Tuesday, July 08, 2008

Acknowledging scarcity

Another thought I had while reading "Small is Beautiful" relates to how things are priced, or valued. The author points out that natural resources have no intrinsic value until they are used up. A fair point. Certainly it's hard to see why anything natural would be preserved if economic growth is the only thing society values and therefore nothing natural has any value until it is put to economically productive used. However, the author laments that the price of scarce natural resources is set no differently than any other good which can be produced over and over again. While I agree that it's true that both are set by the simple measure of what price the market will bear, I don't think this means that scarce natural resources are priced the same as manufactured goods that can be produced repeatedly. The difference in price is set by the buyer who recognizes that one good is limited and the other is not (or at least one is more limited than the other).

Overlooked in the recent debates over what's behind rising oil prices is one simple idea: the buying public has reached a tipping point where most buyers recognize that oil is a scarce good whose economically viable supplies may be exhausted within the lifetime of most people alive today. (I did not say run out, because we will never "run out" of oil in the earth. It simply becomes exponentially more expensive to extract oil as reserves become more depleted. Long before we "run out" of oil, it will simply be impossible to get oil from the earth for any reasonable price.) For decades after oil was first put to productive use, people assumed that the reserves within the earth were so great as to be considered unlimited. Over time, more and more people have called this assumption into question. As so often happens in human society, this idea was marginalized until it reached a "tipping point" at which a sufficient quantity of people believed the idea to make it broadly acceptable. I believe we've reached that tipping point where people are beginning to price oil as a scarce good rather than an unlimited good. And as long as a sufficient number of buyers are willing to price oil as a scarce good, that will be how it is priced, as the buyers who want to price it as an unlimited good will simply be unable to find sellers.

Until something happens to convince a significant number of people that oil can in fact be treated as an unlimited resource, oil prices will probably remain at or near current levels.



Post a Comment

<< Home