India Uncut

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Wednesday, August 24, 2005

The solution to $60 oil...

... is $60 oil, explains Jay Hancock in a lucid essay in the Baltimore Sun. He writes:
Bloody shame about those high oil and gas prices.

They're causing billions of dollars to be invested in petroleum production, which will increase supply. They're discouraging unnecessary driving, encouraging use of public transit and fuel-efficient cars and cueing industry to cut fuel costs, which will decrease demand.

And they're triggering billions more to be invested in new technologies such as solar power and hybrid engines, which will offer alternatives.

I hate to say it, but if this keeps up we might avoid a 1970s-style energy crisis, with its shortages, gas lines, severe recession and petroleum prices a third higher than they are now, adjusted for inflation. We might even set the stage for a new era of low oil prices, like we had in the 1980s and 1990s, or at least new stability.
After listing out the various positive consequences of the current high prices, he concludes:
Maybe higher prices are part of an invisible hand creating economic order, as described by Adam Smith. Maybe $60 oil is beaming signals across the economy that will boost supply, cut demand and eventually lower prices, as described by Friedrich Hayek. Maybe we didn't need the energy bill Congress just passed.
It's a fine piece, read the full thing.

(Link via Cafe Hayek.)

Update: Reader Shrikanth Shankar points me (via A VC)to a post on the same subject by Steven Levitt of "Freakonomics" fame. Levitt points out a fundamental truth:
What most of these doomsday scenarios have gotten wrong is the fundamental idea of economics: people respond to incentives. If the price of a good goes up, people demand less of it, the companies that make it figure out how to make more of it, and everyone tries to figure out how to produce substitutes for it. Add to that the march of technological innovation (like the green revolution, birth control, etc.). The end result: markets figure out how to deal with problems of supply and demand.
In fact, the very worst thing one can do when the price of oil goes up is to artifically bring it down with price controls. That is what the Indian Express correctly argues against in this editorial. They also look at one possible unexpected consequence of it: our oil PSUs going into the red, and our thus being able to privatise them, as the demand of the Left that we do not sell off profit-making PSUs would then no longer apply. Clever, I suppose.
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