The Greening of the Planet

Cheap Oil, Good Times

Everyone has been agog over the rapid fall in oil prices.  No-one is quite sure when the bottom of the price barrel will be scraped.  Despite the Greenists dire predictions of  looming “peak oil” to hit in 2010, 11, 12, 13, 14 . . . and counting . . . which would have allegedly spelled the end of plentiful oil supplies, leading to rapidly ratcheting oil prices and economic doom, the opposite has happened.  (The Greenists, of course, trumpeted peak oil as an ideological rallying cry to force governments into investing other people’s money in “alternative energy”.  They were never interested in telling the truth about oil supplies.)

Now the world is awash with cheap oil.  You can draw a bath of the stuff, if you wish, and it will only set you back a nickel.  What is going on?

Firstly, there has never been a shortage of oil reserves.  Since new technologies have been developed to extract oil, such as fracking,  the world’s oil reserves have increased significantly.  Moreover, the United States has been sitting on oil reserves greater than those in Saudi Arabia which, for reasons known only to itself, it decided decades ago to “lock up”.  Which leads to the real reason oil prices stayed high for so long: the supply of oil was artificially constrained by states and government which thought themselves smarter than the average bear and which, being made up of our betters, decided that oil supplies should be constrained for our own good, mind.  Thank you, thank you, dear Papa Doc.

The oil cartel, OPEC was one such “beast”.  By deliberately constraining supply, world oil prices were ratcheted up, leading to massive wealth transfers from the rest of the world to OPEC members.  It was price fixing of the most crude sort.  The refusal by President Obama to build the Keystone Pipeline from Canada was another.  It has been an ineffectual, idiotic attempt to craft the world into the vision of our “betters” in an attempt artificially to engineer alternative energy sources.

But free markets always have a way of getting around artificial, hubristic, human imposed constraints.  As the price of oil rose, it justified investing in new technologies to extract oil in hitherto inaccessible places, such as shale.  What happened was that instead of a few more million barrels of oil at the margins being discovered, a vast ocean of oil suddenly became available for extraction.  But, worse still for the market cartels, the exploration had only just begun.  Who knows how much oil there is on the surface of the earth, awaiting extraction?  We don’t know.  But count on it being heaps.

Within a few short years, oil reserves pushed out to cover hundreds of years of consumption at present levels.  So much for peak oil.  So much for government planners and professional alarmists.  Their doomsday has not materialised.  We have been labouring under their rod through their artificial constraints of supply–all of us–but it was a vanity, a falsehood, a con.  The free market has broken the cartels down and shredded  the market controls of interfering, intrusive, regulative governments.

Where will the price of oil eventually settle?  We don’t know.  But it will settle, somewhere, when supply and demand come back into price equilibrium.  Already, supply is constricting at the margins now that the price of oil has fallen.  Oil which was economical to prospect and exploit when it was selling for US$100 a barrel is now uneconomic at US$50 a barrel.  Exploration plans and extraction plans are being scaled back, folded up, and put in the drawer until a time when prices rise again. 

Even in New Zealand–which has been a marginal producer, yet with unexplored, unexploited potential we are experiencing this reality:

Plunging oil prices have forced explorers to scale back plans in New Zealand, some have had to restructure and there could be a sharp decline in capital spending in a sector the Government has backed heavily. Around the world, explorers are pulling back on drilling programmes, rigs are idle and some companies are eyeing hiring supertankers to stockpile oil while prices are at six-year lows.

Oil prices dipped yesterday with Brent crude closing at US$47.57 and West Texas Intermediate hitting a similar trough at US$45.90 a barrel.  The drop came as Goldman Sachs sharply cut its forecast for 2015 oil prices, projecting the US commodity would hit US$41 a barrel in three months and US$39 a barrel in six months, down from US$70 and US$75 previously.  Listed New Zealand Oil & Gas says it is cutting back its exploration and the price plunge had the industry reassessing work programmes. [NZ Herald]

Meanwhile, falling oil prices will mean economic activity will eventually pick up again.  The wealth transfer from oil consuming countries to oil producing countries will ebb, leaving more resources and wealth for investment and expenditures at home.  Sure there will be a few casualties (Russia, OPEC countries, Nigeria, Scotland) whose economies have been built upon artificially high cartel-dictated prices for oil.  But there will be windfalls for oil importing countries such as China and Japan. 

As Sheik Yamani once astutely observed: “the age of oil will come to an end, but not for any lack of oil”.  Eventually, hundreds of years from now, oil-based economies will be replaced by alternative (cheaper) energy sources, leaving more expensive-to-extract oil in the ground.  It will happen naturally–and in an orderly fashion–without the need for a government planner in sight.  That’s the glory of the free market, which is really the glory of free men obeying God by going forth to subdue the earth and make it bud and bear fruit.

Finally, we must acknowledge the shrieks of horror emanating from the Greenists at the prospect of all those millions of tonnes of CO₂ being released into the atmosphere as a result of burning all those megatonnes of oil.  Right on.  The sooner, the better, we say.  All that CO₂ released into the atmosphere will help turn the globe into the greenest it has been.  Plant life will flourish as it never has before–and along with it, all the abundance of animal and bird life that depends upon green grasses, trees, and shrubs.

Drowning in Oil

Peak Oil, Where Art Thou?

The catastrophists have been warning for the past ten years of mankind approaching “peak oil”–that is, the time when oil consumption exceeds supply, leading to a drastic global shortage of energy.  Peak oil was supposed to have occurred around now.  Except . . . .

North America to Drown in Oil as Mexico Ends Monopoly

By Joe Carroll and Bradley Olson 
Dec 17, 2013 6:54 AM
Bloomberg News


The flood of North American crude oil is set to become a deluge as Mexico dismantles a 75-year-old barrier to foreign investment in its oil fields.
  Plagued by almost a decade of slumping output that has degraded Mexico’s take from a $100-a-barrel oil market, President Enrique Pena Nieto is seeking an end to the state monopoly over one of the biggest crude resources in the Western Hemisphere. The doubling in Mexican oil output that Citigroup Inc. said may result from inviting international explorers to drill would be equivalent to adding another Nigeria to world supply, or about 2.5 million barrels a day. 

Note: the lack of production and supply from Mexico was due to stupid, myopic, misguided protectionist policies in that country.  The shortage was an artificially induced situation, created by bad government. 

That boom would augment a supply surge from U.S. and Canadian wells that Exxon Mobil Corp. (XOM) predicts will vault North American production ahead of every OPEC member except Saudi Arabia within two years. With U.S. refineries already choking on more oil than they can process, producers from Exxon to ConocoPhillips are clamoring for repeal of the export restrictions that have outlawed most overseas sales of American crude for four decades. 

US oil production has suffered the from the same kind of Malthusian ignorance and misguided protectionism as Mexico.  The US government has systematically locked-up huge oil deposits in no-mining areas.  But developments in new exploration and oil production technologies (such as fracking) has allowed the private sector to boost its production substantially.  The pressure to remove the export restrictions upon oil produced in the US–another stupid, myopic, misguided protectionist policicy–will put the Obama administration in a bind.  Reflexively this is not what the president will like–being a warrior to stop global warming and all.  His best-case-scenario is to have oil priced at $1,000 a barrel so that wind power will become more economic. But that hand can only stop the leaks in the dyke for so long. 

An influx of Mexican oil would contribute to a glut that is expected to lower the price of Brent crude, the benchmark for more than half the world’s crude that has averaged $108.62 a barrel this year, to as low as $88 a barrel in 2017, based on estimates from analysts in a Bloomberg survey. Five of the seven analysts who provided 2017 forecasts said prices would be lower than this year.

The revolution in shale drilling that boosted U.S. oil output to a 25-year high this month will allow North America to join the ranks of the world’s crude-exporting continents by 2040, Exxon said in its annual global energy forecast on Dec. 12. Europe and the Asia-Pacific region will be the sole crude import markets by that date, the Irving, Texas-based energy producer said.

Rats.  Another looming catastrophe bites the dust.  But let’s never forget, this catastrophe was the result of illicit government overreach in both the United States and Mexico.  When governments get involved and meddle in areas in which they have no competence or divine warrant, bad things happen.  The unintended, unexpected consequences are the real catastrophe.

Douglas Wilson’s Letter From America

No Bureaucratic Shadow 

Culture and Politics – Politics
Written by Douglas Wilson
Wednesday, 20 February 2013

All the early returns indicate that the available supply of energy in North America is virtually inexhaustible. Using words like inexhaustible is problematic to Malthusians, but it looks to be a good description. Energy, it appears, is about as abundant as salt water. With the discovery of new reserves and the development of new technologies of extraction, it has become apparent that if we had an unregulated energy economy, we could drive back and forth across the country for pocket change on the gallon, and do so without getting permission from a single federal official. And that, at least to them, presents a problem.

So it will be important to watch how the Left, the avowed enemies of you staying warm and dry without their permission, will easily pivot away from all the old arguments in order to keep cheap and clean energy out of your house and car. It used to be “no blood for oil,” but when entrepreneurs said, “okay, we found plenty for us here,” the argument suddenly shifts, and we are talking about a bunch of other stuff. But the upshot of their objections is always against obtaining cheap energy.

They are against drilling in the Middle East — there are impoverished Third World nations affected. They are against drilling in Oklahoma — there are non-impoverished residents of Tulsa affected. And they are against drilling in the far reaches of the north — there are entertained and bemused caribou affected.

Charles Krauthammer recently said that liberals don’t care what you do, so long as it is mandatory. This is the real issue. A wealthy middle class (and energy costs are a big part of this) is a middle class that will be much harder for them to manipulate and control. Suppose for a moment that the vast majority of the populace had food, clothing, warmth, and so on, and it was all affordable and within reach. The first and most obvious fact about this state of affairs is that such a people would not need a bunch of government mongers hovering around them. Obviously intolerable.

So these people would rather us be poor and dependent upon them than well-off and independent of them. The government-johnnies want to offer everyone goodies . . . with conditions. But their conditions involve us becoming craven in various ways. That is a lot harder for them  to do when the free market offers a bunch of goodies . . .  with different conditions, things like enterprise, courage, hard work, and no hassles afterwards.

The thing to pray for is for energy innovators to outrun the regulators. This is comparable to the development of the Internet — which was long gone down the road before the graspers woke up to what was happening.

Another way of putting this is that advocates of free markets, which all consistent Christians ought to be, should be looking for entirely new areas for human freedom to operate in. This is a planet filled with opportunities, and most of them have never had a bureaucratic shadow fall on them yet. Why? Because no one has thought of them.

True Commitments

Gore’s Green Commitments

The hypocrisy of Al “do-as-I say,-not-as-I-do” Gore has been well documented.  The man whose personal global carbon footprint is bigger than Texas long ago lost all credibility–except amongst the credulous.  Amongst such, Al still has a devoted band of acolytes and callow tyros fighting the good fight for the salvation of mankind. 

Recently Al sold one of his unsuccessful businesses–a TV station.  This failed commercially not because of a lack of ardour and passion amongst those involved, but because there were no government subsidies on offer to make it pay.  Al deserves full blame for this lack of commercial success.  He broke his own rule of successful investing, which is: never invest in anything that does not have a taxpayer subsidy.
 

Al sold his failing TV channel to Al Jazeera–which is OK in itself since Al is a globalist of globalists–but the rub is that Al Jazeera has been grown out of petro-dollars.  Al sold out to the enemy–or that’s what his stunned band of acolytes believe. 

The New York Post documents the announcement of the sale to Al’s TV station staff:

Yesterday morning, the still shell shocked staff at Current TV was called to an all hands staff meeting at its San Francisco headquarters, which was teleconferenced to their offices in LA and NYC, to meet their new bosses.  That would be two of Al Jazeera’s top guys: Ehab Al Shihabi, executive director of international operations, and Muftah AlSuwaidan, general manager of the London bureau.  Ominously missing was the creator of Current, the self proclaimed inventor of the Internet and savior of clean energy, Al Gore, although his partner, Joel Hyatt, stood proudly with the Al Jazeera honchos.

“Of course Al didn’t show up,” said one high placed Current staffer. “He has no credibility. He’s supposed to be the face of clean energy and just sold [the channel] to very big oil, the emir of Qatar! Current never even took big oil advertising—and Al Gore, that bulls***ter sells to the emir?”

So the poor staff had been working frantically to raise ad revenue, but they had been tethered because they had not been allowed to accept dirty ad money from big oil.  But now their boss, the Green Crusader has stabbed them in the back by accepting cash from those rich Arabs whose sole source of moola is dirty oil money.
 
So much for the Green Crusader.  This is the problem when the acolytes genuinely believe, whilst their leader is merely posing (for commercial gain). The marriage was always going to end in tears.

How do they feel about Gore the savior of green energy now?  The displeasure with Gore among the staff was thick enough to cut with a scimitar.  “We all know now that Al Gore is nothing but a bulls***ter,” said the staffer bluntly.  We do stories on the tax code, and he sells the network before the tax code kicked in?

“Al was always lecturing us about green. He kept his word about green all right—as in cold, hard cash!”

And there is the money quote, if you would excuse the pun.  The only green Al is committed to is cold hard green cash, his–not yours.  

Creation’s Abundance

Energy and Ignorant Greenists

We are all familiar with the Greenist propaganda concerning “Peak Oil”.  It has been thoughtlessly trotted out as a reason to “invest” in alternative forms of energy: wind, solar, and tidal.  The case betrays the Greenists’ ignorance of economics, on the one hand, and their relentless penchant for tax and spend fiscal policies, on the other.

A knowledge of  economic history of energy development shows repeatedly that new energy sources replace current sources long before the current energy source runs out.  As Sheik Yamani of OPEC observed in the 1970’s, the steam age ended long before wood and coal ran out; likewise the oil age would end, long before oil ran out.  Yamani has been proved correct.  But the difference between a market led change (diminishing oil supply leads to gradually higher prices making alternative energy source development economical over several decades, providing time to develop a replacement infrastructure to deliver a new energy source in an efficient and lower-cost fashion) and government fiat led is that the latter results in huge market and economic dislocations, false starts and blind alleys, exorbitant waste of tax payers’ money, and massive economic costs–which we all have to pay for.  Greenist hubris and folly does not come cheap.

Think, for example, of the Greenist advocacy of electric cars which had very scarce and precious tax payers’ money thrown at it by the febrile Obama Administration, shaking in excited anticipation of demonstrating that “Yes, government CAN!”, only to see yet another government “Bridge to Nowhere”.  Yes, the technology for electric vehicles is proven, but horrendously expensive when the supporting and delivery infrastructure is taken into account.  The result: huge investment in the production of a few electric cars which nobody wants because the supporting infrastructure does not exist.  The upshot: another blind alley; another government boondoggle, another waste of other peoples’ money.  But at least those stupid, arrogant, messianic politicians believed well.

We digress. The oil age will eventually come to an end in the next two hundred years.  Long before then it will have been supplanted by a replacement energy source and surrounding infrastructure and technology.  The most likely candidate is gas.  The past few years have seen gas prices plummet as new and economically recoverable sources of gas have increased exponentially.  Consider this one example from the UK.  It turns out that in just one area of the Lancashire countryside sufficient gas reserves have been discovered to keep Britain powered up for fifty years.

Thought we were running out of fossil fuels? 

New technology means Britain and the U.S. could tap undreamed reserves of gas and oil 

By Nigel Lawson
PUBLISHED: 23:27 GMT, 7 December 2012

Thirty years ago, I was Secretary of State for Energy in Margaret Thatcher’s government, and one way and another I have been a close observer of the energy scene ever since. In all that time, I have never known a technological revolution as momentous as the breakthrough that has now made it economic to extract gas from shale.

Geologists have long known that shale — a finely grained rock created from compressed mud, which sits in layers — contains, trapped in it, massive amounts of gas, and in some cases, oil.

Dense rock: Energy companies must drill a well hundreds or thousands of feet deep to reach the layer of shale, which can be just 50ft thick

But getting it out of the ground is a tricky business. Below the North Sea, natural gas forms in sandstone and when a drill reaches the gas, it flows out.  But shale gas is locked in dense rock. Energy companies must drill a well hundreds or thousands of feet deep to reach the layer of shale — which can be just 50ft thick — and then turn the drill sideways to bore horizontally.

Water, chemicals and sand are pumped into the hole under enormous pressure until the rock cracks, allowing gas locked up in the shale to escape and flow upwards into the well.  This process is called hydraulic fracturing — or ‘fracking’ for short.

Until recently, the cost of extracting the gas has been prohibitive. But the combination of two innovative technologies — horizontal drilling and fracking to release the natural resources — has changed all that.
The consequences are difficult to exaggerate. Not just in terms of the economic benefit of a new and abundant source of relatively cheap energy, but in geopolitical terms, too.

Until now, the West has been heavily dependent for its supplies of oil and gas on an unstable Middle East and an unreliable Russia. Crucially, all that has changed because gas and oil-bearing shale is scattered throughout the world — including in Britain.   This has shaken up the old world order — and the global balance of power is being permanently transformed before our eyes.

The dramatic news emerged a few weeks ago that the U.S. will overtake Saudi Arabia as the world’s largest oil producer in 2017.  America is already the world’s largest natural gas producer, and it is estimated that, by 2035, almost 90 per cent of Middle East oil and gas exports will go to Asia, with the U.S. importing virtually none.

For decades, the West in general, and the U.S. in particular, has had to shape, and sometimes arguably to misshape, its foreign policy in the light of its dependence on Middle East oil and gas. No longer: that era is now over.  For decades, too, Europe has been fearful of the threat that Russia might cut off the gas supplies on which it has relied so heavily.

No longer: that era will very soon be over, too. Thanks to the shale gas revolution, the newfound energy independence of the West is a beneficent game-changer in terms of world politics as much as it is in the field of energy economics.  That does not mean the West can become indifferent to the threat of war in the Middle East, as Iran continues with its ambition to become a nuclear power, or to the threat of al Qaeda-inspired terrorism.

Nor does it mean that we can or should regard Mr Putin’s Russia as of no importance.

In his Autumn Statement on Wednesday, Chancellor George Osborne announced a new gas strategy designed to promote the fastest practicable exploitation of the UK’s shale gas deposits.

There is more to international politics than oil and gas. But what it does mean is that we are — or very soon will be — no longer in any way dependent on either region, and that the political leaders of both have lost their biggest source of global influence.

Hardly a week goes by without new shale gas and oil deposits being discovered in America. As these new sources of energy are developed and extracted, energy costs are falling because of continuing technological innovation and economies of scale. And there are sizeable shale gas deposits in the UK, too.

At long last, at least part of the coalition Government has woken up to the significance of the shale gas revolution.

In his Autumn Statement on Wednesday, Chancellor George Osborne announced a new gas strategy designed to promote the fastest practicable exploitation of the UK’s shale gas deposits.  He explained: ‘I don’t want British families to be left behind as gas prices tumble on the other side of the Atlantic.’  In years to come, this may well be seen as a major turning point for the UK economy, when everything else in this year’s Autumn Statement has long been forgotten.

Gas, in liquefied form, is a globally traded commodity, and we will benefit from the cheap gas that is likely to transform the energy market for the rest of this century, wherever it is produced.  But transport costs can be significant, and the greatest benefit for the UK economy will clearly come from the development of our own indigenous shale gas deposits.

These are early days, and we do not yet know how much commercially exploitable shale gas there is in the UK. But the signs are encouraging. The first large discovery to be explored, the Bowland shale under the Blackpool area of Lancashire, turns out to be a thicker seam than any in the U.S.  The company behind the exploration has announced that Blackpool is sitting on one of the biggest shale gas fields in the world — with a reserve of 200 trillion cubic feet lying under the Lancastrian countryside. 

To put that figure in perspective, it’s enough gas to keep the UK going for 50 years and create more than 5,000 jobs.

There are other known deposits throughout a large part of the UK and this promises to be as important for Britain as the discovery and development of North Sea oil. It could even be bigger than that.

Hot property: Blackpool is sitting on one of the biggest shale gas fields in the world with a reserve of 200 trillion cubic feet lying under the Lancastrian countryside

Meanwhile, shale gas production in the U.S. has rocketed from virtually nothing to 20 per cent of its gas supply in less than a decade. As a result, the price of gas in the U.S. has collapsed from $12 per thousand cubic feet in 2007 to around $3 today. Currently, known shale gas reserves alone will supply the U.S. with more than 100 years of gas at today’s consumption levels. By 2035, almost half of all U.S. natural gas output is projected to come from shale. 

Over the past couple of years, huge shale reserves have been identified throughout Europe, Latin America and Asia, too. In Europe, the chances of finding shale gas are, from a geological perspective, as good as in the U.S.  For the world as a whole, technically recoverable gas resources are now conservatively reckoned to amount to around 16,000 trillion cubic feet. In short, as a result of the shale revolution, the Earth can now provide us with about 250 years’ worth of gas supplies.

The so-called ‘peak oil’ theory, which suggests that within the foreseeable future the world will run out of fossil fuels — coal, oil and gas — has never looked more absurd.  While the world’s shale gas reserves appear to be massive, they could even be dwarfed by global oil shale reserves in sedimentary rock, which contains solid organic material that can be converted into an oil-like product when heated.

According to the U.S. government, oil shale deposits in an area called the Green River Formation in the western United States are estimated to contain up to 3 trillion barrels of oil — three times more than the whole world has consumed in the past 100 years.

The shale revolution means the earth can now provide us with about 250 years’ worth of gas supplies

The economic and political repercussions of such discoveries cannot be understated. The cheap energy brought about by the shale gas revolution, for example, is already boosting the U.S. economy.  Indeed, sections of U.S. manufacturing are even repatriating their activities from China.

Sadly, however, Europe’s leaders have wholly failed to face up to this energy revolution and many European policy-makers are blocking shale gas developments.
There are a mere two dozen test drills around Europe, compared with an estimated 35,000 fracturing sites in the U.S.

As a result, instead of benefiting from cheap shale gas, new industries and hundreds of thousands of new jobs, Europe is constraining itself with self-imposed green limits to growth.

This is despite the fact that gas-fired power stations emit roughly half the carbon dioxide that coal-fired power stations do, which is why the U.S. is the only country to have significantly reduced its CO2 emissions in recent years.

By going for those green energy targets, countries such as France and Germany are making their energy-intensive industries increasingly uncompetitive. Germany’s largest companies have warned that they are already losing out against their U.S. competitors thanks to rising energy costs.  In Britain, too, the Energy Intensive Users Group (which lobbies for companies in the steel, chemical and glass industries) recently warned that the UK’s manufacturing industry can no longer compete against U.S. companies because American energy costs are four times cheaper.

Yet the Department Of Energy And Climate Change (DECC), with its head firmly buried in the sand, continues to maintain that, due to the rising demand for oil, gas and coal, fossil fuel reserves are depleting, and the increasing scarcity of gas and oil will cause prices to increase dramatically.  DECC and the green lobby thus continue to argue that the UK needs to invest in low-carbon energy to avoid disaster. The schizoid nature of the coalition Government is strikingly demonstrated by the new Energy Bill, published last week: a hugely expensive dog’s breakfast based on assumptions (not least about the likely upward trend of gas prices) which the shale gas revolution has already wholly invalidated.

The green lobby, of course, is terrified that, despite the promotion of expensive and heavily subsidised wind power at the heart of the Energy Bill — a subsidy paid to a considerable extent by poor householders through their bills to wealthy landowners with wind turbines — the emergence of large supplies of cheap gas will make this policy unsustainable.  Hence the scare stories, lapped up by the BBC in particular, about shale oil and gas extraction causing earthquakes and pollution of the water supply. 

Needless to say, there is no substance whatever in these scares. As a joint study by the Royal Society and the Royal Academy Of Engineering has pointed out, the so-called Blackpool earthquakes caused by fracking last year were, in fact, barely perceptible tremors (no worse than a heavy lorry passing by your house) of a kind that occur quite frequently every year, sometimes caused by coal mining, sometimes naturally.

Scare stories about fracking leading to water pollution are equally unfounded, with upwards of a mile of solid rock separating the shallow aquifers from which we draw our drinking water from the deep deposits where the shale gas is to be found and where the fracking occurs.  The bottom line is that, contrary to the peak oil fantasists, fossil fuels are going to become more available, not less.

Today, oil, gas and coal represent 80 per cent of the global energy mix. They will continue to dominate the world’s energy markets for decades to come. And within that picture, natural gas is going to offer the cheapest way to produce electricity: cheaper than nuclear energy and massively cheaper than renewables.
We are living in an era when good news is thin on the ground. The shale gas revolution is the exception: a game-changing piece of good news, both economically and geo-politically, both for this country and for the world.

Lord Lawson was Secretary of State for Energy from 1981-83 and Chancellor of the Exchequer from 1983-89. He is currently chairman of the Global Warming Policy Foundation (www.thegwpf.org).

Drill Baby, Drill

Rumours of Peak Oil Greatly Exaggerated

Sheik Yamani, former head of OPEC, once famously opined that the steam age did not end due to any shortage of wood, and the coal age did not end due to a shortage of coal.  Likewise, he reckoned, the oil age would eventually end, but not for any lack of oil.

For forty years now, we have been regaled with horror stories of the consequences of oil running out.  We have been told repeatedly that “peak oil” was just around the corner.  In fact, it should be happening now.  After that, oil prices would rise dramatically, due to international shortages leading to severe economic dislocation.  Apocalypse now!  As a result we have been subjected to endless government and crony capitalist waste, fraud, graft and corruption in a useless effort to develop alternative energy sources (solar, wind, ethanol).

Now it is all being exposed as rubbish.  Stupid, ignorant rubbish.

Letter From the UK

O Canada our only hope

By James Delingpole
The Telegraph

I love Canada. I love Canadians. I like very much what their government is doing. I have great faith in their future. And if it weren’t for their winters, I’d go and live there like a shot. Weird, huh?

Well it’s certainly weird enough for those of us old enough to remember Canada in the Seventies, Eighties and Nineties when it was little more than an embarrassing liberal-lefty joke. Sure we still remembered the suffering and courage of those plucky Canucks from Vimy Ridge to Dieppe to the Low Countries, but that spirit appeared long since to have vanished under the noisome regime of Pierre Trudeau and his grisly communitarian successors. Canada was like a pale imitation of the US with all the worst aspects of European Socialism and political correctness tacked on to it.

But suddenly – sorry South Park – but Canada-is-crap jokes just aren’t funny any more because they lack the key ingredient of truth.

And the truth is that right now, of all the great Western nations Canada is probably the only one left still standing up for the values that made the West great. What better evidence of this could there be than the glorious news that Stephen Harper’s Conservative administration has declared war on the anti-growth, anti-energy, hair-shirt eco-loons who are trying to destroy the Canadian economy? (Mega H/T Benny Peiser at GWPF)

Terence Corcoran has the story:

It is a cliché in journalism to declare metaphorical wars at the drop of a news release. In this case, it looks like war is exactly what Natural Resources Minister Joe Oliver launched Monday in an unprecedented open letter warning that Canada will not allow “environmental and other radical groups” to “hijack our regulatory system to achieve their radical ideological agenda.”
“These groups,” said Mr. Oliver, “seek to exploit any loophole they can find, stacking public hearings with bodies to ensure that delays kill good projects. They use funding from foreign special interests to undermine Canada’s national economic interest. They attract jet-setting celebrities with some of the largest personal carbon footprints in the world to lecture Canadians not to develop our natural resources.”

The “foreign special interests” are the ones exposed by Vancouver investigative blogger Vivian Krause in articles like this – on how America’s Tides Foundation has spent at least $6 million funding a propaganda war on Alberta’s oil sands production – and this blog post.

According to my preliminary calculations, since 2000 USA foundations have poured $300 million into the environmental movement in Canada. The David Suzuki Foundation alone has been paid at least $10 million by American foundations over the past decade. Why are American foundations spending so much money in Canada instead of in their own country or in other countries around the world that are far more needy than Canada?

Actually I think the sinister-foreign-interests-trying-to-destroy-Canada angle is overdone. It’s not Canada these green activists specifically want to ruin: it’s Western industrial civilisation generally. The only reason Canada may be attracting more flak than most at the moment is because of its courageous position on Kyoto (it wants to pull out), on fossil fuels (it has lots and wants to exploit them) and on economic growth (controversially among the current crop of Western administrations it considers it to be a desirable thing).
Now let us pause for moment and weep for America where sadly rather different attitudes to the environment and economic growth now obtain:

Oil and politics are a volatile mix for President Barack Obama, as he weighs whether to approve a pipeline to bring crude oil from Canada to Texas. On the merits, Obama should greenlight construction of the Keystone Pipeline. Our economy runs on oil. Given the political volatility in some oil-rich regions of the world, it’s just common sense to help maximize the oil-producing capacity of our friend to the north.
But Obama tried to put off the issue until after the election. That’s because to decide is to antagonize either labor unions, who want pipeline jobs, or environmentalists, who fear pollution and climate change.

America’s problem is that Canada isn’t going to wait for it to make up its mind.

“I am very serious about selling our oil off this continent, selling our energy products off to China,” said Prime Minister Stephen Harper last week. “I ran into several senior Americans, who all said, ‘Don’t worry, we’ll get Keystone done. You can sell all of your oil to us.’ I said, ‘Yeah we’d love to but the problem is now we’re on a different track.’”

So now the battle lines are drawn. On one side are China, Brazil, India, Korea and the other emerging economies whose priority is growth – and, by extension, jobs, a higher standard of living and a future for their citizens. On the other are the moribund economies of the West – weighed down by regulation, hamstrung by activist pressure groups on issues ranging from equality and diversity to environmentalism and elf and safety – whose slow demise will meant that for the first time in two centuries the latest generation is all but guaranteed to enjoy a worse standard of living than its parents. Canada, by joining the former, has chosen well for its children.

As I outline in my expose of environmentalism Watermelons, the green movement bears a huge amount of responsibility for our economic decline. Greens are not kind, they’re not fluffy, and they’re definitely not caring. At least not unless you’re one of those ruddy, completely un-endangered polar bears.

Running on Fumes

It’s All Going to End–Not

Part of the catechism of Green Catastrophism is describing the forthcoming horrors of Peak Oil.  You know, the world is running out of oil and the dislocation and suffering that will bring to humanity is unthinkable–so, the governments of the world (through the UN) had better come up with a government led solution to save us all, yah de yah de yah. 

But, we recall the sage words of Sheik Yamani.  He opined that the Coal Age ended not for lack or shortage of coal, and the Oil Age will also eventually end, but not for lack of oil.  The Sheik knew a thing or two about economic development, it would appear.

“Peak Oil” looks a more and more distant risk.  Take this as an example (it’s not uncommon):

Massive Oil Deposit Discovered in Arctic Region

Norway’s Statoil said Monday it has discovered a large oil reserve in the Barents Sea, its second major oil find in the Arctic region in less than a year. 

The state-controlled oil company said a well drilled in the Havis prospect in the Barents Sea proved both oil and gas at an estimated volume of between 200 million and 300 million barrels of recoverable oil equivalents.
Last April, Statoil said it had discovered between 150 million-250 million recoverable barrels of oil equivalents in the nearby Skrugard prospect.

The company has received a huge boost to its reserves in the past year. In August, it announced the biggest find in the Norwegian continental shelf in 30 years with a massive discovery of 500 million to 1.2 billion barrels of oil in the North Sea.

>More Swamps Than Christchurch

>The Liquifaction of the Left

One of the most destructive carnards concreted into the mind of greenism and environmentalism is the proposition that natural resources are fixed, finite, and limited. Once gone, they are gone forever. Therefore, conservation of said resources is a moral imperative.

Statists warm to this proposition reflexively, that is, without thinking. To conserve on a grand scale requires big government: to regulate, limit, control, restrict, order, prescribe, proscribe, and ban. Without such a big intrusion into the lives and endeavours of citizens, disaster will fall upon the entire race. Therefore, statists join the moral crusade. Advocating for big-brother government suddenly makes one morally good. Saving the planet and saving humanity has a nice moral ring to it, making big government itself a moral imperative.

Socialists likewise find the proposition of limited resources needing to be conserved a convenient doctrine. It justifies pre-emptive property rights of the state over private citizens. It also gives moral cover to advocating for more government taxation and expropriation to fund things like “green industries” and “green energy”. You just have to take a glance at President Obama’s “new” energy strategy. Instead of “drill, baby drill” it is “spin, baby, spin”, referring of course to the windmills he is spending billions of dollars worth of citizen’s property to manufacture and deploy.

So, we have the ideological Grand Coalition of our times: greenists, environmentalists, statists, and socialists. Ladies and gentlemen put your hands together for “the Left”.

There is one small problem. This monumental intellectual and political construction is built upon a simple fallacy, known as the fallacy of composition. It beggars belief that in a world self-proclaimed to be so smart and so rational that the very same wise-in-their-own-estimation are actually operating with a grand intellectual and political edifice built on more swamps than Christchurch, or more volcanoes than Auckland.

The fallacy of composition assumes or asserts that the attributes of the parts must sum to the attribute of the whole. In this case, since each specific natural resource is clearly finite, natural resources as a whole must, therefore, be finite. Once you explode this childish error, the modern moral edifice for greenism, statism, and socialism is largely exploded, revealing beneath the actual rictal grin of an immoral lust for control and power over the earth and mankind. Babylon redivivus.

So, let’s explode the fallacy. It was neatly done by Sheik Yamani of OPEC when he ironically opined that the steam age did not end for lack of wood (a finite natural resource); the coal age did not end for lack of coal; nor will the oil age end for lack of oil. Technological advances made steam and coal redundantly superfluous. The whole is gloriously far more than the sum of the parts in this case.

To change the analogy: imagine a dining room table on which a finite number of apples is placed every evening for the meal. More and more people come to eat every evening so it is obvious that the size of everyone’s meal will reduce, assuming everyone gets a turn at the table. Until one evening, the table has not just apples, but oranges on it. Then pears are added. Then . . . you get the point. While each of the foods is finite and limited, by being able to add more types of foods, the supply of food becomes functionally limitless. The attributes of the part are not necessarily the attributes of the whole. Schoolboy error.

At this point the Grand Coalition usually retreats to moral mutterings about the need to be prudent, and careful, and risk-averse. All of those Yamani examples are in the past. We face the future. The planet is at stake. It more prudent to conserve rather than consume, we are gravely told. In fact the opposite is more likely. The more society conserves, under the nannying aegis of the Grand Coalition insisting on what’s best for us all, the less likely replacements are to be found through technological innovation, enterprise, creativity, and skills. In other words the Grand Coalition’s doctrine of finite resources requiring conservation becomes a self-fulfilling prophecy. The Grand Coalition gets for us all what it has asked for.

Now we know there is currently no shortage of oil in the world. But there is an actual shortage of supply because the Grand Coalition insists upon restricting it. Facing the apples on the table, believing that starvation awaits, the Coalition insists on reducing the number of apples available and putting some into storage (for when the apples run out). The only people benefiting from this nannying prudishness are the apple growers, who find that the price of their apples rises and rises, because they are now in “shorter” supply. “See, we told you that was going to happen,” shriek the harridans of the Grand Coalition.

The Wall Street Journal has just provided us with a perfect case study of the myopic, ignorant stupidity of the Left and the great damage they do to mankind. It is a case of technological innovation that looks to make oil increasingly redundant. It is but one illustration of how, when it comes to natural resources, the whole is very definitely far greater than the sum of the parts.

In the early 1980s, George P. Mitchell, a Houston-based independent energy producer, could see that his company was going to run out of natural gas. Almost three decades later, the results of his effort to do something about the problem are transforming America’s energy prospects and the calculations of analysts around the world.

Back in those years, Mr. Mitchell’s company was contracted to deliver a substantial amount of natural gas from Texas to feed a pipeline serving Chicago. But the reserves on which he depended were running down, and it was not at all clear where he could find more gas to replace the depleting supply. Mr. Mitchell had a strong hunch, however, piqued by a geology report that he had read recently.

Perhaps the natural gas that was locked into shale—a dense sedimentary rock—could be freed and made to flow. He was prepared to back up his hunch with investment. The laboratory for his experiment was a sprawling geologic formation called the Barnett Shale around Dallas and Fort Worth. Almost everyone with whom he worked was skeptical, including his own geologists and engineers. “You’re wasting your money,” they told him over the years. But Mr. Mitchell kept at it.

The payoff came a decade and a half later, at the end of the 1990s. Using a specialized version of a technique called hydraulic fracturing (now widely known as “fracking” or “fracing”), his team found an economical way to create or expand fractures in the rock and to get the trapped gas to flow. . . .

As late as 2000, shale gas was just 1% of American natural-gas supplies. Today, it is about 25% and could rise to 50% within two decades. Estimates of the entire natural-gas resource base, taking shale gas into account, are now as high as 2,500 trillion cubic feet, with a further 500 trillion cubic feet in Canada. That amounts to a more than 100-year supply of natural gas, which is used for everything from home heating and cooking to electric generation, industrial processes and petrochemical feedstocks. . . .

In the energy industry, use of the new technology quickly gathered speed. The know-how was applied across North America, in such shale formations as Haynesville, mostly in Louisiana; Eagle Ford in South Texas; Woodford in Oklahoma; Horn River and Montney in British Columbia; Duvernay in Alberta; and the “mighty Marcellus,” the huge formation that spreads from Pennsylvania and New York down into West Virginia.

Gas output rose dramatically, and the anticipated shortfall turned into a large surplus. As the volume rose, the inevitable happened—prices came down. Substantially. Today, natural-gas prices are less than half of what they were just three years ago.

Suddenly there are not just apples on the table, but now oranges. This pattern has been repeated for centuries. The only impediment is the wowsers of the Grand Coalition, who believe they know what is best for us all. Bless their little cotton socks.

When Christians realise the entire edifice of the Grand Coalition rests upon a basic schoolboy error in inductive reasoning the more distasteful the niggardly faux morality of the Grand Coalition becomes. Moreover, as Christians come to understand and believe in the superabundant generosity of the Living God manifested in the reckless, prodigal, super-abundance of His creation for our exploitation and enjoyment, the insult to the injury becomes detestable.

>Where has all the Oil Gone?

>Histrionic Alarmism: Who will Rid us of These Pestiferous Fools?

It’s now mainstream. Time Magazine has run a piece on the Gulf oil spill by Michael Grunwald that presents the case for it being a storm in a teacup. The real disaster has been the Federal Government’s handling of it and the economic damage it has caused as a result of suspending deep sea drilling. But as they say in the trade, never let the facts get in the way of a good story.

The Deepwater Horizon explosion was an awful tragedy for the 11 workers who died on the rig, and it’s no leak; it’s the biggest oil spill in U.S. history. It’s also inflicting serious economic and psychological damage on coastal communities that depend on tourism, fishing and drilling. But so far — while it’s important to acknowledge that the long-term potential danger is simply unknowable for an underwater event that took place just three months ago — it does not seem to be inflicting severe environmental damage. “The impacts have been much, much less than everyone feared,” says geochemist Jacqueline Michel, a federal contractor who is coordinating shoreline assessments in Louisiana.

Yes, the spill killed birds — but so far, less than 1% of the number killed by the Exxon Valdez spill in Alaska 21 years ago. Yes, we’ve heard horror stories about oiled dolphins — but so far, wildlife-response teams have collected only three visibly oiled carcasses of mammals. Yes, the spill prompted harsh restrictions on fishing and shrimping, but so far, the region’s fish and shrimp have tested clean, and the restrictions are gradually being lifted. And yes, scientists have warned that the oil could accelerate the destruction of Louisiana’s disintegrating coastal marshes — a real slow-motion ecological calamity — but so far, assessment teams have found only about 350 acres of oiled marshes, when Louisiana was already losing about 15,000 acres of wetlands every year. . . .

Marine scientist Ivor van Heerden, another former LSU prof, who’s working for a spill-response contractor, says, “There’s just no data to suggest this is an environmental disaster. I have no interest in making BP look good — I think they lied about the size of the spill — but we’re not seeing catastrophic impacts.” Van Heerden, like just about everyone else working in the Gulf these days, is being paid from BP’s spill-response funds. “There’s a lot of hype, but no evidence to justify it.”

The scientists I spoke with cite four basic reasons the initial eco-fears seem overblown. First, the Deepwater oil, unlike the black glop from the Valdez, is unusually light and degradable, which is why the slick in the Gulf is dissolving surprisingly rapidly now that the gusher has been capped. Second, the Gulf of Mexico, unlike Alaska’s Prince William Sound, is very warm, which has helped bacteria break down the oil. Third, heavy flows of Mississippi River water have helped keep the oil away from the coast, where it can do much more damage. And finally, Mother Nature can be incredibly resilient. Van Heerden’s assessment team showed me around Casse-tete Island in Timbalier Bay, where new shoots of Spartina grasses were sprouting in oiled marshes and new leaves were growing on the first black mangroves I’ve ever seen that were actually black. “It comes back fast, doesn’t it?” van Heerden said.

Grunwald’s conclusion:

Anti-oil politicians, anti-Obama politicians and underfunded green groups all have obvious incentives to accentuate the negative in the Gulf. So do the media, because disasters drive ratings and sell magazines; those oil-soaked pelicans you saw on TV (and the cover of TIME) were a lot more compelling than the healthy ones I saw roosting on a protective boom in Bay Jimmy. Even Limbaugh, when he wasn’t downplaying the spill, outrageously hyped it as “Obama’s Katrina.” But honest scientists don’t do that, even when they work for Audubon.

“There are a lot of alarmists in the bird world,” Kemp says. “People see oiled pelicans and they go crazy. But this has been a disaster for people, not biota.”

>You’ve Got to Do Somthing

>Praying to the Idol

Oh, no! Another calamity is coming. Climate change is now passe, deja vu. People have got over all the tingly feelings of apprehension and dread. Copenhagen was a blast, but the sceptics are now running the show. The party’s over.

But, on cue Richard Branson and fellow concerned citizens have discovered another apocalyptic threat. Peak oil. The good old Guardian‘s headline gets the terror tingles going again: Branson warns that oil crunch is coming within five years.

Chief prophet Branson really gets our attention when he says that it is going to be worse than the credit crunch. And like all card carrying prophets, he then turns to the West’s god and intercedes earnestly for its help.

Sir Richard Branson and fellow leading businessmen will warn ministers this week that the world is running out of oil and faces an oil crunch within five years. . . .

“The next five years will see us face another crunch – the oil crunch. This time, we do have the chance to prepare. The challenge is to use that time well,” Branson will say.

“Our message to government and businesses is clear: act,” he says in a foreword to a new report on the crisis. “Don’t let the oil crunch catch us out in the way that the credit crunch did.”

Oh, goody. The gummint will save us. The prophet has prayed to the ministers of the idol. “Most glorious gummint–in the past when we have called upon you for help in our troubles, you have heard and answered. You have always delivered us from our desperate needs. Dearest lord, you have passed laws, made regulations, taxed, bestowed grants. You have always saved us. Now, we need your mercy again. Peak oil will overwhelm us. A short five years and it will be upon us. Oh, lord hear! Oh, lord, act! We beseech you, do not delay. Deliver us from our darkest enemies.”

Those enemies are devious blasphemers: they serve another god. They conspire to hide the threat until it is too late.They are breeding an army in their caverns–and army which has but one purpose–to destroy our way of life.

Their call for urgent government action comes amid a wider debate on the issue and follows allegations by insiders at the International Energy Agency that the organisation had deliberately underplayed the threat of so-called “peak oil” to avoid panic on the stock markets.

Ministers have until now refused to take predictions of oil droughts seriously, preferring to side with oil companies such as BP and ExxonMobil and crude producers such as the Saudis, who insist there is nothing to worry about.

What on earth is “peak oil”? It is an artificially manufactured crisis. But it has its uses. It shows once again that the West has become a worshipper of governments while its peoples live in profound, self-willed ignorance. Ah, oil. The rumours of your death are greatly exaggerated, but they give us the willies, and we like that. And fears of your death give us a reason to evoke our god with passion, urgency, and great pride. We like that too.

The canard of peak oil compares daily world consumption with known oil reserves. Sooner or later the oil is all going to be used up. As that happens the price of oil will explode, leading to economic dislocations fearful to contemplate. Act, oh government. Act now. Save us.

The direction of the price of oil is a very useful thing. It tells us whether demand for oil is exceeding supply, or the reverse. But peak oil theories bring in another assumption: a freeze frame view, which declares that the amount of energy in the world is known, fixed, finite–and it is what we know now. So, according to this pagan world-view when the price of oil is rising, it tells us that its supply, which is fixed, is coming to an end.

Peak oil doomsaying is not new. Consider the following:

We don’t just figure out how to use resources more efficiently. We discover, and create, fundamentlly different types of resources. A every stage, some doomster can do a little math and predict that the current resource will soon be depleted. And he will almost be right. In fact, people in every era of recorded history have worried about running out of whatever resource they’re using at the time. England began to experience lumber shortages in the 1600’s. They got so severe that in the 1700’s that the island came close to being stripped of its forests. People feared a complete loss of wood. So what happened? Wood became too costly to use as fuel in most places. That encouraged innovation with other resources like coal. The English eventually switched to coal, and over time, English forests returned.

The process was hardly inevitable. It involved all manner of effort and ingenuity, usually brought on by rising scarcity, which led to rising prices. Because of the role of prices, scarcity and crativity conspire to get us to the next level, to the next resource, or the next technological breakthrough. . . .

So, after the switch to coal, did all of England rest easy and quit worrying about running out of resources? Hardly. In 1865, a prominent social scientist named W. Stanley Jevons wrote a book proving to his satisfaction that England would soon exhaust its coal, and the economy would grind to a halt. It didn’t happen, and there’s still plenty of coal available more than 140 years later. [Jay W. Richards, Money, Greed and God, (New York: HarperOne, 2009), p.190]

Richard Branson is channelling the ghost of W. Stanley Jevons. He will go the way of Jevons, being consigned to the dustbin of history, nothing more than an eccentric curio. Sadly, however, it is likely that his government god will endure for the foreseeable future and continue to do great damage,being dumb enough to respond to the intercessions of eccentric prophets like Branson.

Peak oil is a pseudo-threat, unless government “acts” in response to the wailings of chicken littles and makes it real. As Sheik Yamani astutely observed, “The Stone Age came to an end not for a lack of stones, and the oil age will end, but not for a lack of oil.”

And there is an additional, very important consideration. “Peak oil” dreads are always based upon known oil reserves. Peak oil is never based upon how much oil actually exists in the world. No-one knows how much oil actually exists. It is costly to find that out–very, very costly. As Thomas Sowell astutely observed, “How much of any given natural resource is know to exist depends on how much is costs to know.” (Richards, p. 187) Crudely put, if the price of oil were to rise, we would soon discover more of it.

Long before oil is exhausted, superior sources of energy will have been exploited to take its place. The last thing we need is for governments to “act”. But as the proverb says, never get between a fool and his folly; it would be better to hug a bear robbed of its cubs.

>Tea Leaves and Belgian Dentists

>Has the Reserve Bank Got it Right? Or, Should it Matter?

There has been a lot of debate recently over whether the Reserve Bank has done the “right thing” by starting to loosen monetary policy. We at Contra Celsum do not make it our business to prognosticate on near or immediate outcomes. It is far too difficult for mere, fallible humans to do credibly. It is even more difficult to benefit fiscally from such speculations. When a near term prediction is credible and widely believed it will be already priced in markets—so that, perversely, by the time conviction arrives, it is too late. The price horse has bolted, as it were.

When predictions of near term outcomes are uncertain, the risks are even greater. To invest or divest capital on the basis of such fantasies or speculations is folly indeed. Yet thankfully many do, which usually leads to the wonderful phenomenon of artificially and speculatively inflated or depressed capital markets—which, in turn, usually offers wonderful investing or divesting opportunities for a careful allocator of capital.

Whether the Reserve Bank was “right” in loosening monetary policy in New Zealand this week is a very difficult call. So prudence would suggest that we pass and consign it to the realm of speculation on a near term outcome.

What is more useful, however, is to consider some longer term economic fundamentals—factors which are usually overlooked in the frenzy of near term speculation, but which will inevitably “play out” in the longer term. Here, then, are some longer term fundamentals which we believe the sagacious need to keep in mind—in no particular order.

Economic growth occurs when capital and labour are both deployed to produce desirable goods and services of such quality and price to attract buyers. New Zealand is a small economy. It is an open economy. It can only sustain economic growth over the long term if it succeeds in producing goods and services which are more attractive in either quality or price, or both, than what other peoples and nations can produce. Thus, the key to economic growth is a competitive tradeable sector (that is, goods and services that are either exported or can be used efficiently to substitute imports, such as oil.)

New Zealand has few tradeable sectors which are sufficiently productive to cut the mustard in a global market. Agriculture is one (dairying in particular). Owing to the application of knowledge, research, and technology the productivity of the agriculture sector has steadily increased over the past thirty years, once the artificial subsidies of the Muldoon era had been removed.

The economic lifeblood of the nation is wedded to businesses that can trade effectively with the world, which means exporting to selling to domestic consumers who may also buy competitor imported goods on a cost-effective basis. There are two longer term critical impediments to doing this. Firstly, our labour productivity is falling. That is, less is being produced for every hour worked. Wages, however, are rising—therefore labour costs are going up, while productivity is going down. This means that in general New Zealand is economically terminal. Secondly, our cost of capital is high. This is due to its scarcity. We do not save enough: therefore, we rely on international savers to lend to, or take equity in, our businesses. They require a higher premium, a higher return, for investing in New Zealand because the risks are higher.

Given our higher costs of capital, and the falling productivity of our labour force, the longer term outlook for the New Zealand economy is not good. Things will have to change for the longer term outlook to become more positive—and change is likely to mean lower standards of living and some considerable economic pain.

Inflation is a hydra with many faces. Inflation is not caused by rising prices, per se. Inflation is caused by an increase in the supply of money. Prices can rise and fall due to imbalances of supply and demand. This is not inflationary. Thus, to the extent that prices have risen due to inadequate supplies of oil to meet increasing global demand, it reflects a non-inflationary market effect. It is highly unlikely that such market driven price increases will flow through to self-reinforcing general price and wage spirals without a commensurate increase in the supply of money (regardless of whether the increase comes from the actions of the Reserve Bank or from overseas investors.) Choke off the supply of money and an inflationary spiral is far less likely.

A small open economy will always be subject to occasional global economic shocks. It is not the shocks that are critical, for they are inevitable and unavoidable—it is the speed and efficiency with which the productive sector of the economy can adapt that is vital. The greatest impediment to a speedy adjustment is the government sector, both with its artificial propping up of the economy through distributive spending, and with its endlessly complex spaghetti of rules and regulations. New Zealand’s government sector has grown substantially relative to the size of the economy over the past nine years. The ability of the economy to adjust to the current global credit crunch and oil shock has been commensurately weakened. This suggests that the pain will go on for longer. If the government introduces a carbon trading tax, it will go on for much longer.

A country that runs a large current account deficit can ordinarily expect that its currency will devalue over time. This, in turn, allows the tradeable sector to price itself more competitively. On the other hand, when an economy is competing effectively in the tradeable sector, over time one would expect that the currency would appreciate, forcing greater efficiencies—a virtuous circle.

New Zealand’s currency has been propped up for a long time by our relatively high interest rates. Japanese housewives and Belgian dentists have lent money to New Zealand banks because the interest rates were so much higher than they could earn at home. This has made the New Zealand currency attractive. With such strong buying support, the dollar has remained high, creating a huge headwind for the tradeable sector.

Unfortunately, most of the investment in New Zealand by Japanese housewives and Belgian dentists has flowed through to the non tradeable sector—namely, housing. So, we have been subjected to a debt fueled lifestyle-consumption extravaganza. It has created a false sense of wealth. It has created a dual economy: one which has a productive, tradeable sector struggling in the face of significant impediments, and a consumption sector turbo-charging its appetites with easy credit. Government hand-outs have abetted the chimera of prosperity and given its speculation greater impetus.

This artificially propped up currency has to fall if the economy is to have any hope of righting itself. It would possibly be best if it were left to fall drastically and quickly. This would lessen the chances of creating a wage and price spiral as a result of gradually increasing import prices, due to a gradually falling currency. But fall it must—eventually.

In the light of the above, prudent investment of capital becomes a simple matter, although not easy. Firstly, there are businesses in New Zealand operating in the tradeable sector which have made a reasonable fist of growing their earnings, despite the huge headwinds of the past five years. As the currency falls, they are only going to do better.

Secondly, in tough economic times, the best companies get better still. They tend to increase market share as their competitors fade away. Consequently, it is a wonderful time to be a capital allocator, provided you can read a balance sheet and an earnings statement with a modicum of intelligence, and provided you have a reasonable dash of common sense, and your investing time frame is at least ten years. However, without those attributes, don’t even think about it. Every time you get tempted to speculate (for that is what you will be doing) imagine Dirty Harry aiming his 44 magnum at your eyeballs, and growling, “I know what you are thinking, punk.”

Many of the things we have discussed will not play out tomorrow, or the next day, or the next year. Maybe not in the next five years. But, play out they will. The New Zealand economy is a huge leaky home. In the end, the rot will show through.

In the meantime, there is no better course as a capital allocator than to buy high quality assets at attractive prices, then take a ten year holiday.

>If You Can’t Beat Them . . .

>The Open Society and a New Enemy

In a recent article on the Energy Bulletin website (June 29, 2008), Kurt Cobb, who is a founding member of the Association for the Study of Peak Oil and Gas, argues for restrictions upon free speech with respect to climate change.

This is not new. It has been part of the sinister underbelly of the movement for some time. Every so often the covering is removed for all to see.

Towards the end of World War Two, Karl Popper wrote the now famous The Open Society and Its Enemies. Popper argued very successfully, against the backdrop of the closed societies of Soviet Russia and Nazi Germany, that a pre-requisite for progress was maintaining an open society where there was a tolerance of the free exchange of ideas scholarship and research. Cobb and his ilk are calling for the Open Society to be closed to climate change skeptics. The rights of free speech should be removed from anti global warming advocates.

What exigency would require such a lurch into a closed, controlled, totalitarian society?

Let us consider carefully Cobb’s two reasons for this extreme suggestion.

1. The dire magnitude of the threat requires that basic freedoms be relinquished. This argument is familiar to us all. In a time of war, when our very existence is threatened, it is common for a nation to move to a “war footing” which usually results in greatly expanded state powers, on the one hand, and greatly diminished personal freedoms, on the other. We all understand this, and most find the argument compelling.

However, as we look around we don’t see a state of war. It does not appear as though we are living under dire threats. Cobb and his ilk argue in return that this is the very point. The threat exists, it is real—but it won’t show up for another fifty years or so. There is so much carbon in the atmosphere right now that these consequences are inevitable; so we must take urgent action now. It is comparable to a situation where we know that a submarine has launched a polaris nuclear missile, but it is just going to take several decades to arrive. So we ought to go to a war footing now—with its attendant restrictions on personal freedoms. All criticism of global warming must be silenced because it is equivalent to traitorous talk in a time of war. Just as we jailed conscientious objectors during the world wars, we should silence global warming critics now.

The problem with this argument is its question begging. It is a fallacy. It assumes what has to be proven. It is precisely the existence of the danger, the proximity of the peril, and the reality of the threat that is at issue. Critics don’t believe, or are not convinced, the polaris missile is airborne, or even that there are hostile submarines out there. Until global warming acolytes can engage rationally with the objections and the criticisms, and prove them wrong, suppressing the critics amounts to no more than substituting force for reason. Might is attempting to make right.

Now, we don’t question the depth or fervency of Cobb’s belief in anthropogenic global warming. We just believe him to be in error. He and his colleagues have far more work to do.

A variant of the “dire threat” argument is the pragamatic overlay: it is better to be safe than sorry. The argument runs that even if global warming is not correct, it will do no harm to combat carbon emissions in the meantime. We will not have lost anything.

Really? Try telling that to the starving millions who cannot afford to buy food any more, courtesy of the bio-fuel mania—explicitly whipped up to combat global warming. Sure the UN has now declared bio-fuels have turned out to be a crime against humanity, but it is a little too late.

It turns out that working to prevent “so called” presumed damage in the future brings terrible hardships, deprivations, and suffering now. It does a great deal of harm. Wisdom says we had better be sure we are right, before we inflict that price upon ourselves—particularly because the price will be disproportionately born by the poor, the weak, and the vulnerable in the world—the people that Franz Fanon called the Wretched of the Earth.

2. Public debate is being muddied because oil companies have huge financial resources with which to promote their case in the media and to the public. By implication environmentalists don’t have has much money so in this issue the state of free speech is an uneven, unfair playing ground. He who talks the most wins the debate.

Again, there is a certain force to this argument. We have all observed arguments where one protagonist has shouted the other down, has not let him get a word in edgewise, and effectively has won by silencing his opponent.

But is this really the case? When we observe such a situation, do we not resent the shouter and disrespect his arguments? Do we not have sympathy for the person whose views are silenced? Does it not make people more determined than ever to hear the other side? Often that is precisely the effect.

Secondly, oil companies can have no apparent vested interest in fossil fuels per se over the longer term. They are essentially energy “manufacturing” and distribution companies. One would have thought it was deeply within the vested interests of oil companies to promote all sorts of fears about global warming. Who stands to benefit from the bio-fuel mania? Oil companies. As soon as it becomes industrialised and in the supply chain, the oil companies will take a position and make money from it.

It is likely that oil companies will morph into energy conglomerates and will make lots of profit from global warming fears. After all, the major oil companies have been researching alternatives to fossil fuels for decades. So it is not immediately evident why all their vast resources will be put to silencing the siren calls, or to queering the debate. In fact, if anything the widespread phobia over global warming could well be due in part to oil companies stirring the pot along.

We would humbly suggest that every major oil conglomerate in the world right now is carefully positioning itself to maximise its profit from energy measures and policies arising out of efforts to oppose global warming. They will make heaps off the government subsidies, the rules and regulations—because in the end the world needs energy, and it needs capital to develop tools to harness it—and the major oil companies will be right up there.

Finally, is Cobb’s capitalist conspiracy theory credible when you consider that all the mainstream media appear to froth at the mouth to publish stories about global warming? Every significant climate event is causally connected with global warming. Once again, like the oil companies, it helps them make profits. Sensational dangers grab attention and increase news consumers—leading to higher advertising revenues. The content of the mainstream media has favoured the cause of global warmingism many many time over.

In 2007, news clippings services recorded that James Hansen, Al Gore’s resident global warming expert, was quoted over nine thousand times. No sceptic even came close.

What we desperately need is more, not less debate. The dangers of trying to shut your opponent up by force are just too great. You usually try and do that when you sense your argument is weak and deeply flawed. Or you are frustrated. Or both.

>Peak Oil on Artificial Steriods

>Bubble, Bubble, Oil and Trouble

The prospective price of oil has been a hot topic in recent weeks. It is the kind of issue which fascinates us at Contra Celsum because it has so many facets. We posted recently that the West has recently taken on the role that OPEC played in the great oil shocks of 1973 and 1974—albeit for different, although connected, reasons. Both OPEC then, and the West now, see themselves as being under real and substantial threats. Both acted (and are acting) to restrict the supply of oil.

In the seventies, OPEC felt that it was being exploited by Western oil consuming nations. So Arab nations (predominantly) formed a cartel, restrained output, and forced the world oil price up. The impact was felt all around the world. It resulted a decade of stagflation in the US and Europe (and other western economies, such as New Zealand). Stagflation is a macro-economic condition of rising prices (inflation) coupled with stagnant or no economic growth.

Stagflation leads to rampant inflation. Universal rising prices are tolerable (although not healthy) where productivity and economic growth is matching or outstripping price rises. Where prices are rising, but economic growth is static or contracting, however, as is the case under stagflation, in the end inflation becomes rampant. That is, economic actors (producers and consumers) engage in adaptive behaviour and adjust their production and consumption decisions to the expectation that costs and prices are going to rise.

On the expectation that prices will continue rising they markedly increase their debt levels (borrow now, and pay back later with cheaper, inflated dollars) thereby pushing up interest rates. They hoard real assets on the expectation that they will match rising prices (gold, silver, real estate, hard commodities) driving up hard asset prices still further. Manufacturers build in greater margins on the expectation that the next lot of raw materials will cost more, thereby pushing up prices still further. Employees, demand and get higher wages, without any increase in productivity or more effort. Rising labour costs result in yet another universal price rise. So the spiral goes viciously upward.

Well, we hear you say, so what? As long as everything keeps adjusting upwards the party can go on for a long time. Not if you are on a fixed income, or have no hard assets, or are renting. For such people, who are usually the most vulnerable in our society, stagflation and rampant inflation is devastating and results in impoverishment. Moreover, inflation means that more and more paper money is in circulation in the economy. To cope with rising prices and economic pain, credit restrictions are eased. But the transmission of the money supply is never uniform. There will always be those who are closest to the money spiggots; they always benefit, but at the expense of those who are furtherest away. Monetary based inflation is theft, pure and simple.

To break stagflation and burn it away required the harsh monetarist medicine of the eighties, with the inevitable accompanying recessions.

There have been plenty of people raising the stagflation spectre in recent weeks. But it takes more than the rise in the price of a commodity to create conditions of stagflation. Rising oil prices are a necessary, but not sufficient condition. The world is now far more of an open global economy than the seventies and while it is possible that stagflation will eventuate, it is not likely. Nevertheless, were trade barriers to be erected once again, were free trade agreements and treaties to break down, were wage and price controls begin to emerge, and were widespread government deficit spending to re-occur, all bets would and truly be off. But we are not there yet—not by a long way.

Meanwhile, will the price of oil come down again? Courtesy of the Hive, we read that a senior economist for Export Development Canada is arguing that the price will drop in the second half of this year back down to around US$80 per barrel. Reason: slowing economic growth will reduce world-wide demand for oil. And George Soros is quoted in another article, also courtesy of the Hive, arguing that the oil price will drop, but his reason is different. He reckons price is now the result of a speculative bubble which will burst. So, which is it to be? Slowing economic growth or the bursting of a speculative bubble? If both are right, the price may drop back to US$40 or US$50 per barrel.

Not so fast. Courtesy of Adam Smith of the Inquiring Mind we have been linked to a very thoughtful piece in the Wall Street Journal. It argues, based on research work being done by the International Energy Agency (IEA), that supplies of oil are going to be far tighter than previously thought. In fact, we are already at conditions of “peak oil”.

The methodology of the IEA until recently has been to forecast world demand for oil, and it has simply assumed that production would rise gently and gradually to meet demand. Now, however, the IEA is looking at supply, and concluding that aging oil fields and diminished investment mean that it is unlikely that world supply will keep up with demand.

But this occurrence of “peak oil” is an artificial creation. There are plenty more supplies of oil in the world. As one analyst put it, the difficulties in oil supply are not buried in oil fields—they are above ground. They are social and political. In the West they are largely the result of greenist ideology.

To be sure, the greenists do not mind that peak oil is being artificially created. They would be quite happy to see not one more drop of oil consumed—for this, they believe, would combat global warming. They are very pleased to see the price of oil so high, and wish that it were higher. They will probably be gratified in the months ahead, unless our Canadian economist and George Soros are correct.

In their zealotry, hard core greenists are happy to see everyone poorer. They write off as mere “collateral damage” the degradation, starvation, and death of millions in the poorest countries in the mad drive to manufacture ecology-destroying biofuels. Like all good utopians, rationalists, and ideologues, the end really does justify the means.

What of the reality, however? Laying aside the lunatic fringe, will greenism triumph? Not when it starts to hurt. All the soft-core greenists, the fellow travelers and the politicians who represent them, are likely to desert the cause pretty quickly. The most likely immediate response to high oil prices: reduced taxes on gasoline. We are bold enough to predict that in the forthcoming election campaign in New Zealand, one of both major political parties will move to reduce the price of petrol at the pump by reducing state petrol taxes. France’s Sarkosy has already made such a call—yesterday, in fact. Gordon Brown has proclaimed that high oil prices are his current apocalypse du jour. (Last week it was global starvation as a result of biofuels. Poor Gordon is finding that all the pet leftist causes are creating global crises which he is now left to deal with. Old Blony Tair. You have to give the man credit. He has to be the ultimate exponent of the hospital pass.)

Secondly, expect that when rising oil prices are seen as a threat to national security, the US congress will move rapidly to open up some of its vast oil reserves in Alaska and the western states to exploration and development. Greenism will quickly be seen as a nice-to-have, but only when you are sitting in your warm living room, with lots of affordable groceries in the kitchen. But it will take time to bring the oil onstream.

Thirdly, expect the major developing countries in the Third World, which have never bought into greenist ideology, to move quickly and effectively to assist in exploration and development, in exchange for favourable supply contracts, in the poorer third world. We continue to expect that within ten years the crisis will have passed.

“Peak oil” will seem like a distant memory, a time of temporary madness. What is an open question is whether greenism will have been thoroughly discredited and completely repudiated in the process.

Unlikely, for as Freeman Dyson recently argued environmentalism has now replaced socialism as the established secular religion. High priests and zealous acolytes do not relinquish religious beliefs so easily.

>How High Will Oil Prices Rise?

>Either Learn from History or be Condemned to a Worse Fate

The demand for oil is increasing steadily as economic growth speeds up in Asia, the Middle East, and in the Southern Hemisphere in general. Meanwhile oil stocks in the US are about average. Demand is falling in the US, due to slowing economic growth. Nevertheless, the global price of oil keeps rising.

Some have pointed the finger of blame at financial speculators, who, believing that the price of oil is going to continue to rise, rationally buy more of it, thereby artificially pushing up the price. This is how speculative bubbles are produced: the belief in rising prices causes greater demand, which in turn fulfils the expectation, leading to yet more speculative demand—until . . . One day, the house of cards comes crashing down and the speculators lose their shirts, or kaftans, or whatever.

Some analysts have concluded that speculation accounts for around 30% of the current price of oil at US$135 per barrel. This appears to be the view of Boeing Corporation which has recently announced that it expects the price of oil will fall back to a long term average of between US$70 and US$80 per barrel.

Maybe. It is very hard to predict successfully. Ordinarily the prognosis would be fairly simple. Oil shortages (due to increased demand from developing countries) would lead to a rise in the global price of oil (tick). Overall consumption would drop somewhat due to the rising price (tick). Global oil consumption has stabilised for the present. It has fallen slightly in the US. The higher prices, however, will mean that production will rise globally as oil producers seek to maximise their profits, and oil explorers and field developers, encouraged by the higher price, discover more oil and bring it onstream (cross). This increase in supply would lead to a falling oil price over time.

But things are not normal. The supply of oil is not increasing in response to the higher price. This implies that the problem is not one of increased consumption of oil, but of inadequate supply. According to the Economist, the output of several big exporters, such as Russia, Mexico, and Venezuela, is declining. None allow foreign oil firms access to the country to prospect or develop oil fields. The Middle East is likewise generally off limits to foreign investment.

Worse, Western nations are now in the inexorable grip of greenist global warming theories. This has led governments to stop the development of oil fields. The US Congress has declared that there will be no drilling in the Gulf of Florida or in the Arctic—which of course, includes oil rich Alaska. Thus, the US—one of the most oil rich countries in the world, as well as its largest consumer, has its supply of oil constrained by luddite, scaremongering greenism.

The oil shocks of 1973 and 1974 were caused by OPEC, the Middle East oil cartel, deciding to restrain supply. Prices shot up and the world economy suffered. It was the cause of regulated “car-less days” in New Zealand—one more governmental, bureaucratic idiocy that created more of a problem than the one it was intending to fix. It also led to Muldoon’s Think Big projects, which squandered untold wealth. These catastrophic responses to the oil shocks brought the New Zealand economy to its knees.

Of course the effect of the oil shocks was exacerbated many times over by bankrupt government policies trying to cope with the problem. In the end, government fiscal discipline evaporated like the morning dew, leading to reckless overseas borrowing and huge public deficits, rapidly rising inflation, and the eventual imposition of wage and price and interest rate controls.

Ironically, the Western world broke the power of OPEC by increasing the exploration for, and production of, oil. Now, it is the lunacy of the greenist West that is exacerbating (if not creating) the problem. The greenist West is the new OPEC.

What then is likely to be the outcome? It is difficult to say. But, if this analysis is correct, Boeing will turn out to be wrong. Oil prices will continue to rise on average for the medium term. The greenist governments of West are likely to continue to exacerbate the problem by looking for scapegoats (other than themselves) , attacking oil companies with “windfall taxes” and other strategms which will have the effect of reducing supply still further.

A solution may arise in the developing world. China and India are unlikely to be hobbled by greenism. Nor are they likely to put their economies at risk. They are likely to engage in geo-political manoeuvering to secure longer term, growing supplies of oil. Hopefully, this will not be done out of the barrel of a gun, but with bilateral trade agreements that will lead them to invest heavily in increased oil exploration and production in those countries that are likely to welcome their overtures—that is, the poorer southern hemisphere countries. In exchange, they will enter into longer term price-fixed oil contracts with China and India.

The solution will not be immediate, but within ten years the greenist lobby in the latter-day pseudo OPEC West will be irrelevant. It will have succeeded only in making its host countries poorer. Meanwhile, the balance of economic and political power will have definitely tipped to the emerging giants of the Southern Hemisphere.