Irrational exuberance about alternative energy.

Commentary about business and finance.
July 22 2006 9:36 AM

The Prius Bubble

We're irrationally exuberant about alternative energy—but that's good.

(Continued from Page 1)

So, why isn't anyone panicking? In 2001 and 2002, when the postmortems of the dot-com era were written, it was easy to declare the whole thing a failure and a scam. But with the passage of time, another picture has emerged. In a process that has repeated itself throughout history—with the railroad and telegraph, for example—investment bubbles frequently kick-start new industries and leave behind innovations and commercial infrastructure that others can use. The fiber-optic cable and dot-com business infrastructure that was rolled out in the 1990s wasn't simply abandoned. Second-generation entrepreneurs and companies have used it to great effect. The excessive investment in infrastructure may have set off ruinous price wars in 2000. But it also led to the swift rollout of broadband and sharply reduced prices of Web-hosting and data transmission. Google, MySpace, Flickr, YouTube, and iTunes—all these highly successful, quality-of-life-improving businesses—were built on the wreckage of the dot-com era. As consumers, investors, and workers, in other words, we've all been enriched by the fruits of the dot-com boom. It just took a while.

A similar process may be unfolding now in the alternative-energy business. Many of these venture-backed alternative-energy firms will fail, and some of the publicly held ethanol stocks will turn out to be turkeys. But fierce competition will lead to price reductions in energy-saving equipment. The vast sums being plowed into research may lead to incremental improvements or revolutionary breakthroughs. And as more giant companies such as Wal-Mart become consumers of alternative-energy products and services, the industry will gain scale—a development that leads to price reductions for all consumers. So, let's hear it for the Prius Bubble.

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A version of this piece appears in the Washington Post Outlook section.

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