High oil prices are supposed to get people to use less, yet oil consumption continues to rise in many places. That could be because oil really isn't as expensive as it's been in the past, according to some ways of looking at it. A recent article in the Economist says that because Western consumers' incomes have risen considerably over the past few decades, oil prices would need to top $134 a barrel to have the same impact as prices in 1981. The price of oil was a mere $119 a barrel yesterday.

Oil, of course, dominates world economics and politics. But it's conceivable that some day, alternative fuels and other clean technologies, combined with the rising costs of extracting oil, could diminish petroleum's influence. But by that time, another scarce commodity--water--could come to dominate geopolitics, and venture capitalists are starting to take note.

The thinking goes like this. Biofuels are enormous consumers of water, says Jim Matheson, a general partner at Flagship Ventures, a venture capital firm in Cambridge, MA. And water is not always abundant where it's most needed. "So, increasingly you're going to see water as a scarce resource. I think it's going to drive not just economics but also a lot of geopolitical dynamics. So, we're trying to find technologies that can allow us to plug into this enormous value chain." He's interested, for example, in membranes and other water-treatment technologies that will allow biofuel-makers and others to reuse water. But he says there's a big challenge to making these new technologies successful. There has to be a way to scale them up to bring down costs. "The problem is that water is like the Internet. People love it and they use it all the time, but they don't want to pay for it," he says. "So the question is, how do you come up with a business model that actually works?"

One option, he says, is to develop technologies that can both clean up wastewater and extract energy from the waste, effectively adding value to the water. Matheson spoke as part of a panel on "green technology" investment at the Venture Summit East conference in Boston yesterday.

Although biofuels continue to have strong political support, they may not be a smart way to address global warming or wean countries off of oil. A new report from the Organisation for Economic Co-operation and Development (OECD), a respected international group with 30 member countries, including the United States, warns that increased use of biofuels will cause high food prices, won't do much to offset petroleum consumption, and is an extremely expensive way to reduce carbon-dioxide emissions.

The idea that as farmers grow more crops destined to become fuel, rather than food, food prices will increase, isn't new. The report adds that biofuels aren't worth the cost. For various reasons, biofuels will only account for 13 percent of liquid fuels by 2050, doing little to offset petroleum consumption. What's more, there are cheaper ways to reduce carbon-dioxide emissions. To achieve one ton of carbon-dioxide reductions costs more than $500 in subsidies in the Unites States. In contrast, a businessperson wishing to offset carbon emissions from airline flights can do so for less than $15 a ton. (Such offsets use efficiency measures, reforestation, and various renewable sources of energy to reduce carbon emissions.)

What, then, should be done about carbon-dioxide emissions from vehicles? Private offset programs will probably only take us so far. More-efficient gasoline and diesel cars, as well as electric vehicles and plug-in hybrids, can help. (See "Electric Vehicles 2.0.") Biofuels can still play a role, but government investment should focus on research on second-generation biofuels (for example, ethanol from grass and agricultural waste), since these could have a far greater impact on carbon emissions than, say, the ethanol from corn grain produced today. Ultimately, instead of mandating the use of biofuels--or any particular technology, for that matter--the government should instead put a price on carbon-dioxide emissions, and let the market sort out the best strategy.