This is the type of situation in which a good understanding of economics helps. When I was in high school (1975-76 year) the topic for debate was "the energy crisis." We had boxes of quotes about oil running out. Then it was always 2000 that was going to be the disaster. All the experts were saying that by 2000 there would be no more oil. Of course, in the 1980s the price of oil dropped dramatically.  In 2000, I am sure that you all filled up your gas tanks. Chart of the Day sent this chart of inflation adjusted oil prices out this week.

http://www.chartoftheday.com/20060324.htm?T

Will oil run out some day? Well assuming that nature is not creating oil fields faster than we use oil, the answer for practical purposes is yes. But, what happens when the supply of oil falls? If you look at the supply and demand model, you notice that the supply curve shifts to the left the price of oil increases.

Now at this higher price, the oil companies start making higher profits, just like we saw after Katrina. These hire prices and increased profits signal to the rest of the business world that this is a place where higher than normal profits can be made. These high profits are a big incentive for oil companies to invest in methods for finding and extracting oil, which were not practical before. The cost of these methods made them unprofitable, but with higher prices they become profitable.

These companies and other companies also see that higher cost, alternative sources of energy, which could not previously compete with oil, may now be profitable with the higher oil prices. So, people work on ways to extract shale oil and oil from tar sands. They consider ways to create oil substitutes from corn and bio mass. They look at other energy possibilities like wind and solar power. The price mechanism brings about the solution to the problem. It is a big flashing light to the economy to bring resources here to solve this problem. The more acute the problem becomes the hire the price of oil and the brighter the flashing signal to the economy to shift more resources into solving the problem.

But, say that the response is to interfere with the market. Say that Congress decides to impose a "Windfall Profits Tax" to punish the oil companies for price gouging. Now, the oil companies do not have the resources to plow back in to the problem of figuring out how to recover more oil or develop alternative sources. Probably anyone looking at something similar to oil thinks twice, wondering if they are successful “will they also get caught up in the same deal?” “Will their profits be taxed away?” Remember, others are willing to move their resources into the energy sector, because they believe that big profits can be made. If they are worried that such profits will be taxed away, they will not invest their resources in energy.

What if the response is to impose price controls? What if Congress says gasoline cannot be sold for more than $2.00 per gallon? Well, Congress has just flipped off the switch to the price signal. There is no big blinking light saying put resources here to make a lot of money. In fact, resource will be exiting the oil sector of the economy and going to other sectors where a profit can be made. At the same time, more people will demand gasoline at $2.00 per gallon. So, with a lower supply and higher demand, you have a shortage. People get to sit in long lines and drive up to empty pumps.