The subject of oil has generated a heated debate on the Hendon Mob forum recently. It all started when someone named 'Big Brother' posted a message titled 'Wooohooo The Green Party'. It read:
Just Listening to Sky News where they were talking to a Spokeswoman for the Green Party.
Interviewer: "What would you do about the taxation on oil?"
Spokeswoman: "We would increase the taxation on oil and introduce a package of measures to get people to make better use of the public transport system"
Perfect! just what we wanted to hear. We're not getting ripped off enough! Has this bitch ever used the "public transport system" on any kind of semi-regular basis?
A poster named 'Brad' replied:
In 20-30 years from now when basic commodities like paints, plastics, medicines and packaging, are priced beyond most peoples means, and we've contributed to catastrophic climate change (assuming by then it hasn't already happened), we may wish that governments had acted sooner to control the crazy burning of oil.
and on another occasion he wrote:
If government including the US started taking a long term view instead of stealing from future generations (with cheap oil and a massive national debt), then we wouldn't now be facing an impending energy crisis and higher interest rates. Personally I feel that oil should be regarded as a global resource, should be taxed at a global level not a national level, and at least some of the proceeds reinvested into finding alternative energy sources.
Personally I'm sceptical about whether anything needs to be done for many years to come. I believe that normal market mechanisms are sufficient to ensure that alternative energy sources are explored. I certainly don't believe that oil should be taxed in order to prevent it being stolen from 'future generations'. Why is it theirs any more than it is ours?
So I wrote back in a post with the intentionally sarcastic title 'What have future generations ever done for us?', in which, among other points, I said:
It's true that the supply of oil is finite. but we don't know how much of it there is and past attempts to quantify how much remains have been laughably off track. I recall being worried when I was a child that it was going to run out a few years after 2000. That seemed to be a common worry. Since then more has been discovered and we are warned that it will run out in 30 years time, just like I was being told as a child! Here are some examples of past false warnings:
In 1914 US Bureau of Mines estimated reserves at 10 years.
In 1939 Department of the Interior gave a 13 year projection.
In 1972 "The Limits to Growth" predicted we'd be out of oil in 20 years.
In 1987 Paul Erlich (best-selling environmentalist) said the oil shock would come in the '90s.
and I ended with saying:
I want to attack the ridiculous idea that we are stealing from our children's future.... Human inventiveness will see us through the challenges of the future and our best policy is to trust the free-market mechanisms that we have to tell us when to reduce consumption, increase production, switch to alternatives or otherwise innovate. There is certainly no point in reducing living standards now out of fear.
Regular readers of the Hendon Mob will know that Brad was unlikely to leave this unanswered. He replied in a long post from which I post the following extracts:
Taxing energy helps counter the massively wasteful trend of more and bigger SUVs. And now the latest fashionable trend is patio heaters each of which are said to consume as much energy as a speeding truck!
Free markets, David, are not a panacea for everything as you seem to think. Free markets serve the "as long as I'm alright Jack" culture very well, and I'm generalling in favour of a non-interventionist approach. But what is in the best interest of the individual is not necessarily always in the best interests of society, the environment or the human race. The wasteful consumption of oil being a perfect example.
Economists have a term for the kind of situation that Brad describes where one person's consumption or production of something affects another person. They call these losses and benefits 'Externalities'. An obvious example of an externality is pollution. Another might be passive smoking. Legislation exists to make the polluter pay for the cost of his pollution, which would not otherwise be factored into his profit and loss statement. Cigarette smoking is being banned in public places, because otherwise the lung damage that cigarettes cause would not be purely confined to the person who chose to smoke.
But oil consumption does not merit such intervention. It's not a case of 'Externalities'. It ridiculous to say that my consumption of something that is finite in supply is harmful to those yet unborn. Why should it be reserved for them, when their use would rob their descendents?
Brad posed the question: Don't you think it would be better for them to use their "human inventiveness" to work out ways to save energy now - rather than when it's forced upon them?
This response assumes that only government intervention could prevent such a catastrophe. This isn't true. If production were to fall as demand stayed stable or rose, people would examine other sources of energy, especially renewable ones. Why panic now however when oil is still affordable? Investing resources and scientific research to this problem comes at the cost of the money invested and the potential benefits to accrue from the same scientists working on another more pressing problem. The end of oil is several decades away and scientific knowledge could change so much between now and then that our investment could be pointless.
I wrote back: What good would it have done people in the 1930s to try and guess the future direction of the telephone business? Would they have guessed that they should be installing fibre optics instead of copper? Never! It's completely pointess. Oil producers are prepared to sell at current prices. Either buyers pay those prices or they don't. Introducing artificial incentives is completely pointless. In short, let's wait until the problem is forced on us because that is the first time we need to worry about it.
I began to feel that it might be pointless to reason Brad out of something that he wasn't reasoned into. Everyone has their own degree of natural optimism or pessimism. For some the glass is half-full. For others it's half-empty. So I said:
Many debates end up being a split between Roundheads (puritans) and Cavaliers. You are a puritan. Deep down you fear that happiness in the present leads to misery later.
I was getting irritated because he mentioned SUVs (Sports Utility Vehicles). They are the bete noire of environmentalists and other puritans. They are said to guzzle gas and worse still, they are pleasurable to own and drive - something guaranteed to annoy the 'There'll be hell to pay for this later' crowd.
Brad was in fine form with his next reply:
... maybe people should think twice about making lots of long distance leisure trips. Maybe it's not a bad idea for them to consider videoconferencing or other alternatives sometimes instead. Maybe it's a good idea for people to be encouraged to live closer to family, and closer to work? Maybe that would help conserve the planet's resources.
Why stop there? Maybe we should all quit what we are doing and invent a pill for all known diseases. I love Brad's idea about videoconferencing as a replacement for long-distance leisure trips. Why bother taking the kids to Alton Towers or Disneyland when you can videoconference the rollercoasters in their bedrooms? A hologram of Mickey Mouse is sure to please them just as much as a visit to the real thing.
He nails his colours to the mast with:
...bingeing today likely will lead to discomfort in the future. I believe that discomfort will be felt by a sudden and damaging shock increase in oil prices to high levels. Governments have the power to graduate that shock and prepare the world for it gradually, and at the same time invest in high-tech enterprise, and alternative energies.
And here's where it gets interesting, because if he believes that oil will be much dearer in the future and that governments are not doing enough about it now then there is a profit opportunity. At the time at which this debate was taking place, oil was trading at roughly $40 per barrel. If you think that it will be $100 in 10 years time then don't just sit there reading this, do something! Buy all the barrels you can get your hands on. How else will you get a return of 150 per cent over 10 years? It's not an option at the building society and none of the Post Office's National Savings products can deliver this. Get cracking!
To be fair to Brad, he is doing this in a manner of speaking. He tells us I'm long Jul Nymex Light Crude at #2 a point, but sadly neglects to mention the price at which he went long. This is a short term position but he can roll this over when the contract expires and keep doing this for years if he wants. It's easier and cheaper than buying the oil itself and paying for its storage for a decade. I have no idea how long he intends to hold this position. At present all he's really doing is betting on Al-Qaeda, as without the fear of terrorist attacking Saudi refineries, the price would be $4 to $8 per barrel cheaper (source: The Economist, May 22nd, Page 11).
And if he's long at $40 or higher, he's also doing his nuts at the time of writing this, as this graph will demonstrate:
Click here
_ DY
at 8:00 PM BST
Updated: Thursday, 10 June 2004 8:07 PM BST