One of the most interesting (and misunderstood) aspects of the energy business is the economics of extracting oil and gas. Those economics not only have much to do with the price that we end up paying for energy, but also the success or failure of investing in a particular exploration project.
In this instructive Wall Street Journal ($) op-ed, Peter Huber and former Reagan administration staffer Mark Mills — who are authors of the new book, The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy (Basic 2005) — make an interesting point about why energy prices tend to gyrate from time to time:

Oil prices gyrate and occasionally spike — both up and down — not because oil is scarce, but because it’s so abundant in places where good government is scarce. Investing $5 billion dollars over five years to build a new tar-sand refinery in Alberta is indeed risky when a second cousin of Osama bin Laden can knock $20 off the price of oil with an idle wave of his hand on any given day in Riyadh.
By simply opening up its spigots for a few years, Saudi Arabia could, in short order, force a complete write-off of the huge capital investments in Athabasca and Orinoco. Investing billions in tar-sand refineries is risky not because getting oil out of Alberta is especially difficult or expensive, but because getting oil out of Arabia is so easy and cheap.

Moreover, the authors point out that new technology is having a dynamic impact on the cost of extracting oil and gas:

The cost of oil comes down to the cost of finding, and then lifting or extracting. . . But these costs have been falling, not rising, because imaging technology that lets geologists peer through miles of water and rock improves faster than supplies recede. Many lower-grade deposits require no new looking at all.
To pick just one example among many, finding costs are essentially zero for the 3.5 trillion barrels of oil that soak the clay in the Orinoco basin in Venezuela, and the Athabasca tar sands in Alberta, Canada. Yes, that’s trillion — over a century’s worth of global supply, at the current 30-billion-barrel-a-year rate of consumption.

Here is the entire piece. Also, Tyler Cowen over at Marginal Revolutions has this comment on Messrs. Huber and Mills’ new book.