Now there is much more to the picture than this simple dynamic. Other factors do bear on oil prices. But the principle is sound. Mr Murphy's analysis is particularly aimed at the interventionist sentiment which gives rise to calls for windfall profits taxes. He argues that government interventions to moderate prices in fact prevent market participants from taking appropriate action (investing in capacity) that will serve to moderate prices by reducing incentives to profit. Thus the market suffers from reduced capacity and prices remain high.

This is good background reading to help elucidate the behavior of the oil market.