Chicken little and oil.

NOW that oil prices have reached $40 a barrel and gasoline is selling in some markets at $2 a gallon, Chicken Littles are gloomily predicting that the earth is rapidly running out of energy. Paul Krugman recently wrote a New York Times column about a future of continuing hikes in the price of oil owing to the "intensifying competition for a limited world oil supply." Krugman famously predicted in the early 1980s that oil prices would surely rise--right on the eve of the steepest decline in oil prices in history. Even the Bush administration is investing billions of tax dollars in hydrogen-cell cars in anticipation of the end of oil.

But don't despair: This is at least the fifth time in a century that "experts" have falsely predicted the planet would soon be running on empty. In the 1920s, many geologists said that oil supplies would run completely dry within 50 years. In the early 1970s the Club of Rome predicted oil would cost $100 a barrel by the year 2000--they were off by a factor of about 4. And Jimmy Carter declared during the 1977 OPEC crisis that "we could use up all of the proven reserves of oil in the entire world by the end of the next decade."

Now for a quiz question: When did the United States and the world possess the largest reserve of oil? The answer is, today. When it comes to recoverable oil, we have more, not less, today than we did 20, 50, or 100 years ago. And we will have more, not less, 20 years from now, thanks to advances in technology that always outrun the pace at which we use the commodity.

Despite the recent surge in prices caused by the Iraq War and the supply cutbacks by the OPEC cartel, oil is still cheap by historical standards. (See the accompanying chart.) In other words, we have to work less today to purchase oil than any other generation had to--which is really the best measure of scarcity. Think gasoline is expensive today? In the 1920s our grandparents paid, in today's wage-adjusted prices, $10 a gallon. In today's prices, oil cost $100 a barrel in 1900. Energy prices have been falling almost continuously (with some notable exceptions, such as the 1970s) ever since man first discovered that this black gook could be used for fuel. In many areas of the country Americans pay more for a gallon of bottled water than for a gallon of gas.

The late economist Julian Simon proved two decades ago that oil is not a "finite" resource, because the human mind is infinite in its capacity to find new oil or energy substitutes. In the 1950s, for example, no one thought it was possible to get oil from the bottom of the sea. By 1965 we had the technological capacity to drill 60 feet into the sea bed. Today's rigs can drill more than 10,000 feet down. Moreover, new sources of oil are being discovered. One of the richest oil fields in the Western hemisphere is up in Alaska, at Prudhoe Bay. Geologists recently discovered there is at least twice as much oil in this deposit as originally forecast. No one knows for sure how much oil is available within the Arctic National Wildlife Reserve, but this could amount to one of the most lavish oil deposits in the world--yet the Left refuses to allow drilling. Krugman foolishly writes that "no major oil fields have been found since 1976, and experts suspect that there are no more to find." Krugman should be nominated for President of the Flat Earth Society. He sounds like the head of the Patent Office who, 100 years ago, said that just about everything that could be invented, has been invented.

It turns out that capitalism is the best way to ensure an abundance of oil at affordable prices. The price of energy will continue to fall over the long term, if only our meddling politicians understand that we already have a national energy policy that works quite well, thank you: It's called the free market.

ENERGY IS STILL CHEAP AND ABUNDANT

PRICES ADJUSTED TO 2004 WAGES

                                  1900   1950   1980   Today

Retail Gasoline ($/Gallon)               2.92   2.85   1.84
Crude Oil ($/Barrel)              114    27     49     40
Residential Electricity (C/kWh)   73     25     8      10