4/21/2006

Oil: The Long Run

Oil rose past $75 a barrel today. And I feel fine. Indeed, I feel positively thrilled.

Why? Won't high oil prices act as a drag on the economy in general, and on the personal prosperity of millions and millions of people? Yes, in the short term. But over time, sustained high prices for oil will have a number of beneficial efffects.

First, high oil prices have stimulated a rush of investment in alternative energy sources such as biodiesel, ethanol, solar power, and improved batteries. Such investments languished during the halcyon days of $10/barrel oil during the Clinton Administration, prolonging our reliance on an energy source which is overwhelmingly controlled by oppressive foreign governments in general, among whom are states like Saudi Arabia and Iran which used their riches to attack us by proxy. But we are now rapidly approaching the break-point where we can transition away from oil as our main source of fuel, and therefore stop enriching our enemies.

Second, high prices will inevitably cause people to conserve energy. This is good by itself; but even better is that some of them will probably do so by using solar power or some other method of cogeneration. In this manner, the slow process of decentralizing our power system will be accelerated at least a bit. When energy production becomes decentralized (one could even say democratized), the system as a whole will be more resilient and less prone to critical failure, and individuals will take back some measure of control over their lives from the vast centralized distribution networks that dominate modern life. Self-reliance is a good thing.

Third, the rising price of oil is largely driven at present by speculation. All of our production capacity is back online by now, and supplies are near their highs. What this tells me is that traders are anticipating some sort of strike against Iran, or some other "geopolitical risk," and are positioning themselves accordingly. The benefit of such speculation is that it makes the shock of the event, when and if it comes, less painful; we are already prepared for the blow. Any price movement that lessens panic in the long run is good in my book.

So by all means, cut back on your oil usage. But don't rail overmuch against corporate greed or price-gouging as you do. The market is simply encouraging us to do now what we should have begun doing decades ago, and we owe it a debt of thanks.

1 comment:

Joel CatalĂ  said...

Excellent.

Only one point, you say:

"The market is simply encouraging us to do now what we should have begun doing decades ago, and we owe it a debt of thanks."

It's not an impersonal market that we should thank, but the good people who become entrepreneurs.