Oil RigsIf the New York T!mes tripled its subscription price, how many would immediately call-up to cancel? Most would probably wait until their subscription ran out and not renew. And many would start looking around for alternate sources of business, political, and entertainment news. The NYT itself would probably publish stories claiming economists' price "theories" don't apply to "needs" like reading the NYT, so the price change should have no impact.

So it has been with oil and gas prices. Prices jumped dramatically, and NYT reporters repeatedly claim consumers are not driving less and not switching to sanctified high-mileage cars. Sitting in their NYC offices and traveling on expense accounts tends to shield reporters from much of everyday life. In the real world, large-scale shifts are taking place on both the demand side and supply side, just as they did when oil prices jumped in the 1970s. Rental car lots quickly filled up with unrented SUVs and mini-vans, and after some months, car dealers have large unsold inventories SUVs and mini-vans. Real-estate prices have crashed the hardest in communities with long commutes to jobs, for example. As usual, the NYT didn't retract, correct, revise, or even comment on their earlier "high prices aren't reducing demand" stories.

Market-failure stories in the New York T!mes come in various flavors. There are the "high prices don't change consumer behavior" stories run whenever politicians and environmentalists are pushing for new taxes and regulations to make people "do what's right." And then there are the equally popular markets "overreacting" stories about corporate lust for profits leading to "over-investment" chaos that somehow hurts "the little guy."

Reporters regularly blame markets for overreacting (though often the culprit is an earlier intervention or regulation). Still, much can be accomplished by overreacting in life. Men propose marriage (an obvious overreaction). Others, temporarily frustrated at work, quit their jobs and regret it at first, but are later thankful. Are oil companies overreacting to high prices, throwing money at a dizzying array of energy projects? Shell claims to have fifty new projects in the works. Gas exploration firms are investing large amounts in British Colombia (after Alberta arbitrarily raised energy taxes). Brazilians are investing in new deep-sea projects. Of the thousands of energy exploration projects that looked promising at $50 a barrel, each now looks like a slam-dunk, and tens of thousands of new energy projects look promising at $75 a barrel.

And on the alternative energy side, we see a similar story. As coal prices and political threats against coal burning have risen, solar, hydro, wind, geo-thermal and other alternative energy projects become more attractive. New millions (or billions?) are being invested in improving solar cell technology, and deploying current technologies. And when better car batteries enable new electric and hybrid cars to recharge at home from the grid, or to "fill-up" with pre-charged batteries at gas/battery stations, demand for expensive gasoline will begin the big slide.

So how far will oil prices fall as these demand-side and supply side investments come on-stream? A lot depends upon the Saudis, as usual. Those who remember the 1970s, remember the abuse heaped upon Milton Friedman and other free-market economists who claimed that cartels always fall apart. The OPEC cartel of major oil producers, let by America's "friend," the Shah of Iran, seemed to hold together, restricting oil sales and keeping prices high. (The joke was that Milton Friedman had proven OPEC wasn't a cartel… because it hadn't fallen apart.)

But before long OPEC did fall apart for just the reasons economists predicted: the urge to cheat and reap outsized rewards is just too strong. Saudi expenditures rose quickly to absorb oil income, as the Saudis wasted billions growing wheat and building new cities in the desert. OPEC would meet and members would promise to keep to their quotas in the interest of all cartel members. Then they would return home and push to secretly expand production and sales as much as possible. If everyone else held back, each member would reason, they could boost output and make a killing at the higher prices.

Oil profits were a magnet that drew vast capital into oil exploration, and new discoveries in North Sea and other non-OPEC developments soon pumped new oil supplies into the market. Higher prices allowed the Saudis to expand their exploration and upgrade their equipment. Before long new non-OPEC supplies, combined with widespread OPEC cheating, flooded world markets and drove oil prices way, way down.

As many analysts have emphasized, it was these years of low prices that are at the root of today's high prices. Conflicts in Iraq and Nigeria, along with government confiscations in the USSR and Venezuela, have played a role, but the low prices that essentially bankrupted the Saudis in the late 1990s also stopped development and even maintenance in Saudi Arabia and around the world. The majors laid off tens of thousands and most merged and downsized into the Chevron-Texaco, Exxon-Mobil, Conoco-Phillips two-name firms we know today.

So now the Saudis have all the billions to expand supply that they could ever wish for. And so does Shell, Exxon, Chevron, Total, Petrobras, along with hundreds of private-sector exploration and development firms large and small. It is true that more major oil reserves are owned and mismanaged by corrupt governments now than in the 1970s. But the earth is a big and mostly unexplored place. High oil prices paired with high-tech exploration and development innovations will bring new supplies to market, maybe just as alternative energy innovations take hold to lower energy use.

If so, the New York T!mes will have yet another opportunity to complain of markets "overreacting" to lower oil demand and boost oil supplies "too fast." Only government taxes and regulations, the NYT will argue (again), will be able to save billions of dollars invested in nifty green energy.


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