A second important effect of rising prices is to stimulate the production of substitutes for the exhaustible resource. Sooner or later, the world is going to run out of oil. The activities we use oil for today will someday have to be done using some other means, or else not be done at all. As oil gets more expensive, entrepreneurs will have strong incentives to discover alternative ways of carrying out the activities that require oil. Despite the uncertainty about the volume of existing oil reserves and about the future costs of alternative technologies, markets for oil and other exhaustible resources function remarkably smoothly most of the time.
Severe disruptions are usually the result of politically related cutbacks in supply.
Apart from supply interruptions of this sort, perhaps the greatest threat to the functioning of these markets are policies that attempt to restrain the natural growth of exhaustible resource prices. In an attempt to maintain affordable supplies of energy for the poor, the Carter administration implemented a complex system of fuel price controls during the late 1970s. By keeping energy prices well below their equilibrium values, we jeopardize the gradual transition between energy sources that is characteristic of the market allocation. Far better to let energy prices be governed by market forces and find some other way of easing the burden on the poor. All exhaustible sources of energy will eventually run out, at which point we will be forced to rely on renewable sources of energy.