Price shocks and oil stocks - why we will never run out

The recent 40 per cent rise in the price of oil is shocking it's back above $72 US a barrel again this past week. The recent rise in the cost of filling your gas tank is also shocking, although it's still not quite like last summer when oil was pushing $150 US a barrel.

And when I say "shocking" you may take it in two ways at once.

In common parlance, one meaning of shock is a horrible surprise. A pleasantly literal example was when my then-eight-year-old son was petting a donkey and he accidentally touched an electric fence. Not so pleasant for him, of course, but educational.

The word shock has another meaning in economics, although economic shocks are also educational. In economics, a shock means a big change that hits the economy so suddenly and so hard that everyone is left reeling.

Yet the common meaning and the economic meaning are in some ways pretty similar. Here we are coasting along. We know the price of things. We may or may not keep formal books, but we know roughly how much we have to pay for rent, for gasoline, how much we have left over to pay for play. We are relaxed. We are, if you will, eight-year-olds petting the donkey's soft and fuzzy nose, scratching between his ears that dangle humorously at odd angles, wondering if we might want to find some weeds to feed him, when suddenly, "Gaahhh!" we get the shock.

When gas prices suddenly shoot up, just as my son's first reaction was to snatch his hand away from the fence, your first inclination is to change something to relieve the pain.

Unfortunately, by definition, an economic shock is one that we cannot adapt to quickly. Pretty theory shows straight-line relationships, graphs with smooth curves. But as we saw last summer, and are seeing again now, the world is a collection of fractal zigzags of shocking highs and soothing lows.

When the shocks are repeated again and again, like some poor rat in a lab experiment, it teaches us to be careful.

We have heard predictions that we are running out of oil. We have also heard that oil will soon be too expensive to burn. Both those things may be true, but rest assured, we will never run out of oil. The shocks are helping, and there are some secret champions waiting in the wings to rescue us. Those champions are what some economists call "backstop technology."

At any moment there are thousands of great ideas out there. But turning great ideas into useful technology is an expensive business. It also takes time.

The classic example was when wood in England was becoming too rare and too expensive to burn, just as the urban population was growing. Digging coal out of the ground and shipping it miles to where it was needed was absurdly expensive.

But coal production existed as a backstop technology.

As wood got more and more expensive, financial concerns got swept aside. The technology of coal moved from backstop technology, to expensive innovation, to commonplace. Not only that, digging coal stimulated even more innovations notably the steam engine, brought from backstop technology into commonplace to pump water from mines when hand and horse power became expensive and inadequate.

I recently read an article that said we were reaching the limits of automotive technology. The idea was that we were stuck with gasoline-powered cars and they were pretty well as efficient as they were going to get.

As someone who loves to read both history and science fiction, I find that view absurd. In only a few years we have all watched the Prius hybrid go from backstop to expensive innovation. Now as competitors enter the market the Prius is becoming commonplace. Toyota has geared up production, and the cars are an everyday sight in every city.

But there are more backstop technologies waiting in the wings. My family's new diesel wagon gets better fuel economy than the 1.6-litre wagon just snatched from us by terminal rust. There is talk of the same diesel efficiency being used in a hybrid.

Other innovations, such as long-life batteries and Shai Agassi's instant battery replacement technology, are at the backstop stage. When gasoline is so expensive that all of us have switched to batteries (or some innovation not yet invented), there will still be plenty of oil. It will just be a lot more expensive than the backstop alternative.

Adopting backstop technology is not just a matter of science and technology. As mentioned, stopping a shock is not just a matter of snatching your hand away. We are stuck with the SUV we bought three years ago. There are no hydrogen stations yet, no battery switching stations.

Adopting new technology also depends on the willingness of we humans to accept the change. There is always that voice in us that says, "If horses were good enough for Pappy..." or, "I've always driven an eight-cylinder truck...". Most of us are willing to withstand a lot of pain and spend a lot of money to avoid change. A change of generation helps.

But another helper is the shock. Shocks teach us a lesson. Smooth and gentle changes are like the proverbial frog resting comfortably as the water is heated gradually to boiling (please don't try this at home, kids). But shocks give us a taste of the terrible future.

And they remind us it is time to take action.

Don Pittis is senior producer of CBC News Business. He has reported on business for Radio Hong Kong, the BBC and the CBC.