions for a better solution (price regulation being what I would consider a worse solution)). That’s not a bad solution, but I’m wondering if the speculators who made out this time around are introducing us to a new, more turbulent oil market that isn’t as reflective of supply as much as it is reflective of fear-mongering. Since our economy is more sensitive to spikes in oil prices than in other goods, that sounds like a bad thing to me.

Notably, I disagree with Jack Rafuse from TCS on the refining issue. He says this:

• Increased refining capacity does not add crude oil to US or to world supply. The price of crude oil (and thus of gasoline) depends on the amount of crude oil on the market—the supply among all the nations that use oil.
• More US refining capacity will not address those issues.
• US oil companies have continued to improve efficiency and increase refining capacity to meet US demand for gasoline and other fuels. Refining capacity is tight, but will continue to grow with demand. The main issue is supply.

I say this: at the height of summer we saw our oil reserves growing while our refining capacity was maxed and our gas reserves declined. Refining capacity is too tight. An industrial accident at one of the refineries or another summer where our refining capacity can’t keep up with our actual oil supply will only help make these oil price spikes nastier.

Here’s the article (which is good reading aside from my point of disagreement).

"A lot of those people made a good bet in the sense that by diving in and bringing their friends, they successfully forced the market to spike over a pretty good period of time.”

The ability of a small group to control the market is limited when the market is more diverse.  Increased prices tend to cause people to look for other sources, which makes the market more diverse.  Diversity is pretty highly correlated with stability:  Consider the overall effect of oil price spikes if oil is only 5% of the energy economy.

Now, building meaningful additional energy sources is tremendously capital intensive (see Den Beste on the scaling problems attendant upon using alternative energy sources, http://denbeste.nu/cd_log_entries/2004/06/Energyscalingproblems.shtml, for instance).  This capital must come from somewhere, and that means big profits or big taxes.  I prefer profits, since then the people paying are the people getting the benefits.  Oh, yeah, and the government isn’t, how do you say, competent.

“Your suggestion would probably be for me to be patient and let the market settle back....”

I’d rather you solve the problem for all of us and become fabulously wealthy, but failing that, I bought gas last night at 2.369/gallon.  You might not have to wait long.

I buy mid-grade, so my fill up was still in the 2.70 range, which, functionally, doesn’t seem that far off of the 3.00 price that I paid a little bit back but, mentally, has an entirely different effect on me.

For the record, I would prefer that solutions come from profits, too, since I have almost zero faith in the government to do something with the efficiency that a private company can do the same thing.

Now, let’s talk about ways that I can become fabulously wealthy…