As usual the latest Paul Krugman column gets a lot of blog time. John Quiggin at Crooked Timber uses it as a peg to hang a piece on, and an interesting piece it is, in part arguing that high oil prices will make the US public willing to intervene in more oil producting ( Middle Eastern ) nations.
Krugman’s take on rising oil prices is unexceptionable on the face of it, ending with the admonition :

So what should we be doing? Here’s a hint: We can neither drill nor conquer our way out of the problem. Whatever we do, oil prices are going up. What we have to do is adapt.

Well, yes Paul. What we actually expect from a sometime good economist such as yourself is a description of how we will adapt.
As you don’t provide that I shall have to.
Let’s start by assuming that shortages are inevitable, that oil really will go up to, say, $ 100 a barrel and stay there. What will happen ? There will be substitution. At least three different types of it. We’ll leave aside all the extra exploration that will come from such high prices, the new technologies that will be created to extract more from the same field ( you know that the majority of oil in a field is never recovered ? ) and all those sorts of things. We’ll just address that concept of substitution in the manner in which an economist should. And we’ll limit ourselves to transport, for as Quiggin notes, that’s the one area where we don’t appear to have an alternative straight out of the box.
1) We’ll extract oil substitutes from other sources. From the Athabasca tar sands for example. Profitable at today’s prices, at $ 100 a barrel this is a no brainer. According to the US Geological Survey there’s half a millenium’s worth of oil up there for the whole planet. Or ethanol, or bio diesel. No great change in society, infrastructure or technology. We might even follow the example of some enterprising residents of South Wales : running their cars off waste frying oil. Yes, it works, what do you think bio diesel is ?
2) We’ll substitute other technologies for powering transport. Things like fuel cells ( today’s obligatory scandium reference, yes, I do at the day job, The Low Hanging Fruit Company, provide scandium for solid oxide fuel cells ) running on hydrogen, which could be extracted from water via nuclear power stations. That may not be the best way to do it, or even the best technology, but at some price between $ 40 and $1,000 a barrel, one of these alternatives is going to make it into the mass market.
3) It’s axiomatic ( meaning, blindingly obvious to the initiates) that everything is substituitable. We are not restricted to thinking about ” what can I put in my car other than oil ? ” or “what power source makes oil irrelevant for cars ?”. We also have ” How will people change their behaviour if transport is expensive ? ” Can we make a decent stab at estimating this ? Is there any method or example to help us ?
Oddly ( you just know what the answer is here don’t you ? ), yes.
In the UK, petrol prices are currently $ 7.30 per gallon ( if I’ve done the UK : US gallon thing right ) and at similar levels elsewhere in Europe. Tax rates of course. That is way higher than what $ 100 a barrel crude would bring to the US. Has civilisation fallen over ? With the exception of France, which arguably hasn’t had any since the end of the Angevin Empire, no. People drive smaller cars, with smaller engines. Those engines tend to have higher efficiencies than US engines of the same size ( mostly to do with US mandated pollution controls. One might point out that increased air pollution would be a substitute for oil. ). People tend to live closer to their work, and so commute less. There is less zoning in cities, allowing urban residents to dispense with a car for the daily round of shopping, drinking and eating. There is more use of mass transport, less suburban sprawl and so on and so on.
All of these are substitutions for oil.
So Krugman is correct : What we will have to do is adapt. And that adaptation won’t be that horrible, it’ll just mean the US getting a little more like parts of Europe in one respect. No, civilisation won’t collapse, we won’t all become cheese eating surrender monkeys, won’t have to sign over our guns nor give up free speech. It’ll just be the normal rules of economics, a market system allowing individuals to substitute one set of goods for another in response to changing relative prices.
So, Paul, why didn’t you tell your readers what will happen, instead of your doom laden pronouncements? I mean, you used to be a pretty good economist, certainly up there in the list of likely Nobel nominees. What happened ?