Energy Transition vs Law of Supply and Demand

The law of supply and demand is the foundation of economics since Adam Smith. However, In a 2021 article by George Franklin Gilder, American investor and economist wrote: "In classical theory, the supply curve — signifying the relationship between prices and volume — rises as prices rise. In a static system, only higher prices induce more supply. In learning theory, the supply curve rises as prices drop. The progress of learning unleashes a spiral of ever lowering costs and expanding volumes, which in turn elicits more learning. …. information theory “inverts” the supply curve."

Both theories are playing out in real time with great significance to the current energy transition debate.

On the one hand, energy in its traditional forms, such as oil and gas, behaves like a commodity, where prices are driven by supply and demand. Yet, as the world moves toward renewable energy, the dynamics of technology adoption take on an increasingly significant role, shifting the market from one governed by scarcity to one influenced by learning and innovation.

Commodities: Constrained Supply and Demand Sensitivity

Commodities, such as oil, gas, and metals, closely adhere to the law of supply and demand. The production of these goods is typically constrained by natural availability, seasonal cycles, and geopolitical factors. Consequently, when the price of a commodity rises, consumers often reduce their demand or seek alternatives, while a price decrease leads to increased consumption, as the law of demand predicts.

This supply constraint makes commodities more prone to what economists refer to as "inelastic supply." Because these resources cannot be easily scaled, increased demand often results in price spikes rather than expanded supply. For example, fluctuations in crude oil supply due to geopolitical tensions or natural disasters can significantly drive up prices, leading to a direct impact on global consumption. Commodities thus display a volatile sensitivity to market conditions, reinforcing the classic price-demand relationship.

Technological Adoption: Learning and the Experience Curve

In contrast to commodities, renewable energy —such as solar, wind and battery — Is currently driven by a completely different market dynamic. They do not follow the traditional law of supply and demand. Instead, they benefit from the experience curve: as demand for a particular technology grows, production processes improve, and economies of scale lowers the cost of production, making the technology more affordable to a broader range of consumers. In turn, the rising demand leads to further lower production costs, enabling these technologies to become even more accessible. Learning and scalability in fact inverted the typical supply-demand relationship, creating a "virtuous cycle" in which increased adoption of renewable technologies fosters greater cost reductions, encouraging further demand and accelerating the transition to clean energy. In other words, supply creates its own demand, supply is the demand.

Extensive studies have demonstrated that learning curves hold well across the entire economy, for everything from airplane production to automobile manufacturing, from poultry eggs to renewable technology deployment. Each additional unit produced and consumed enhances efficiency—producers learn to produce more effectively, while consumers become more adept at using the products. This translates into a cost reduction by between 20 and 30 percent for every doubling of total units produced.

This iterative learning process can fundamentally alter market dynamics. For instance, as demand for solar panels has grown, manufacturing has become more efficient, economies of scale have developed, and overall costs have fallen dramatically. This pattern defies the law of demand, as rising demand does not increase costs—instead, it drives them down, making renewable energy a viable competitor to fossil fuels.

What does this mean for businesses and policy makers? While fossil fuels will continue playing an important role in the near future, many have underestimated how strong and how fast this compouding learning curve effect has played out for energy transition. As an example in the following graph created by Rock Mountain Institute, many organizations including International Energy Agency have consistently underestimated the speed of growth of renewable energy.

Conclusion

As the society going through energy transition, it is critical for businesses, investors, and policymakers to understand these differences. Commodities respond predictably to supply constraints, while renewable energy technologies introduce a dynamic model where learning and scalability enable cost reductions with rising demand. This duality in the law of demand underscores the evolving nature of energy markets as society transitions toward sustainable energy solutions.

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