Grumble, but don't panic

The price for a litre of regular gasoline in Corner Brook skyrocketed to 115.6 cents today. Still enjoying your Chevy TrailBlazers and Dodge Durangos, guys?

This is a bloody nuisance, to say the least, but Steven "Freakonomics" Levitt says we shouldn't panic about oil running out anytime soon - or even remaining this expensive:

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.

Which is exactly the situation with oil right now. I don't know much about world oil reserves. I'm not even necessarily arguing with their facts about how much the output from existing oil fields is going to decline, or that world demand for oil is increasing. But these changes in supply and demand are slow and gradual -- a few percent each year. Markets have a way with dealing with situations like this: prices rise a little bit. That is not a catastrophe, it is a message that some things that used to be worth doing at low oil prices are no longer worth doing. Some people will switch from SUVs to hybrids, for instance. Maybe we'll be willing to build some nuclear power plants, or it will become worth it to put solar panels on more houses.
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If oil prices rise, consumers of oil will be (a little) worse off. But, we are talking about needing to cut demand by a few percent a year. That doesn't mean putting windmills on cars, it means cutting out a few low value trips. It doesn't mean abandoning North Dakota, it means keeping the thermostat a degree or two cooler in the winter. (via InstaPundit)

The Washington Times reports that the Bush Administration is coming under pressure to increase CAFE standards for cars and trucks, but expensive gas will probably do more than any government policy to drive Americans (and Canadians) into more fuel-efficient vehicles. What amazes me is just how unprepared the "Big Three" American automakers, who've been splurging on profitable trucks and SUVs for the past ten years, have been for a world of expensive gas. In contrast to Toyota and Honda, which have introduced or will soon introduce small sub-compacts and hybrids to the North American market, Ford and Chrysler have nothing smaller than the Focus and Neon. GM has the Chevy Aveo, but I wouldn't count on a rebadged Daewoo to save the company.

Posted by damian at August 22, 2005 12:03 PM | TrackBack