A recent plunge in fuel prices has quieted much of the pulpit-banging in Washington. But with so much of the world’s oil supply controlled by illiberal governments, there’s no telling where prices may go in the near future.
Cries for government action could still resume as Election Day approaches — as if Congress had some magical authority over the ups and downs of energy markets. An electorate largely ignorant of economics and foreign cartels will happily exchange votes for promises of lower-priced gasoline. Sadly, the costs of such action will simply be spread to places we can’t see, but will experience anyway.
So-called energy “experts” have used high prices to insist that we are not only in a spike, but that we’re approaching a point called “peak oil.” They think we’ve not only become addicted to oil — a sentiment echoed by the president — but that we’re running out. And with China and India coming online, economically, we’d better do something unless we want everything on earth that depends on oil to come grinding to a halt.
Scared yet?
Enter Julian Simon, perhaps the 20th century’s greatest economic myth-buster. Simon said you can take any major resource and use it infinitely — i.e., that it would never run out. In fact, he was so sure of himself that he bet the world’s most famous living pessimist, Paul Ehrlich, that he could prove such.
Sound impossible? How can more and more people continue to use a resource and have it not run out?
They agreed that prices reflect scarcity. They also agreed that they couldn’t be talking about short-term fluctuations, but long-term trends. Wouldn’t a higher price mean the resource was running out?
Simon’s challenge became: “A public offer to stake $10,000 … on my belief that the cost of non-government-controlled raw materials (including grain and oil) will not rise in the long run.” Ehrlich could name the terms: Select any raw material he wanted — aluminum, copper, whatever — and select “any date more than a year away.”
Ehrlich chose 10 years and five major resources. Simon bet the commodities’ price on that date would be lower than it was at the time of the wager. If the 1990 price was higher than the 1980 price, Ehrlich would get the difference. If the price were lower, Simon would win. Ten years later, in October 1990, Paul Ehrlich mailed Julian Simon a check for $576.07.
How could Simon have known? Was it luck? Not at all. Simon pinned his hopes on three things: Institutions, markets and human ingenuity. When those three things are clicking, the outcome is predictable.
Institutions, of course, are the legal constructs that allow markets to flourish securely and with fewer impediments.
And we know what markets do: They send powerful price-signals to economic actors — which amount to useful information the actors can use to be more competitive.
But what about human ingenuity? That’s when human beings apply their wits to figure out how to do more with less — all to be more competitive (and of course profitable).
And that’s exactly what’s going to happen with oil. If government keeps its mitts off, there are five ways markets may respond to price-signals with human ingenuity:
1) Tar nation. I recently met a chemical engineer who claims to have figured out how to extract petroleum from sand. The tar sands of Alberta are just oozing with oil. Until now, no one has figured out how cost-effectively to get it. If the man’s claims are right, someone has.
2) MPG. Auto companies are coming out with new fleets that get more miles to the gallon. While hybrids may not yet be cost effective on net, they soon will be. (Even small designers like JW 2 of Alexandria, Va., are working on “100 mpg” engines.) Nano-manufacturing techniques will make vehicles stronger, but lighter. And new additives and lubricants will make engines run more efficiently.
3) Deep treasure. The recent discovery of more petroleum in the Gulf of Mexico will encourage development of deepwater extraction techniques.
4) Un-gas. Innovations outside fossil fuels will advance and become more competitive with oil, which will not only drive prices down, but mean we’ll use petroleum for fewer things.
5) Bikes and buses. Some human ingenuity comes simply from people thinking about how to save money by changing their behaviors. Individual decisions like “I’ll walk” or “Let’s take the Honda” add up.
My bet is that most or all of these human factors will amount to cost savings in the long run — especially if “windfall” profits continue to spur said ingenuity.
I’d even be willing to bet that in 10 years, gas prices will be under $3 per gallon. Wanna bet?
Max Borders is TCSDaily.com managing editor.
