InTheHat was over yesterday and as usual he kept the conversation interesting. I love to debate about nearly any topic of course but the future as it relates to gradually increasing oil costs and the economic consequences, well, that is just a delicious topic. I wonder how many people in the world would see that as I do and would be incredibly interested rather than utterly bored by such a discussion...
Obviously we can't keep increasing our oil usage at current rates. While we aren't going to run out of oil to burn for centuries or millennia we will certainly run out of *cheap* oil, and that point is approaching rather quickly if we have not already reached it. So what will the consequences of expensive oil be? I think objects, manufactured goods, will be less affected than many other things. The components of our calculators, fridges, computers, plastic toys and other items are often made from oil products but the actual cost of those products relative to the final selling price is miniscule, often running as low as 5% in lower price categories. The much more challenging part of the equation is how much costs of transportation will go up and how that will affect our entire economic system. How much of the cost of a microwave is actually based on the cost of moving it from place to place?
We currently shuffle goods all across the world to save money on salaries for those people turning those goods into other things. It is normal for raw goods to be shipped across an ocean, manufactured into something else and then shipped back across that same ocean to be sold in the same country the ingredients originally came from. This completely insane waste of resources is only made possible by incredibly cheap energy and vast differences in living standards between different countries. Those differences in living standards don't show any particular sign of vanishing soon but the incredibly cheap energy is going to gradually slip away as time goes by. Certainly that will create some good as manufacturing will be more logically placed near the market for the goods in question, reducing usage of fossil fuels and the attendant environmental problems, but it will require a lot of change and change isn't free.
I really do wonder how elastic the demand for oil really is. People are quite clearly addicted to their cheap goods and low cost transportation but are they willing to give that up easily when confronted by a big price increase? I find the US situation particularly fascinating given the way the people there get so massively worked up over high gasoline prices, particularly when their prices are among the lowest in the world. Are they going to suddenly start spewing out train tracks and recycling centres or will they just pay more for oil and try to keep things the same as they have always been? Those sorts of questions are the type economists wish they could answer but mostly have to be resolved the hard way I think.