Friday, May 25, 2007

The Future Is Slippery

Last night on The Daily Show, Jon Stewart mentioned the rise of the price of oil during the Memorial Day weekend. To paraphrase, he asked why, on this most predictable of demand increases, don't oil companies increase production to compensate? Implying, of course, that they are colluding to restrict supply on purpose.

First, oil prices are actually slipping as the Memorial Day weekend approaches. But this could just be a strange fluctuation. It could also be overcome in the US by American demand. What else is going on?

The second point is much more subtle. It takes months for any oil company to respond to a change in demand. That means to prepare for this weekend's surge in gas use, companies have to estimate today's increase in gas consumption back in winter. Not only could a lot happen in the mean time (as it always does), it's very easy to get the initial estimate wrong. So to play it safe and compensate for the cost they must bare by trying to predict the future, they sometimes get it wrong. It's not that they aren't adjusting to the prices, they just aren't doing it perfectly. But that hardly means they are colluding. It just means they are human.

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