Oil prices rise. We adapt. (So don't panic.)

Oil prices are rising, but that doesn't spell doom, just opportunities for change and innovation.

David Zalubowski / AP / File
An oil pumper stands silhouetted against Long's Peak, near Firestone, Colo., in this 2001 file photo. As finite resources like oil become more expensive, innovators and entrepreneurs will find new solutions to the problems oil currently solves.

In this column, Paul Krugman says some wise stuff. As an applied micro economist, he starts with some facts: "Oil is back above $90 a barrel. Copper and cotton have hit record highs. Wheat and corn prices are way up. Over all, world commodity prices have risen by a quarter in the past six months."

He offers some speculations about the causes of these price dynamics. But, the interesting part of the article is his predictions about the consequences of these events:

He writes:

"So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources."

This smells like the logic presented in my Climatopolis.

In Climatopolis, I argue that the anticipated rise in fossil fuel demand in China and India will help us to adapt to climate change. If forward looking entrepreneurs anticipate that real fossil fuel prices will rise over time, then they have an incentive to find substitutes. If these substitutes are cleaner than fossil fuels (i.e renewables) then we can achieve the win-win of economic growth without exacerbating GHG concentrations in the atmosphere. In this sense; the belief in "Peak Oil" helps us to simultaneously mitigate and adapt to climate change.

Note that Krugman predicts a gradual adjustment of society to our new realities. He is taking a gentle slap at those who believe that we can fall off a cliff over night.


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