Last week wholesale gasoline prices hit a historic low (Alas, not at the pump in Montana however.) and crude oil is just over $11.00 per barrel. But it wasn't supposed to turn out this way. On the first Earth Day, ecologist Kenneth Watt stated: "By the year 2000, ...there won't be any crude oil". And things got worse. In the 1972 book, Limits to Growth, we were told petroleum would be exhausted by 1992.

Such predictions continued. James MacKenzie of the World Resources Institute wrote in 1996, "....it looks as though...a shortfall in crude oil is now within sight. As this time approaches, we can expect prices to rise-markedly and, most likely permanently". What can we learn from these predictions of pending crisis and today's reality? First, let's review the predictions.

After the first oil shock of October, 1973 crude oil prices went to the previously unbelievable $10.00 per barrel, about $35.00 in today's dollars. This generated a plethora of dire forecasts. Civilization would collapse--unless governments took control. Silliness was in ascendancy. Montanans, with our great coal reserves, would become "the blue eyed Arabs". Twenty- eight huge coal fired generating plants would be build in Eastern Montana. The US Synfuel corporation was to spend over 106 billion dollars to convert coal to gas.

Nearly all competent economists dismissed these cries of doom. Their analysis during this period proved dead on. What did they understand that others didn't?

Like good ecologists, economists are trained to ask, "And then what? What are the predictable consequences of a given change?" In the case of oil, they understand a crucial point: oil supplies are a function not only of geology but also of technology and prices. When prices escalate dramatically, people suddenly face strong incentives to conserve and seek substitutes for what has become dear.

We saw this conservation process at work. Think of the improvements in insulation of houses, refrigerators, and the fuel efficiency of even large automobiles. Today's 5500 pound Suburban gets 18 mpg, about twice the average of 20 years ago. Consider the energy efficiency of today's windows. The improvements in manufacturing are even more pronounced. When the price of energy rises, people conserve. No economist is surprised by this process.

Now consider substitutes for expensive crude oil. In the 1970s we were, we really were, running out of natural gas. Why? Because the price was regulated at such a low level that no one had incentives to find it.

Natural gas was considered an accidental byproduct of oil discovery. When natural gas was deregulated in the 1980s, we were suddenly afloat in it.

What explains the current world oil glut? Why can't OPEC simply turn a valve and reduce supply? OPEC has come unglued as it members face incentives to cheat on their cartel and exceed their productions quotas. Exploration outside the cartel has exploded. And as oil prices plunge, firms must reduce the costs of exploration and production or lose money. They apply ever more sophisticated technology and move up the learning curve of using it. Hence, the world is awash in oil and prices are low.

Is this a good thing? Many of my green friends think it's not. They seized the energy crisis as a rationale to use the government to force people to change their behavior. In their view most people, the less enlightened, insensitive masses, are mesmerized by advertising. They too often want the "wrong" things.

They believe people should use mass transit, bike to work and play, and generally live lives of voluntary simplicity. The energy "crisis" gave them ammunition to impose their vision of how others should live. And any how, they claim, the current glut is a transitory phenomena. We will, they claim, soon run out of oil so the governments of the world should make people conserve the soon to be precious oil.

Of course, they're wrong again about running out of oil. We'll never run out of oil. Should oil again become scarce, people will conserve, substitute, and innovate. We'll see more solar power and God only knows what else. We will continue our long move from a carbon based economy to one based on hydrogen, an environmentally superior source of energy.

When relative prices change, people adjust their behavior. When property is secure and the market is free, material scarcity has never won a race against creativity and innovation.

John Baden was a member of the National Petroleum Council for two terms.