Farewell to Oil?
WITH their uncorrupted faith in the sublime dynamics of perfect competition, the editorialists of the Economist in London have been proclaiming a coming age of energy abundance in which oil producers will come hat in hand to sell their stuff at declining prices. According to this bastion of classic (i.e., 19th-century) English liberalism, the present expectations of ever-higher oil and energy prices caused by increasing scarcity are based on the “third-rate political economy of linear projections,” which take no account of the inevitable reactions to high prices and their long-run effect on the market.
This argument rests on a bit of hardcore economic theory: assume that a group of wicked monopolists were to corner the market for a product-say apples, a favorite in first-year textbooks-thus artificially raising their price to three times the pre-monopoly level. What happens next? The good student knows what he is expected to say: first, economy-minded consumers will start buying pears instead, thus depressing apple demand; second, fruit growers and non-monopoly apple growers will plant many more apple trees, thus increasing industry supplies; and third, many other landowners will switch their lands to apple orchards, thus increasing further the supply by expanding the size of the industry itself.
About the Author
Edward N. Luttwak is senior adviser at the Center for Strategic and International Studies in Washington, D.C.