The useful thing about markets, though, is that high prices are a signal of the degree of scarcity in the market. High prices of gasoline have decreased the quantity of gasoline demanded by US consumers over the past months. Further, high prices of gasoline spur investment into other energy sources (since the potential profits from alternative energy sources are much higher). In an article in this week's Economist (subscription required), they confirm that the recent high oil prices have led to more investment in alternative energy sources:
The article goes on to discuss that high oil prices are not only increasing environmentally friendly energy sources, but also alternative sources that are not so "green," like coal.
GE's wind-turbine business, which was inconsequential a few years ago, made over $2 billion in sales this year. Ethanol, a costly green fuel which in America is usually made from corn, now looks a better buy. And wind and solar power are also back in fashion.
Industry sources reckon that global sales of solar panels this year will reach $11 billion, up from $7 billion last year. America's Energy Conversion Devices, a pioneer in hydrogen storage and solar cells, has seen its shares soar by 50% this year and venture-capitalists are taking an increasing interest in the industry.
All told, reckons Christopher Flavin of the Worldwatch Institute, a green think-tank, investments in “new renewables” (not including big dams, which nobody likes anymore) grew from $24 billion globally in 2003 to $29 billion in 2004—and, he thinks, the pace of growth is even faster this year.
Overall, the point is that even though high prices of gasoline are painful to pay, those same high prices will help reduce reliance on oil more efficiently than any reasonable government plan could.