OPEC has declined to raise its quotas, causing the price of oil to jump back towards $100. A few years ago, OPEC ministers were worried that prices were heading towards $50; they feared that this would lead to the kind of demand collapse that ravaged OPEC finances in the mid-eighties. Now the FT says price hawks, led by Venezuela, were arguing that "a price of $100 a barrel was fair." Undoubtedly, if the price crosses $100, $125 will start to look more than just.

To be sure, the other members are less aggressive; the FT reports that Abdullah al-Badri, Opec’s secretary general, said: “There is no reason whatsoever for prices to go up to $100.” Nonetheless, they caved to the hawks, apparently because last week's price drop, which was based on expectations of a quota increase, scared the more moderate producers.

As in the late seventies and early eighties, these producers have become extremely dependent on expensive oil to support their budgets. Hawkish member Venezuela is hawkish in part because Chavez's diversion of investment funds to social spending, and his creative nationalization of oil fields, have caused Venezuelan crude production to fall. Should the price of oil fall back towards historical level, the Venezuelan boom will not only bust, but leave the Venezolanos worse off than they were before. Most of the other members are in similar, if less dire, straits; they are spending their windfall, not saving it, and when (if) the price falls so will the government's income and popularity.

Too, the lengthy price run-up has not just made them more dependent on high oil prices; it is also making high prices seem less scary. After all, demand remains robust, and world economic growth is still okay(ish). But this may be a false sense of security. Human beings are programmed to continually reevaluate the probability of an event based on recent events. Emotionally, we become more comfortable with situations the longer they persist, even if there is no rational reason to believe that the underlying risks have changed--indeed even during events such as stock market bubbles, where the risks get worse the longer the situation endures.

OIl prices are highly inelastic over the short run; people have to drive to work and heat their homes even when the price of oil rises, so they buy the oil and gasoline, and cut other spending from their budget. Over periods of years, however, conservation becomes a priority in making all sorts of purchase decisions: they opt for smaller, better insulated houses, more efficient cars and appliances, shorter commutes. Importantly, these changes are extremely persistent. The durable goods may last a decade or more, cutting into the demand for your product. And the memory of high prices is also persistent, affecting purchasing decisions even after the price starts to come down. The result, in the mid-eighties, was that prices did not decline gracefully; after years of run-up, they simply imploded, taking the OPEC members' budgets with them. There's evidence that Americans are starting to get serious about conservation--my aunt, located deep in the heart of red state America, just traded her SUV for a Prius. Abdullah Al-Badri may be more right than he knows

Of course, there's another explanation for OPEC's behavior, one that is increasingly worrying energy experts: that they aren't increasing production because they can't. High prices like this are usually accompanied by rampant cheating, but the overall level of leakage seems to be pretty modest. If that's the case, a few years from now, we may think that $100 a barrel sounds pretty fair ourselves.

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