I don't get this (anymore)

2009-08-03 · Original WordPress address

Peak Oil is the idea that the economy is heavily dependent on petroleum and we are getting close to pumping all of the stuff out of the ground. Thus, catastrophe. The typical economist's response is that the dwindling supplies will increase the price of oil. This will make substitutes more attractive and it will induce innovations, generating new or better substitutes. Then comes the part I don't get. Then, the economist will say, we shouldn't worry about Peak Oil. How, dear economist, do increased prices translate to more innovation? There's no magical price-to-invention machine that produces these innovations. If people don't "worry" about higher prices of oil, they won't be induced to innovate. Telling people "innovation happens" removes the incentive to innovate! Economists can tell you a simple supply and demand story (supply goes down, prices go up) or a more fancy dynamic resource extraction story. They can even tell you a pretty convincing story for what sort of policies and institutions have created incentives that seemed to have induced innovation in the past. They can tell you what goes in the black box and what comes out. But they can't tell you a damned thing about how that innovation will actually happen.