Gambling and Gas

My dad spent a good portion of his debate with William Jeter on Monday night talking about the problem of rising gas prices.

Underlying their discussion was a fundamental question about the relationship between the economy and the environment: are we facing a future in which oil, metals, and other raw-material resources are going to become increasingly scarce – and thus increasingly expensive? If so, the only way we can maintain our standard of living is by investing in technologies that will enable us to do more with less. We have to figure out how to drive our cars and light our houses without burning fossil fuels, how to grow our food without depending on petrochemical inputs, and how to manufacture products that don’t require us to mine new materials.

If not – if resources like oil, copper, and iron are going to remain relatively cheap over time – then maybe it makes sense, at least from an economic perspective, to stay our current course and not worry too much about making our economy more resource-efficient.

Economists are a gambling sort of people, and twenty-eight years ago, two of them placed a friendly bet on this very question. Paul Elrich, of Stanford University, bet Julian Simon, another noted economist, that the prices of five metals – copper, chromium, nickel, tin, and tungsten – would rise between 1980 and 1990.

Elrich lost the bet. The discovery of new deposits of the metals in question outpaced the growth of demand, causing prices to fall over the course of the 1980s. And so, the story of the Elrich-Simon bet became a favorite example for people who like to argue that the world is in no danger of resource scarcity.

What few people realize is that if the Elrich-Simon bet had been extended to today – if it had been a twenty-eight-year bet rather than a ten-year bet – Elrich would have won decisively. Inflation-adjusted prices of the five metals, with the exception of chromium, are now significantly higher than they were in 1980, indicating that they have become scarcer over time.

Do you think this trend will continue? Are we going to run out of new oil fields to drill and new metal deposits to mine, with the result being that prices for these resources will continue to rise?

Put another way, do you think the days of buck-a-gallon gas are gone for good? If not, why? If so, do you think it makes sense to start making our transportation system – and the rest of our economy – less dependent on non-renewable resources?