MAGIC MARKETS

Here is a perfect example of how capitalism could work to solve a rather vexing social problem we have in the U.S. Austin Bay writes about the potential for over a trillion barrels of oil to be available right here in the United States, rather than from foreign governments.

And what is required to access this bounty?

Most people don’t realize that there are a whole host of alternative energy technologies that become instantly viable when oil gets above a certain price. Of course, the price needs to be sustained in order for the needed investment to flow into these technology areas. In the long run, however, the rise in oil prices may be very good for the U.S. economy by spurring innovation and investment much like PCs and software in the 80’s and 90’s.

For over two decades or more, Americans and their elected officials have been whining on and on about the need to become less dependent on foreign oil. Simultaneously though, Americans have basically refused to diminish their gasoline consumption; have continued to purchase gas-guzzling cars; and seem to believe that the basic purpose of the government is to keep gas prices low so that their addiction can continue despite the consequences of their dependence.

OTOH, their elected officials aid an abet this irresponsibility; put pressure on the President to "do something" if gas prices go up; and are willing to do anything, just anything in order to decrease our dependence on foreign oil--except of course, to let the free market do its magic to solve the problem.

In this case, the magic of the market is nothing more than those famous "Laws of Supply and Demand."

First, when the price of gasoline goes up -- as it has recently; and as it will as a consequence of Katrina and Rita; it has the immediate effect of discourage the use of motor vehicles--particularly the inefficient gas guzzlers. This result happens with no big government intervention; no new rules or regulations; and no pleas to the people to conserve. No law needs to be passed to encourage people to decrease their driving when the price goes up. It happens automatically--almost magically-- because the market is completely consistent with human nature.

Simply put, the higher the price, the lower the demand and the lower the price, the higher the demand. This is known as "The Law of Demand" and it works automatically and holds true universally. Only when well-meaning (or not) idiots artificially muck around with the market do strange things happen to this universal law. For example, keeping the price low, when demand is scarce results in severe shortages.

You know what? People will adjust to the increased prices by driving less. People who absolutely positively cannot live without using a lot of gas--will either pay through the nose, or find an alternative. Believe me when I say that they will find an alternative.

Secondly, as the quote above points out, if the price of gas stays high long enough, it will spur the development of new technologies, innovation and investment.

The Law of Supply states that the quantity supplied is directly proportional to price. Consumers want to pay as little as they can, and they will buy more as the price drops. But at the same time, sellers want to be able to charge as much as they can. They will be willing to make more and sell more as the price goes up. This way they can maximize profits.

When the price of gasoline goes up, suddenly profits become possible with Shale oil. Investment will increase; and the technology will begin to push the envelope. The ultimate result will be that our dependence on foreign oil will be altered forever.

Of course, there will be wailing and whining and the gnashing of teeth from both sides of the political spectrum. Count on it. Particularly from the side that claims they desperately want us to be free form dependence on oil and who scream "No War for Oil!". Well, here is a perfectly non-violent, peaceful way to alter our relationship to the world's oil supplies. Not unexpectedly, they hate capitalism, too. Reason is not one of their strong suits.

I also expect the usual cries of outrage about how this will impact the poor most of all... That it is racist, sexist, or some other such nonsense. Or that we'll just be making the eeeeevil oil companies rich (not for long, if they aren't the ones who do the investing and innovation); etc. etc. I'm sure I will get emails describing how such insensitive behavior will result in harming little children and puppies disproportionately and without compassion.

Nevertheless, the end result of letting the Market achieve its own equilibrium will be a stronger US economy as we detox from our horrible addiction to energy sources controlled by despots and tyrants in the Middle East and elsewhere. I rather think that children and puppies will be relatively unfazed.

Oh, and by the way. When I speak of the "magic" of the free market--what I am really talking about is your basic, fundamental, hard-wired human psychology and biology.

Policymakers ignore it at their own peril.

[A related post from Dr. Sanity: Biological Fantasies ]