The Power of Price

If you want a market to produce better products and falling costs it needs to have real prices.  It is this lack of real prices that cause education, government and healthcare to be so expensive and broken.  The first goal of any policy should be to reintroduce as much real price signalling at the point of consumption.

As resource economist Julian Simon taught us years ago, we never have, and never will, run out of scarce resources like oil because as a resource becomes more scarce, its price will rise, which will set in motion a series of actions that will counteract the scarcity.  For example, higher prices for oil will increase the incentives to: a) find more oil, b) conserve on the use of oil, and c) find more substitutes.  And that's exactly what's happened recently in response to higher oil prices - domestic crude oil production reached a 14-year high in March, and the share of rigs drilling for oil (vs. natural gas) set a new record high of 70% last week.  

And now an LA Times article today highlights how companies are making efforts to find substitutes for high-priced oil, here are some examples from the article:

1. Ford has eliminated 5 million pounds of petroleum annually by using soybean-based cushions in all of its North American vehicles. The company also got rid of an additional 300,000 pounds of oil-based resins a year by making door bolsters out of kenaf, a tropical plant in the cotton family.

2. BioSolar of Santa Clarita, Calif., dealt every day with the fact that solar modules are typically made with a glass front, an aluminum frame and a back sheet made out of a petroleum-based plastic or polymer.

"We saw where the price of petroleum was going," BioSolar CEO David Lee said. "We're not economists, but we knew that the price of oil was going to keep going up. The cost of photovoltaic cell manufacturing was going to skyrocket." BioSolar has changed its process to instead use castor beans.

3. Los Angeles businessman Neal Harris once relied on beads made from a petroleum-based polymer to hold fragrances for his company's products. Harris' company, Scent-Events, sells fragrances as a marketing tool to enhance movie premieres, concerts, parties and products. This year, he'll use ceramic beads 95 percent of the time. "It's saving us money, and we no longer have to keep track of oil prices," Harris said.

4. In March, McDonald's began a trial of double-walled paper hot-drink cups in 2,000 restaurants, in place of polystyrene containers, which start out as petroleum. 

5. Coca-Cola and PepsiCo are becoming bioplastics bottlers.

As Daniel Yergin, energy consultant and Pulitzer Prize author of a book on the history of the oil industry, told the LA Times, "Now there are accelerating efforts to squeeze oil out and find ways to substitute for it. That is the power of price."

Related: Duke economist and blogger Mike Munger explains here why "peak oil" is "peak idiocy" and why "Of all the idiotic things that people believe, the whole "peak oil" thing has to be right up there."