Higher Oil Prices are Great

Higher oil prices are great. Before I explain why, let me step back for a second and explain the power of Capitalism and the information that prices convey. When a commodity or a service gets scarce or there is too much demand for that service, the price rises. The power of that price rise is very important, because it is communicating to the market that supplies are getting scarce and alternatives need to be found, or more efficient use needs to be enacted.

So with this in mind let’s turn back to oil. What does $126 a barrel and $4 a gallon gasoline tell the market? It tells the market be aware, there is too much demand and not enough supply. So, what is the reaction? First, people stop using as much oil and gas. And this is happening in miles driven stats and a recent article from the New York Times on a surge in mass transit usage:

mass transit article from the new York Times

The next thing that happens is money and investment pours into alternative sources of energy from solar to wind, to nuclear to clean coal to natural gas. Here is another article talking about how in California investment into alternative energy is soaring:

investment into California alternative energy

Here’s another article talking about the billions being thrown into clean energy:

clean energy investments

Or what about the government of Abu Dubai investing $15 billion into alternative energies that was announced earlier this year?

All of this is possible by soaring oil prices. Its spurring massive investment and innovation. Think of the push for high gas mileage cars, fuel cells and hybrids. None of this would be possible without the massive catalyst of higher oil prices.

And this says nothing for the benefit to the environment, which will be the biggest beneficiary of all if we are forced off of oil because of high prices.

And this is the wonderful thing about capitalism, it sends us signals and price information so that we can act accordingly. The problem is that sometimes it creates short term pain like higher oil and gasoline prices, but in the long run, it really helps us out. In the end the high prices of oil, will be its undoing and will be the key that frees us from the grip of being addicted to oil as an economy and as a country. It may take awhile, but be sure, the faster oil goes up and the more expensive it is, the better it is for us in the long run, because it will spur us even more to find alternatives and to be efficient, and in the end everyone will benefit.