Posts Tagged ‘law of supply’

An energy crisis plagues the Western world. Diminishing supplies and increasing transportation costs are driving up prices. Fuel sources are drying up. Many fear that the current way of life will become unsustainable. Families spend escalating proportions of their income on simple amenities such as heating their homes.

The previous paragraph may accurately depict the modern world. However, it was written about Europe in the sixteenth century. In Before the Industrial Revolution, Carlo Cipolla explains that timber remained the primary fuel of Europeans until the late 1600s. Only when coal was increasingly used as a substitute did timber prices began to diminish. So why did the Europeans wait so long to start burning coal? The answer is that at low prices it simply wasn’t worth the time or effort to extract the coal from the ground. When timber prices rose, coal sellers could undercut the price and still make a profit. This is the law of supply–as the price increases, more people are willing to supply a good.

High oil prices lead to talk about increased consumer costs and windfall producer profits while the most promising aspect is often ignored. Necessity is indeed the mother of invention (and innovation). The resolution to our generation’s fuel problems will most undoubtedly be the same solution as four centuries ago: the development of new energy sources. The need to develop new energy wasn’t there when oil was relatively cheap. High oil prices incentivize the development of new competitive energy sources and methods.