Gas pains

Economics is the study of how people respond to incentives.

In this case, the incentive is increased energy prices, especially oil prices.

Here's how the market is responding to these incentives. (Hat tip: Cafe Hayek)

In Libya, which has some of the biggest untapped crude reserves in the world, lifted sanctions and the prospect of getting $60 or more for a barrel is helping induce Chevron, Marathon and numerous others to open millions of acres for drilling. Exploration is also creating jobs and expanding supply in Russia, Angola, China, Algeria, Britain, India, Canada, Azerbaijan, Nigeria, Poland, Malaysia, New Zealand and Trinidad and Tobago, reports Oil & Gas Investor. The profit signal sent by $60 oil is so strong that last month the number of exploratory rigs around the world hit its highest level since 1986, says Baker Hughes, the petro services company.

Chevron is expanding its Pascagoula, Miss., refinery by a fourth. Kinder Morgan and Sempra want to spend $3 billion on a pipeline bringing natural gas from the Rockies to the Midwest and East. Texas-based Valero and ConocoPhillips are spending billions to improve their ability to process sour crude, which is cheaper than sweet and will help bring down prices. Thai Oil is spending $1 billion on new output capacity. Brazil just announced plans to increase processing capacity by 20 percent. China and India have doubled refining capacity in recent years. In short, high prices have spurred the global petroleum industry to make up for decades of miserable investment and operating with rickety equipment. We're finally investing in the future and ensuring our ability to produce energy for our children.

(Kind of a pity the oil companies had all those "obscene profits" to spend on this expansion, isn't it?)

As rising oil prices make alternatives look attractive, we're also getting the strongest incentives in two decades to reduce our petro addiction and take the next step. Public transit use seems to be rising. Ridership on the MARC commuter rail system is up 13 percent since 2003 despite ridiculous breakdowns and delays, The Sun reported last week. Public transit ridership also seems to be up mildly in places from Washington to St. Louis to Los Angeles, according to various newspaper reports. Sales are soaring for "hybrid" vehicles that run on gas and electricity. Toyota doubled production of its Prius hybrid this year. Ford has a hybrid SUV. GM has a hybrid truck and says it could produce a fuel-cell car that runs on hydrogen by 2020. Florida-based FPL Group is building up to 750 megawatts' worth of wind-powered electricity generation this year - nearly half the capacity of Constellation Energy's Calvert Cliffs nuclear facility. Frederick-based BP Solar, a division of BP PLC, is expanding again after downsizing in 2003, the Frederick News-Post reported a few months ago.

The predictable result of this particular incentive?

I hate to say it, but if this keeps up we might avoid a 1970s-style energy crisis, with its shortages, gas lines, severe recession and petroleum prices a third higher than they are now, adjusted for inflation. We might even set the stage for a new era of low oil prices, like we had in the 1980s and 1990s, or at least new stability.

Anyone care to bet what the price of gasoline, adjusted for inflation and averaged over the entire year, will be in 2010? I'll bet it's lower than today.