<p>“For this economic system to work, either supply would have to increase (which it won’t) or demand would have to decrease (which it won’t). Producers set their price based on the scarcity of what they produce (in theory), then there is some compromise involving the demand of consumers but there comes a point where the purchasing power of most consumers is simply not enough to acquire the product. I don’t see the price of yachts, private jets, etc. decreasing because most people can’t buy them.”</p>
<p>Yachts and private jets are luxuries, and inherently expensive (until replicator technology is invented). Resources used for energy, like the kind we’re talking about, are necessities. Otherwise we’re back to caveman days. I don’t think you’d disagree with any of that.</p>
<p>But you’re not quite right when you say that prices are set by producers based on their scarcity. There is a sort of bidding process which determines prices. At an auction this is easy to see, in other instances it’s difficult to see how the bidding takes place. When a store sells jars of pickles for four bucks each, and I pick up the jar, look at it, see the price, then put it back on the shelf, this is as if the store said “jar of pickles starting at $4, do I have any bids?” and I didn’t raise my hand. If prices are too high for enough people to buy the product in the numbers the producer wants to, and at the price they want to sell for, then the price will come down. If producer A doesn’t bring it down, then producer B will bring it down. If the price is climbing due to increased scarcity (scarcity <em>affects</em> prices, but it doesn’t determine them), this will encourage producers to bring more of the product to market.</p>
<p>Using oil as an example, there are many known sources of oil. When you hear about “the oil supply” and how it’s running out, it’s a misinterpretation of facts. What’s called “the world’s supply of oil” is more accurately called “the world’s supply of known oil which it is profitable to get out of the ground and refined at the current market price of oil.” Places that weren’t considered worth drilling because of various reasons which made the oil there harder to get are then brought into action, etc. This happens with any product. If apples became popular, so popular they vanished from the shelves, apples wouldn’t just vanish forever and remain permanently very expensive. Land used for other purposes would be converted for apple growing. Higher profits (or higher potential profits owing to the high prices) attract investors.</p>
<p>A common pattern in the economy is for a particular product or industry to become very profitable and popular, prices to rise substantially or to stay high for a while, and then for other competing businesses and investors to swoop in and offer that same product or substitutes, which increases the supply and brings the price down. Higher prices act as signals in the economy, they guide resources to where they are most valued. The supply of that resource grows, which (all other factors aside) means the price can come down.</p>
<p>Now, you talked about constant demand. This happens for certain goods in certain times and places, look up price elasticity. But it doesn’t always happen and it has its limits when it does happen.</p>
<p>As I’ve said, assuming the scenario where oil literally runs out ever happens, it’s important to understand what would precede that so you can understand that you needn’t be afraid of it.</p>
<p>For one thing, the price would continue to climb as long as demand remained strong. Alternative energy sources, which before were unprofitable and cost more than they were worth, would become more worthwhile over time. Goods which require energy (vehicles, electronics, etc.) would be manufactured so as to be more energy efficient. More investment dollars would flow to new technologies and alternative energy sources (especially those that produced measurable results), people would change their habits because of the higher cost of doing certain things or buying certain things.</p>
<p>Some important things about that sequence of events:</p>
<p>No government program or centralized organization would be necessary to make it happen. It would all happen as a result of market forces, as a result of people responding to the incentives they face. Investors wanting to make money, consumers wanting to save money, etc. Particular technologies or energy sources would be used in places and by people for whom it is most appropriate, rather than being forced on people by a top-down government program aimed at making people use particular products (and lining the pockets of politically-well-connected corporations).</p>
<p>Also, we aren’t near running out of oil. The fear is based on a misunderstanding (or deliberate misrepresentation) of what “world oil supply” means. You hear that we only have fifteen, twelve, or tens years worth of oil. Well, that has always been the case, because of the way oil is counted, not because of how much oil there actually is in the ground.</p>
<p>I want to point out again that merely being scarce doesn’t make something expensive, and merely being abundant doesn’t make it cheap. If the demand isn’t there, a rare item will still be cheap and if demand is abundant, then an abundant good will be expensive. It can be confusing because scarcity and abundance seem to correlate so often with high and low prices. There <em>is</em> a relationship there, but it is one part of a back-and-forth process between supply and demand.</p>