The Real Question: Should Oil Be Cheap?

Amite Foundry & Machine is one of those gritty manufacturers at the heart of American industrial might. The Louisiana company’s fiery 2,800F furnaces melt down hunks of recycled scrap steel and recast them into massive parts for trucks, oil rigs, and other heavy equipment. Amite even turned 30 tons of metal from the World Trade Center into the bow of the Navy’s USS New York. But the company suffered as manufacturing moved offshore, and the town of Amite, 65 miles north of New Orleans, with its faded white clapboard churches and a main street that time forgot, has suffered along with it.

No more. Amite Foundry’s orders jumped 25% in 2007 and 30% more so far this year, spurring the company to hire dozens of workers. Why the turnaround? The price of oil. With the cost of a barrel of crude well north of $120, anything that can provide additional supplies, alternatives, or gains in energy efficiency is booming. One example: Canada’s oil sands. They’re boosting sales of Caterpillar’s (CAT) 380-ton-capacity mining trucks


Obviously, the soaring cost of energy is causing plenty of pain for Americans, especially at a time when they’re being hammered by declining house values and rising food prices. The pain isn’t about to ease, either. “We haven’t yet seen the cost of heating,” warns R. Neal Elliott of the American Council for an Energy-Efficient Economy. That will kick in this fall and winter, with dramatic increases in the prices of heating oil, natural gas, and even electricity.

But Amite 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