Peak Oil paranoia on path to presidency

Last week, the Financial Mail led with a lengthy cover story on the oil price and its implications for the South African economy. It contains some very enlightening facts, such as a chart which shows that for every ten units of fuel South Africa uses for a unit of production, the United Stateas uses only nine, and both China and the world average operate more efficiently, at eight units. Ours is a much more energy-intensive economy than even the United States. (So why exactly there’s a windmill on the graphic is beyond me.)

Our consumption of oil since 1980 is up by 60%, compared to 20% in the US, and minus 20% in many European countries. In an energy intensive economy that actually grows (unlike, say, Europe), this is to be expected, and in itself is a positive sign. But the article is right to point out that both of these facts put us at a comparative disadvantage when global oil prices rise.

What the article neglects, however, it to consider consumption as a function of price, which in South Africa is controlled by the state. Our fuel, like our electricity, has been kept cheap compared to competing economies, which means that we can — or could, until recently — afford to favour energy over other resources such as time, labour, or high-technology, to drive production. (Much of this is because our fuel tax is comparatively low. Still 27% too high, of course, as pointed out in a previous post, but much less than in many other economies.)

What is disappointing is that instead of a focus on how businesses can reduce fuel as a component in production, or a discussion of price, price controls and how they might affect both suppliers and consumers, the article spends much of its time talking up the alarmist scenarios of the Association for the Study of Peak Oil and Gas, known as ASPO. Price deregulation is relegated to a short sidebar by a different writer, which predictably notes that lifting price controls in a steeply rising market is likely to be a political non-starter.

ASPO is an outfit born out of “Peak Oil” alarmism, a group of assorted environmentalists, socialists, economic illiterates and special-interest lobbyists, who have been whingeing for decades about a looming peak in oil production. I’m pleased to see at least one oil company CEO, Tony Hayward of BP, has taken on ASPO president Kjell Aleklett, in a wager reminiscent of the famous bet between Paul Ehrlich and Julian Simon, on a similar subject: the scarcity of natural resources. Simon won that bet handily, and I’d urge Hayward to take Aleklett’s complaint about the low prize pot (or rather, barrel) at face value. Double up. Go all in. Maybe set something up so others can buy shares in the bet too.

Fair enough, the ASPO alarmists, headed in South Africa by one Simon Ratcliffe, have been asked to inform the Thabo Mbeki presidency’s scenario planning exercise about their whacky, apocalyptic prophesies, so perhaps their arguments deserve to be better known, lest they become deluded government policy. But one would expect a finance publication to be a little more critical in its assessment of ASPO’s claims.

The Peak Oil paranoiacs say that much of what they predicted appears to be coming to pass. Well, that’s not quite true. They predicted that we’d run out of oil and have a crisis. Or more accurately, that we’d reach a production peak and then have a crisis. Price never really featured in Peak Oil alarmism until the oil price began its most recent run-up, when it became a convenient “told you so” data point.

The obvious response to their argument has always been: it doesn’t really matter if we’re running out of underground oil, if it becomes more costly to exploit, or if Americans are too stupid to use their own underground oil resources.

If scarcity does not increase, the case is trivial. There’s no problem. If it does increase, however, prices will simply rise. If prices rise, consumers will be forced to become more efficient, and more uneconomical resources such as tar sands and alternative forms of energy will become more profitable. Canada’s vast shale oil deposits, previously hard or impossible to mine, are being exploited at full steam (if you’ll excuse the pun). Even at the current meagre recovery rate of about 10%, they are second only to Saudi Arabia in their bounty. If the extraction technology improves, they could double proven global oil reserves. Their exploitation became economical only recently, so this kind of expensive production wasn’t even considered by the Peak Oil doomsayers at the time. Their simplistic argument, if I recall correctly, went something along the lines of “if it takes more than the equivalent of a barrel of oil to extract a barrel, it cannot be economically extracted”. Better technology, higher prices, economies of scale, or other forms of energy, never entered the static, linear systems in their muddled little heads. But then, perhaps that’s because they won’t profit from finding and producing energy. I sure hope they’ve sold their shares in the stupid companies that are flocking to Canada for a piece of the action.

So, the price mechanism works its magic once again, and the “crisis” is a non-event. Scarcity is the very reason the price mechanism exists; without scarcity, it couldn’t exist. Price has always managed to distribute scarce resources to where they are most productive. It has always motivated people to find alternatives, or find better, more efficient ways of doing things.

But that’s not what the ASPO people say. They posit two “scenarios”. The first is “business as usual”, in which all of us are complete idiots and sit around ignoring scarcity and rising prices until we starve or kill each other (or both). As if we aren’t smart enough to economise or seek alternatives. Every day, you can hear people talking of ways to save fuel, including fairly extreme measures like moving closer to work, or working from home. Why would fuel be something unique? Why would consumers be insensitive to price rises until there is “a big oil shock”?

Shocks are only likely to occur in regulated markets, where producers and consumers are not able to adjust to surpluses or shortages, because of artificial restrictions, prices, taxes or other market distortions imposed by the state. Last year, the oil price took a breather, to the consternation of market watchers, who found it hard to comprehend a market so badly distorted by regulation, subsidies and outright extortion by governments.

The other ASPO scenario is wholesale restructuring of the economy, central-planning style. A vast web of quotas, rations, subsidies and taxes should be created, all with draconian legislative force. Combined with “a huge investment” in energy austerity and alternative energy sources, this, ASPO says, will solve all our problems and make us live happily ever after. Why it considers expensive fuel a “crisis”, but shrugs off a “huge investment” as just some bitter medicine we’ll have to swallow, is never quite explained. And what happens if our “huge investment” turns out to be misdirected, is never considered. No, the socialist panacea prescribed by Dr ASPO will cure all our ills. After all, the government knows what is best, and can make our commercial choices for us, since we’re too stupid to look after ourselves.

Let’s assume the underlying assertion that supplies are on an irreversible, long-term, downward trend are true. They may well be (beyond the trivial fact that no resource is infinite), though that is far from the only reason prices are rising, and anyone who makes firm predictions on when critical depletion would make oil unviable as a source of energy is either brave or stupid or both. But that oil will one day be too expensive to profitably extract is not an unreasonable expectation. That this will inevitably be followed by “societal and economic disintegration”, however, as Ratcliffe once told MiningMX.com, does not follow.

The fact that ASPO’s preachers make only two prophesies is very revealing. Both are extreme. One is designed to put the fear of God into policy makers and the voting public, so they’ll buy the other as their only salvation. ASPO looks suspiciously like a lobby for all those companies that today can’t make an honest buck selling alternative energy solutions or more economical equipment. I hope the government treats them with as much skepticism as it would treat the oil industry: as just another pressure group, lobbying for preferential treatment for their vested interests.

If the presidency accepts ASPO’s doomsday scenarios as likely, and formulates policy accordingly, I sure hope you’re in on Tony Hayward’s bet. Spare cash will come in handy in a socialist Utopia.

The fairest and surest way to resolve this “crisis” is simply to set the market free. Deregulate prices, even if they rise as a result, and even if they put inefficient companies out of business. People will make a plan. They always have. The world didn’t end when the horse became obsolete, or electricity replaced gas. It became better, healthier, more productive. Let alternative solutions to high-priced fuel fight it out on a level playing field, where nobody is forced to use anyone’s solution, no solution is unfairly advantaged or held back by subsidies or taxes, and no nanny-state restrictions are in play. May the best solution win.

(First published on my own blog.)