The sky is falling? Maybe not

Published 11:00 pm Wednesday, August 8, 2012

As students prepare to return to school, I find myself reflecting back on some of the things I was taught in grade school. Like many people, I was taught that our planet, and thus humanity, had a dismal future. Acid rain was going to contaminate the water supply, and people would soon be resorting to violence to secure clean drinking water. The ozone layer was going to be depleted, and most of us would have to wear masks over our mouths to breath. And, of course, the world was going to run out of natural resources like coal and oil because fossil fuels are nonrenewable. But, none of these pessimistic claims turned out to be true.

Doom-and-gloom forecasts about the environment often turn out to be wrong because they fail to account for market incentives, innovation, and the human mind. For example, businesses have strong incentives not to pollute public water supplies due to the reputational costs their firms would pay for such behavior, not to mention the costs they’d face if forced to clean up their messes. But, suppose our water supply does, indeed, become contaminated by acid rain. Since water’s something people value, dirty water creates an opportunity for entrepreneurs: large profits could be made by the person who finds a way to treat the dirty water and keep it clean. Though my former teachers said we’d be facing severe water shortages today, entrepreneurs have assured us of a much different outcome: around the world, more people have access to clean water than ever before.

Like water, there’s been plenty of alarmism when it comes to energy production and natural resources. Here again, though, innovation and market incentives have resulted in us having more coal and oil available to more consumers than ever before. As resources like oil become scarce, prices rise. The rise in prices has two effects. First, it encourages us to economize and use the resource with greater care; $4 gasoline in the United States, for example, led to a significant decline in the number of miles per year driven by Americans. Second, higher prices encourage greater exploration, innovation, and development of alternative energy sources. Thanks to $100 per barrel oil, drillers are pursuing projects and extracting oil through new methods, which wouldn’t have been profitable at lower prices. The adjustments by consumers and producers help to protect against us ever running out of resources and, in fact, often encourage greater supply.

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Even though resources are becoming more abundant, many people complain about the high price of oil and gasoline, and some think China’s growing economy is going to gobble up all of our natural resources. Their concerns are misguided and fail to account for the long-run trend in natural resource prices: since 1861, oil prices have moved up and down. Prices were at their highest levels ever (in what economists call “real,” inflation-adjusted terms) back in the 1860s when there was more total oil under the Earth’s surface. Since the 1860s, innovations in energy extraction have led to more and more oil becoming available for human use at lower and lower prices. Today’s prices, while high in monetary terms, are not anywhere near1860-levels; in fact, the trend in oil prices has been flat to downward over a 150-year period.

Alternative forms of energy are and will continue to become more prevalent if and when oil prices rise, meaning we will have something to take oil’s place if we ever run out. A few hundred years ago, Europeans dealt with a similar issue when wood—the primary energy source at the time—was running out. Thanks to the changes in relative prices and new developments in alternative energy, Europeans switched to coal; trees never disappeared, and there, in fact, are more trees in Europe today than there were in earlier times.

That oil prices have been flat to falling over a long period of time speaks to my main point: innovation and market incentives are effective safeguards against many of the environmental concerns raised by alarmists. So long as markets in oil and minerals are left free, meaning no price controls or rationing are implemented, the proper signals about prices and profitability will be communicated to entrepreneurs and consumers.

Environmental alarmism has emotional appeal because, if alarmists are right, it means mankind must come to the rescue to save the environment; it also has appeal to politicians because it gives them justification to expand their powers. But, if we truly care about preserving resources and protecting the environment, the best thing we can do is unleash the innovative powers of humanity through free markets and to teach our kids that creativity and optimism, not Chicken Little-style panic, will lead us to a better world.


Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.