My son called the other day to report that the price of gasoline where he attends college is $3.15, a sharp drop in price from where it peaked. It conjured up memories of arrogant politicians threatening evil oil companies with prosecution for price gouging not long ago. They proposed that oil companies could arbitrarily raise prices and increase profits, regardless of what happened in the market. Whether you love or hate the oil companies, whether or not they were colluding, it is obvious that, if they were able to arbitrarily set prices to jack up their own profits, they would be doing so now, instead of letting them drop $1.50 per gallon. In reality, every company that does not enjoy a government-protected monopoly is subject to the laws of supply and demand.
The dynamics of the market are visible in the energy industry when looking back over a period of decades. The oil crises of the 1970s created panic and high prices. They also ushered in a period of feverish exploration for new sources of energy. Drilling rigs erupted all over and exploration companies were the growth industry. Fortunately for us, they were very successful. High fuel prices also resulted in technology which improved the efficiency of everything from home furnaces to giant manufacturing plants. The low cost energy of the 1990s was the result of a greatly increased supply and demand held in check by permanent efficiency gains, which in turn resulted from the high prices of the1970s and 80s.
Those low 1990s prices, however, diminished the incentives for exploration and development. As demand for low cost energy grew, the supply couldn't keep up. The high prices of the 2000s stemmed, in large measure, from the low prices of the 1990s and the resulting lack of development. We are now at the point where the high prices of the 2000s, with its incentive toward exploration, are yielding the development of tremendous new domestic sources of energy. The combination of a weakened demand from a sluggish economy and the prospects of large new supplies is causing prices to drop significantly, as would be predicted by any rational economic analysis. Oil companies, no matter how much they would prefer to gouge, must take what the market offers them.
This leads to the question of just how long we can continue to find new reserves and maintain our energy-dependent economy. The doomsters say that there is a finite amount of energy on the planet, and every unit we consume now is one less that will be available for later. Eventually, they say, the economy will have to collapse as demand outstrips all supplies. On the other hand, the cornucopians insist that the supply of energy is not finite. There is no limit to the amount of energy that the human population can extract and use for development. Which one is right? Well, neither.
There certainly is a finite number of carbon, hydrogen, and all other atoms which make up the matter and store the energy of the earth. It is not infinite in an absolute, physical sense. Energy, however, is more than hydrocarbon molecules. Moreover, energy is never used up, it is merely converted from one form to another. There are endless possibilities for finding new, efficient alternatives and for using the waste of processes as the raw material for other productive processes. Copper, as an analogy, is never used up. As it becomes more expensive, efforts to reclaim and reuse it become more intense. Similarly, the byproducts of combustion don't disappear out of existence. They become available for other processes, just as the carbon dioxide from combustion and respiration is reused by plant life to make more oxygen and food.
As one form of energy becomes scarce relative to its demand, its price increases. That higher price spurs the search for effective substitutes and for more efficient ways to use it and the substitutes. In an economic sense, people don't buy gasoline, electricity, or even the whale oil of the olden days. They buy solutions to problems; transportation, entertainment, and lighting by which to read. There are many alternative ways to provide those things. As more reliable, effective ways pop up, old technologies, like whale oil, go away. Whether energy is carbon based or some other form, prices will lead us to the right decisions if only we let the market do its job without interference. There is certainly an optimistic future as long as free people and free markets survive.
Dan McLaughlin is a columnist for The Post-Journal. Contact him at danmcl999@roadrunner.com.