Oil demand continues to rise while supply stagnates
Historically, when gas prices have increased, so has oil production. This is not currently the case. The New York Times has an article looking at this unique situation, where oil prices have recently skyrocketed, but an increase in supply has not followed, thereby leading to even higher oil prices.
The article quotes Fatih Birol, the chief economist at the International Energy Agency, who states, “According to normal economic theory, and the history of oil, rising prices have two major effects. They reduce demand and they induce oil supplies. Not this time.”
Other than OPEC, there is no explicit agreement between oil producers to artificially restrict supply. According to the article, some of the presumed causes for the failure to increase supply stem from issues such as higher drilling costs, nationalistic policies that restrict foreign investments, high petroleum taxes, costly licensing agreements, scarce manpower, and political wrangling and violence.
The article states that according to Jeff Rubin, an analyst at CIBC World Markets, by 2012, gas prices in the United States could potentially reach $7 per gallon.
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