THERE ARE MORE MISUNDERSTANDINGS about the oil market than perhaps any other. In America, drivers are fuming and politicians are demanding explanations because gasoline has hit about $3.50 per gallon. That's less than half the price being paid by motorists in most industrialized countries. High to us is low to them. Then there are the oil refiners. Relative to the $120 price of crude, $3.50 for gasoline is so cheap that their margins have virtually disappeared. So "high" in Cambridge, Massachusetts and Oxford, Mississippi is "low" in similarly named cities in the UK, and "high" for motorists is "low" for refiners. It depends where you live, and at which point in the supply chain you find yourself.

But assume that prices are "high", which indeed they are by historic standards. We are mistaken when we think these "high" prices are causing inflation. High oil prices can force consumers to spend more on gasoline and heating oil, at the expense of other purchases. Ask any suffering restaurateur or clothes retailer if you doubt that. But high oil prices can't trigger a rise in the general price level--inflation--unless someone pumps money into the economy so that, to use an oldie but goodie from the economists' lexicon, there is more money chasing the same amount of goods. If you want something to blame for inflation, don't look at oil prices, look at the billions the Federal Reserve Board's monetary policy gurus and their confederates at the U.S. Treasury are pouring into the economic system. The cost to taxpayers of saving the financial services sector from ruin is not only making good any collateral the Fed has accepted that might prove worthless, but the run-up in the rate of inflation.

Another myth: we are running out of oil. According to WorldPublicOpinion.org "majorities in 15 of the 16 nations surveyed around the world think that oil is running out. . . . Only 22 percent on average believe that 'enough oil will be found so that it can remain a primary source of energy for the foreseeable future'." Those majorities who think we are running out of oil include 76 percent of the American citizens polled. Luckily, they are wrong.

Production of oil is being constrained by several forces, none of them due to God's failure to put enough of the black gold under our feet. Several countries that are important sources of supply are in political turmoil, and unable to bring to market the oil they are currently capable of producing. Think Nigeria, where security problems have shut down about 20 percent of the nation's 2.5 million barrels of capacity, and discouraged new investment, and Iraq, where political paralysis and terrorists have kept production at less than half of its potential. Other countries will not develop the reserves of oil known to lie under their territories.

Russia has made it clear that foreigners who invest in its oil industry might be playing a game with Vladimir Putin known as heads I win, tails you lose. Find nothing and you lose your money; find substantial reserves and the state squeezes you until your shareholders' pips squeak. Only companies at least 51 percent owned by Russians--read FOPs, Friends of Putin--are allowed to look for oil in the new, difficult areas in which it is to be found. Little surprise that Russian oil output dropped in the first quarter of this year.