As the world finance system disintegrates and the price of oil wafts below $80 a barrel, we are about to see yet another instance of Market Magic.

Demand for oil is falling as world economic activity sputters. Many analysts are now forecasting that the barrel price could go as low as $50 to $60 in the next few weeks.

Meanwhile, however, the marginal cost of bringing a new barrel of oil into production has been rising in recent years, and now stands in the range of $80 to $100. Therefore, as the spot price and futures prices weaken, efforts to develop new oil sources will be mothballed.

At the same time, some recent adaptive efforts to develop renewable energy and energy efficiency, spurred by $150 oil, are getting slammed by lower oil prices and the drying up of investment capital.

Once petroleum supply levels have fallen sufficiently (OPEC is now trying to decide how much production to take off-line), oil prices will start to recover and will eventually soar. But the response this time (by way of investments both in new oil production capacity and alternative energy sources) will be weaker.

Price volatility discourages helpful societal responses.

Markets may be efficient ways of allocating goods and services in “normal” times, but when essential goods become scarce, or the rules of finance get bollixed up, the market can act in ways that are anything but rational.

The only way to navigate the energy transition while avoiding societal collapse is through a planned process that takes charge of the price mechanism in a way that encourages adaptation to the ultimate reality of dwindling supply. Adoption of an Oil Depletion Protocol would be a good first step in that process, followed by massive government support for investment in renewable energy, electric public transit, urban redesign, home insulation, and agricultural transition.

image: world bank