THE BASIC ECONOMICS OF BREAKING WINDOWS:

The Real Question: Should Oil Be Cheap?: Expensive oil hurts, but there's a business case to be made for a floor under the price of crude (John Carey, 7/23/08, Business Week)

[A]mite Foundry's resurgence is just one of countless examples of a deeper truth: Expensive energy, in many ways, is good. Why? When the price of oil goes up, people will use less, find substitutes, and develop new supplies. Those effects are just basic economics. Things are so painful now, many economists say, because of the past two decades of cheap oil. Prices stayed low in part because they didn't reflect the full cost of extras such as pollution, so there was little incentive to use energy more wisely. If those extras had been counted, the country would be better prepared for both today's soaring prices and the day that global oil production begins to decline.

That's why there is growing interest, from both the left and right, in a policy that uses taxes to put a floor under the price of oil. Above a certain level—say $90—there would be no tax. But if the world market price dropped below that, taxes would kick in to make U.S. users pay the target amount.

Expensive energy is a powerful medicine. It may hurt when taken, but it brings long-term cures for a host of ills. It compels companies and people to put fewer miles on the car, ditch the SUV, or install more efficient heating, as Eastern Maine Medical Center in Bangor did: The hospital saves $1 million annually with a system it installed two years ago. Higher costs are beginning to nudge America away from its traditional traffic-congested suburban sprawl to denser, less car-dependent communities. Utah has a government-sponsored bike-to-work program. "When the Republican governor of the reddest state in the union is promoting bicycling as a preferred mode of transportation, you know people are paying attention to the price signals," says Keith Bartholomew, professor of urban planning at the University of Utah.

These changes are saving lives—fewer traffic deaths—and improving health as people get out of their cars. A study from Washington University in St. Louis suggests that 8% of the rise in obesity since the 1980s was due to low gas prices, which led to less walking and biking and more restaurant meals. Silicon Valley engineer Andy King parked his Chevy Suburban in favor of a bike for commuting and says he has dropped 35 pounds since February. "It's good for my body and soul," King says.

High energy prices also water the flowers of innovation, making investments in alternatives pay off and juicing the search for more oil. [...]

With oil demand slowing and supplies headed up, prices are off more than $20 from their July 11 record of $147.27. "I don't think anyone believes prices that high were here to stay," says Massachusetts Institute of Technology economist A. Denny Ellerman.

Just as the low prices of the late 1980s and '90s undid some positive effects of expensive oil, the mere possibility that prices could fall is weakening the market forces pushing toward greater energy efficiency. What really drives behavior is not the actual price, but the perception of where costs will be over the long term.