The Myth of Finite Resources

"Intellectuals, politicians, and journalists treat the idea that capitalism inevitably leads to ecological disaster as an unquestionable truth — ... that free markets cause the destruction of Mother Earth and that we must enact socialist policies to prevent an ecological doomsday scenario. But, what if I told you that economic facts do not buttress this hypothesis at all? And what if I added that an ingenious economist already proved the compatibility of capitalism and environmentalism as early as 1981? ...
    "One of the charges most frequently levelled against capitalism is that this social system must necessarily lead to ecological disaster. After all, the earth’s resources, the eco-socialist argument goes, are finite. Evil capitalists and greedy businessmen will gradually exploit non-renewables until we are doomed because we are out of natural resources. Karl Marx proposed this hypothesis as early as 1867 ...

"Inspired by Jean-Jacques Rousseau, Marx believed that the cause for ecological disaster is to be found in the introduction of private property rights. ... Rousseau and Marx’s solution to this alleged problem was the abolition of capitalism and property rights, a solution which has presently been voiced as vociferously as never before by the eco-socialists. ... While reading fairy tales and fables can certainly be an entertaining pastime activity, it is by now about time to return to reality ...

"In a free-market economy, the price of a resource is determined by its scarcity. If a resource becomes more abundant due to an increase in supply and/or a decrease in demand, its price will typically drop. If a given resource, vice versa, becomes more scarce due to a decrease in supply and/or an increase in demand, its price will usually rise. This change in scarcity and price, in turn, affects the behaviour of any rational market participant with an entrepreneurial mindset, producer and consumer alike. In his groundbreaking monograph, 'The Ultimate Resource,' American economist Julian L. Simon observes, 'Heightened scarcity causes prices to rise. The higher prices present opportunity and prompt inventors and entrepreneurs to search for solutions.' In a capitalist society, the depletion of a nonrenewable resource is prevented by three emerging patterns of behaviour, all of them caused by the increase in the resource’s price.
    "[Between them, rising prices and] the profit motive offer an incentive to the rational businessman to obtain and store more units of the nonrenewable resource in question. ... and to start developing substitutes for the nonrenewable resource in question ... [Meanwhile] the desire to economise motivates rational buyers to become less dependent on the nonrenewable resource in question. ...

"Ultimately, there is only one resource which is necessary to replenish all others, namely the human mind. It is for this reason that Julian Simon chose to name his groundbreaking study 'The Ultimate Resource.' 'The main fuel to speed the world’s progress,' he explains, 'is our stock of knowledge, and the brake is our lack of imagination. The ultimate resource is people—skilled, spirited, hopeful people—who will exert their wills and imaginations for their own benefit.' ...

"The eco-socialists are undoubtedly right in pointing out that the earth contains only a certain amount of nonrenewable resources in a fixed quantity. ...  More importantly, though, the eco-socialist errs in concluding that natural resources must be finite because the earth contains them in a limited quantity. Rather, in a free-market economy, as the resource becomes more scarce the price of the natural resource increases. Changes in producer and consumer patterns, in turn, prevent its depletion. In Simon’s words, 'Population growth and increase of income expand demand, forcing up prices of natural resources. The increased prices trigger the search for new supplies [or substitutes, and provides more human capital for the search and investigation.] Eventually new sources and substitutes are found.' ...

"The key economic problem of a socialist economy [however] is that the price of a resource will not rise if it becomes more scarce. Price ceilings effectively prevent an increase in price, thereby demotivating businessmen from increasing their production of non-renewables, and/or developing substitutes for them. The result, as can be witnessed in socialist countries all over the globe, are shortages and famines.
    "Thus, if people are truly concerned with the potential depletion of finite resources, they should start questioning their political convictions. The solution to preventing the exhaustion of the earth’s resources are not government controls but free markets and free minds. To paraphrase Ayn Rand, 'If concern with [the environment] and human suffering were the [eco-socialists]’ motive, they would have become champions of capitalism long ago; they would have discovered that it is the only political system capable of producing abundance'.”

~ Martin Hooss from his post 'The Myth of Nonrenewable Resources'

RELATED POSTS

• Why We Need Private Property to Deal with Scarce Resources - Patrick Barron, NOT PC
• Environmentalism Refuted - George Reisman, MISES DAILY 
• Some propositions on property rights – and IP - NOT PC

Whatever happened to peak oil?

Now that the Ginger Whinger is retiring, can we please permanently put to bed some of his failed and more fanciful memes? Like peak oil?

[Hat tip Powerline]

Peak politician

You don’t hear the Greens talking about “peak oil” anymore, and there’s a simple reason for that. The simple reason is that even the Greens now realise “peak oil” is bollocks. Fracking changed all that. So now, they’re against that.

So we are still nowhere near peak oil, and given how resource economics work, unlikely ever to approach it.

However, we’re a small country, with few naturally occurring sources of hot air and blowhard, and it looks like we might have now approached peak politician.

The evidence for this frightful state of affairs grew even greater over the weekend, with the announcement of a recycled politician needing dialysis several times a day as a candidate for the Mana Party in Te Tai Tonga.

Georgina Beyer, who when last heard from was withdrawing from work while whinging about not picking up political appointments is the latest political retread to enter the hustings.

Because with so many parties this election year with so few real differences between them, and with only so much locally-produced hot air and blowhard available, there just aren’t enough politicians to go around.

Poor lambs.

“Peak oil” is past

It’s fascinating to see someone’s delusions falling off before your eyes. Environmentalists George Monbiot is moving bit-by-bit with baby steps away from his more lunatic ideas, and down the path trod before him by the likes of Bjorn Lomborg, David Bellamy, James Lovelock and Patrick Moore—sane folk who looked again at some of the enviro-lunacy they helped to promulgate and found it wanting.

He still has a long way to go before you’d call him sane.  But he did call out The Team on what was exposed in their ClimateGate emails.  And he has come out in today's Guardian admitting he was wrong on “peak oil.”  Rather than being at its peak, as he and his colleagues had claimed so noisily, even he now can’t avoid noticing oil is pouring out of the ground all around the world in increasing amounts even as available oil reserves are growing.

And why were he and his colleagues so wrong? In a word: Economics—the very laws of economics he’d never bothered to notice before, especially the principle observing that as prices for commodities go up, more production of those commodities (or substitutes for them) tends to comes on stream. For there is compelling evidence, writes Monbiot, that despite the best efforts of the likes of the Lucy Lawlesses and George Monbiots of the world to stop exploration and slow new production, a new boom in oil production has just begun.

The constraints on oil supply over the past 10 years appear to have had more to do with money than geology. The low prices before 2003 had discouraged investors from developing difficult fields. The high prices of the past few years have changed that.

Great news!

Unless, like George, you’re still a warmist and convinced fossil-fueled climate change is the new Armageddon.

Swimming in the path of progress

So a ragtag bunch of anti-industrialists has headed out to sea in boats made with petro-chemicals and powered by fuel oil to protest about oil exploration and the prospective production of petr0-chemicals 30km off the coast of New Zealand.

Meanwhile, a year on from BP’s Deepwater Horizon explosion, the Gulf of Mexico (the former economic Dead Sea) has been oil-free for seven months and enjoying more fish stocks than it has ever had, and the Gulf Coast itself has largely recovered.

“The spill was a disaster, but it was not the catastrophe that many people were portraying,” said Ivor van Heerden, a marine scientist who once headed the Louisiana coastal restoration programme for the state’s fragile eco-system of wetlands.

It’s the catastrophe that wasn’t. A non-catastrophe that will still help make offshore drilling better, cleaner and safer. A non-catastrophic oil spill that is still nonetheless the touchstone for most of the unwashed. Sure, as Don Boudreaux points out,

oil spills are compellingly photographable – and, hence, attention-getting and emotion-stirring.  In contrast, lower prices for – which, by the way, mean fewer resources used to bring to market – clothing, children’s toys, digital cameras, camping equipment, kitchen appliances, groceries, and other goods that we routinely enjoy are not photographable in any compelling way.  The result is that the social benefits of corporate innovations and competition are easily overlooked, ignored, taken for granted, forgotten.  But these benefits are enormous.

So why are there so many previously unwashed anti-industrialists swimming around in front of other people’s boats off East Cape ?

Precisely because the logic of environmentalism, as practiced by the anti-industrialists, is to deny man’s needs and the requirements of his survival—to deny the benefits they themselves enjoy—to follow instead a path which would logically lead to a society without technology. Even the technology that allows these people to sit, quite literally, in the path of progress.

Why oil is like pistachio nuts

Over at Anti Dismal, Don Boudreaux demonstrates (using pistachio nuts) why we'll never actually run out of oil.  What happens, you see,  is that unless technological improvement saves the day, what's left (whether it's oil or gold or pistachio nuts) simply becomes increasingly difficult to extract.

And no, this isn't a 'wriggle.'  It's actually an important lesson in resource economics.

Drill now, pay less

I've seen objections to the idea of opening up oil fields in Alaska and the Gulf of Mexico which say things like "Drilling in Alaska's National Wildlife Refuge won’t make the slightest difference at the pump, ever." 

How can drilling for oil that won't appear for ten years change the price of oil now?  The answer is simple:  Because the the expected price of commodities in the future plays a huge role in the price of commodities now -- and the 'economic engine' that transmits those expected future prices to the present is that oft-derided character, the speculator.

The basis for this claim is that any discrepancy between prices creates opportunities for profit, whether those price discrepancies are geographic, technological or temporal.  As long as storage costs are minimal -- and there's no more minimal storage cost than keeping your commodity in the ground -- lower expected future supply will mean higher prices now, whereas higher expected future supplies  will mean ... well, you can either do the maths, or see how the argument works with beer.

 As Robert Murphy explains:

If we step back and survey the big picture, what would happen is that the market in a sense would be transferring some of those future [Alaskan] barrels to the present. It's true, the market doesn't have recourse to time machines. But physical barrels of oil that would have otherwise sat underground in 2008, 2009, and so on, will now be brought to the surface and sold, because they have been displaced by the barrels currently buried in Alaska that will be brought to the surface and sold in 2018, 2019, and so on.

Simple, as I said.

But it's not just economic ignorance that is opposed to new drilling in Alaska and the Gulf of Mexico.  As Jeff Perren points out, there's also the political ignorance of members of Congress who think they have the right to dictate when, where and how any oil company should search for or extract oil -- and naturally there's environmental ignorance too: the misbegotten notion (for which the economic and political ignorance are just the facade) that these physical locations and their biota have 'intrinsic value' in and of themselves, whereas human beings and all our enterprise doesn't.

Whatever economic arguments are put up, that is the real motivation of opposition to new oil -- that human beings and all our enterprise, including our 'addiction' to oil, might just continue to flourish.

UPDATE:  I liked this comment at Hit and Run, which puts the 'intrinsic value' nonsense in context.

We could see how much people truly value pristine wilderness if the government would sell off ANWR.. If the Sierra Club outbids Exxon for the land, then it turns out they value it enough to prevent drilling. If you dont want the government selling it all off, they could just auction off the oil drilling rights...

As Ayn Rand pointed out, you can't  have a value without a valuer -- which makes complete nonsense of the very idea of so called 'intrinsic values.'  "The conceptpt “value” is not a primary; it presupposes an answer to the question: of value to whom and for what? ...  Material objects as such have neither value nor disvalue; they acquire value-significance only in regard to a living being—particularly, in regard to serving or hindering man’s goals."

It's not peak oil, it's peak politics

Those economics ignoramuses in the Greens are still attempting to make political capital from "the end of Peak Oil" -- and Helen Clark, being nothing if not desperate, has been continuing the cry.

They're either ignorant, or desperate for attention. "It is not the earth's capacity to deliver more oil" that is at threat, points out Jérémie T.A. Rostan, "but our capacity to extract more oil from it." The worldwide problem isn't too little oil, it's too much politics.

With about a half-a-century's worth of proven oil reserves, the problem is not in bringing on new production. Resources are ample. "The problems are not so much below ground as above it," i.e., "not geological, but political." The problem is that governments forbid access to resources that they themselves fail to manage properly, and they impose barriers on private companies' investments in surplus oil production capacity — i.e., to the satisfaction of consumers' energy needs.

The political problem effects both supply and demand.

Demand is rising in developng countries, true, but it is rising fastest in places that actually subsidise fuel prices -- "those emerging nations that also subsidize fuel prices, such as China, India, and — increasingly — the oil-producing nations themselves." In contrast, the data in BP's review show that 'consumers in Europe and North America are already responding to high prices by moderating demand'." (The same demand story is recorded here in NZ, where the price of petrol rose 7.3% and diesel rose 16.2% over the three months to May, while the value of fuel sales only rose 0.1% [ref, TVHE], and fuel taxes fell not a jot.)

Meanwhile, in the face of all this demand, and contrary to Economics 101 which tells us that all thing being equal greater demand leads to greater supply, worldwide supply is actually falling.

The recent upward trend of oil prices, [explains BP's chief executive Tony Hayward] is mainly accounted for, not by speculation, but by falling production. "Production by the Organisation of the Petroleum Exporting Countries," he writes, "fell by 350,000 barrels of oil a day last year."

In fact, global oil production started a downward trend in 2005.[3] Now, the question is, how on earth is it possible that global oil production responds as weakly as it does to such strongly rising prices — $135 for a barrel of oil in 2008 being nearly twice the price of a year earlier.

No, it's not peak oil. It's peak politics. Notes Rostan,

Sadly, far less than 10% of the world's oil reserves are in countries that allow private companies to operate freely. This means that the latter and, through them, consumers, are denied access to far more than 90% of the world's oil reserves. State-owned companies control more than 65% of the world's oil reserves — e.g., in Saudi Arabia. As for the 25% left, they are mainly situated in countries such as Iran, Russia, Venezuela, etc., where, because of above-ground political factors, private Western companies have the greatest difficulties working efficiently...

This is the reason that Economics 101 is not able to work. All things are very far from being "equal." It's not Big Oil that's screwed the pooch, it's big politics. Oil companies are being prohibited from exploring and drilling for new oil, and the production of 90% of the world's existing fields is controlled by thugs like Chavez, Putin, Ahmedinejad and the House of Saud.

The thugs have different, if not perverse, supply incentives. The incentive for politically-driven oil producers is not to produce more oil when demand rises, but to produce less. The less that's produced, the more power the thugs have. All things in politics are very much not equal -- like Winston Peters on steroids, they like being the centre of attention, however they have to do it.

Just to conclude, then, with your lesson for today: It is not the earth's capacity to deliver more oil that is at threat, but our capacity to extract more oil from it." In other words: it's not peak oil, it's peak politics. The market can solve the energy crisis, but only if it's allowed to work.

Tell Jeanette and Helen next time you see them.

Drilling for lower prices

WASHINGTON (AP) - The White House says President Bush is planning to lift an executive ban on offshore oil drilling.

And not before time. Everybody hand-wringing about inflation should support this. As Walter Williams pointed out recently, as long as the U.S. Congress holds up the production from new and exiting fields, then prices will remain high, and the US Congress remains "OPEC's staunchest ally."

It won't even take drilling to start for prices to drop. As soon as the US Congress legalises offshore drilling, the expectation of future production will cause the the price of future oil to drop -- a drop that will feed through to present prices.

"We can't drill our way out" of the problem of high oil prices? You bet we can.

Dirty old trains (updated)

Out of all the nonsense spoken on the $1.5 billion renationalisation of FailRail, perhaps the most hyperbolic has been the nonsense spoken about "climate change" and "carbon emissions."

Says Helen Clark, no stranger to nonsense, "With growing worldwide awareness of climate change ... many nations are looking at rail as a central component of their economic infrastructure – and so must New Zealand. A modern and well resourced rail system will lessen the carbon footprint of our transport network, and therefore of our whole economy."

Says Sue Kedgeley, a complete stranger to sanity, "We must encourage people to use the bus and train services... Getting people off the roads has to be a priority for any society that understands the basic reality of peak oil and climate change."

Really? Both Labour and the Greens have peddled the line "we need rail to reduce carbon emissions," and it's a line that the media has bought ("With petrol prices high and climate change haunting public policy, rail's renationalisation is timely" said the Herald yesterday, for example), and commentators have peddled ("rail infrastructure" is needed "to reduce transport-related greenhouse gas emissions" says Idiot/Savant) but it's a story that has fewer legs than Heather Mills McCartney.

Just to deal with a couple of untruths at once, I wonder if you could, for a moment, view these three modes of transport below and tell me which produces the least carbon emissions per passenger kilometre. On the left is the eco-weenie, 'planet-saving' girly car, the Toyota Prius ('Save the Whales' stickers not included); on the right is a modern diesel 'Virgin Voyager' (the very latest in diesel trains, and a few generations newer from the government's Soviet-era diesel units); and in the middle is a big mother-hugging earth-destroying Jeep Patriot.

Which of the three do you think is the biggest carbon belcher per passenger kilometre, and which the smallest?










Any idea which of them produces the least carbon emissions per passenger kilometre?

No, you're wrong. First of all, it's not the train. A British rail industry study reveals that "Modern diesel-powered trains are so polluting that a family of three or more would be responsible for at least double the carbon dioxide emissions on many routes when travelling by rail compared with driving in a typical medium-sized car." In other words, as the Times' Transport correspondent summarises:

"It can be greener to drive than catch the train."

Can you hear that, Helen? Do you understand English, Sue? "It can be greener to drive than catch the train." If this is true for modern diesels on the well-patronised British rail system, then how much truer is it for FailRail's antediluvian and poorly patronised infrastructure. The fact is, your ancient and poory managed rail system would not "lessen the carbon footprint of our transport network", even if it were modern, well-used and well-resourced -- which it's never likely to be.

So that's one contestant out of the way, and one myth destroyed with it. Rail is not 'green.' Time to 'fess up and sell the system off for scrap.

Now listen to another inconvenient truth, as you would have on Morning Report last week -- the Prius is not green either:

The hybrid Toyota Prius car has been exposed as being less economical than a diesel SUV.

In fact, Environmental website Clean Green Cars has released figures showing "current hybrid cars offer no significant CO2 advantage over an equivalent diesel of similar performance."

So that's another myth destroyed -- hybrid cars might offer posing value at Green Party meetings, but they offer "no significant CO2 advantage over an equivalent diesel of similar performance."

Inconvenient truth for a modern age.

UPDATE 1: Note that the above discussion only looks at passenger travel. Another inconvenient truth for FailRail enthusiasts to get their heads around is that much the same news emerges for long-distance freight. The most recent comprehensive New Zealand study directly comparing rail and road freight environment costs is quoted by Liberty Scott:

What did it say? Well it compared the environmental impacts of freight between Wellington and Auckland, Napier and Gisborne and Kinleith and Tauranga. The comparison is as follows:

.

Environmental costs per net tonne km in NZ$

Wellington-Auckland rail NZ$0.008, road NZ$0.006

Napier-Gisborne rail NZ$0.002, road NZ$0.002

Kinleith-Tauranga rail NZ$0.001, road NZ$0.004

.

So in other words, on average it is more environmentally friendly to send freight by road between Wellington and Auckland than by rail, but the opposite between Kinleith and Tauranga

As Scott concludes yesterday, "So if it's not economically efficient, if the environmental advantages are dubious and sometimes illusory, then why buy the railway at all?" Why indeed? Are even socialists that blind?

UPDATE 2: Another point most of the morons regularly miss when spouting their warmist nonsense about rail reducing greenhouse emissions is that if taxpayers need to subsidise FailRail to the tune of $80 to $100 million per year, then taxpaying industries will need to produce billions of dollars more to pay for this unsustainable white elephant -- with all the emissions that extra production implies.

There are some people who *want* higher oil prices

While the world's economies reel under higher oil prices -- higher in large part due to bottlenecks in the limited refining capacity available -- environmentalists are blocking the expansion of two refineries in Roxana, Illinois, and Richmond, California.

But maybe the new refineries aren't clean enough, you say?  The upgrade to the Illinois plant will produce a 95 percent reduction in sulfur dioxide emissions and a 25 percent reduction in nitrogen oxides.(Jeff Perren has the details.)

But maybe 'the planet' can't afford the new emissions, you say?  The upgrade to the California refinery will will actually reduce GHG emissions by 220,000 tons.  (Jeff Perren has those details too.)

But perhaps you cant see the point of this new capacity anyway, since like the opening of new oil fields it will be "too many years" until we see any result anyway. A lot of people talk like that.  If it takes ten years, they say, why bother?  Well, why bother planting new seeds ... ?

As Jeff Perren concludes, "There is much that is decidedly medieval" in the views of the opponents of progress.  Environmental objections to progress and wealth creation can be seen once again not so much as 'pro-planet' as they are anti-human.

UPDATE: On a related note, Paul Walker suggests the Greens are a communicable disease.

"Lock up the oil men"!?

James Hansen -- the man who last year likened the construction of a new coal-based power plant as equivalent to the holocaust; who said that trains bringing coal to the new power plant are like than the "death trains" that moving Jews to extermination camps; that Duke Energy's James Rogers is a prospective killer for supporting the new plant -- -- now tells the world that oil companies need to "be put on trial for high crimes against humanity and nature" -- crimes against humanity and nature, yet! -- for, quote,  "putting out misinformation even via organisations that affect what gets into school textbooks."  Unquote.

Hansen is not a lone nutter who marches up and down Oxford St with a cardboard sign saying "We're all going to die in five minutes." No, Hansen heads NASA's climate team, and he takes his sign around the world's capitals to spread his message of doom. He is "the world's leading advocate of the idea of catastrophic global warming, and is Al Gore's primary climate advisor..." For twenty years now he's been marching around the world's capitals predicting climatic disaster with absolutely nothing to show for it* -- he recently had to admit that the warmest decade in the last one-hundred years occurred before he was even born -- and any lingering remnants of sanity are now being replaced by shrillness and increasingly vicious hyperbole.

This is a dickhead who launched his warmist place in the sun by sexing up his evidence, and looks likely to end his career exposed as a man whose organisation has had to resort to cooking the figures to make even his less extreme claims begin to look semi-sane.  Christ, it's not like they're even good at that job: they even lost Wellington recently.

Frankly, if it's "misinformation" that he thinks oil company executives should be locked up for, you have to wonder why he's excluded himself and Al Gore from his fatwa.

NB: To those people who object that once can't criticise a scientist, I respond that Hansen stopped being a scientist that hot day in 1988 he started sexing up his figures in order to grab the limelight for his pet theory, and stopped being sane when he started talking about death trains.  If it's not obvious to you by now that this politics, not science, then I have an engine that can run on banana skins I can sell you.

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* When NASA’s James Hansen first sounded the alarm in Congress 20 years ago, says Steven Milloy at Junk Science, "he predicted that rising concentrations of atmospheric carbon dioxide, or CO2, would drive global temperatures higher by 0.34 degrees Celsius during the 1990s. But surface temperatures increased during that decade by only 0.11 degrees Celsius and lower atmosphere temperatures actually decreased. "  He's got even worse since.

Oil prices again

"Since falling energy prices in real terms has been the norm for centuries, it is instructive to ask: What has gone wrong in the past few years?"  Economist Barry Brownstein succinctly asks and answers the question.

Finding a scapegoat for petrol prices (updated)

The Government has decided how to handle the calls for a reduction on excise tax in petrol: To ignore them.

Specifically, to ignore them and to offer the public a scapegoat.

This is the real point, you see, of the Government-ordered inquiry in petrol pricing: to draw attention from the fact that without excise taxes and GST on petrol, the price would not be the record high of $2.10/litre it is this morning but a highly affordable price of around $1.25/litre. In the words of George Reisman, this will be the guilty interrogating the innocent in order to throw the blame somewhere else.

The reports around the traps this morning and the support for the inquiry from the Automobile Association show that the conjuring trick is working -- the media are too dumb to notice they're being used, and the AA are too keen to curry favour to point out the dishonesty.

The inquiry has absolutely no other point than to take the focus of the extent of government theft. There is absolutely nothing of any substance an inquiry can achieve. You can compare its theft below, in red, to the margins made by local distributors, in grey, and see for yourself the effect that bullying the local petrol companies could have:

The government takes far more in excise taxes and GST on petrol than the local petrol companies earn for importing, refining and selling the stuff, yet by offering up the spectacle of local oil company executives being harangued by local MPs the government hopes the public will forget the extent that the government is thieving from them, and maintain the illusion that the government is on the side of the motorist.

They know, of course, that can rely on the compliant media and a fawning Automobile Association to back up the lies.

UPDATE 1: Julian summarises the situation, for those of you who Lianne Dalziel hopes haven't kept up. "The reasons that fuel costs are so high are because:

1. The cost of crude is high. It is an international commodity. In NZ we are powerless to change that.
2. The majority of the local cost is made up of tax. The government can change this - but will not.
3. I understand that the return on capital for international oil companies has risen from 22% to 23% - that is an increase of only 1% - since oil was at US$40 a barrel. The costs of refining have risen and they are pouring huge amounts of money into exploration (despite governments trying to prevent them from exploration). The risks they face are enormous and they must be compensated for this.
4. Which brings us to the local petrol companies. As the MED graph shows, margins are not high historically speaking. They are powerless in the face of the current environment.

"As you say PC, this is just another exercise in blaming companies - and another attempt to [justify regulating] our lives and business." Don't buy it.

UPDATE 2: The nonsensical idea that international oil prices are being driven up by speculation, and not by basic supply and demand factors, should be given short shrift.

I've dealt before with the supply and demand factors, so I won't do that here. Instead, I'll let George Reisman explode the myth that, in the absence of genuine reasons for price movements, 'speculation' is capable of pushing up the price of anything.

Yes, it's true that many investors have been moving into commodities in recent months, but to blame them for the overall rise in prices ignores a number of things (including those supply and demand factors), including the much overlooked fact that in order to gain their profits the speculators or their agents will at some stage have to sell their holdings -- and if the quantities of their purchases are sufficent to shift the market upward (as the braindead say they do), then so too will their sales drive the market down. Explains Reisman:

The fact that speculators must lose in the absence of an independently caused rise in the demand for and price of the commodity in which they speculate is confirmed by the following supply-and-demand diagram. The diagram shows that initially, in the absence of speculators, the price of a commodity is p0, resulting from the demand DD and supply SS. [That is,] the general public buys the entire supply, equal to quantity OA, at the price p0.
Now, speculators appear on the scene, and when their demand is added to that of the general public, the total demand for the commodity rises from DD to D'D'. The result is that the price rises from p0 to p1.
At the higher price, the general public reduces its purchases from the full supply, OA, to the part of the supply represented by OB. The speculators buy up the part of the supply represented by AB. If the speculators bought the quantity AB all at once, they would have to pay a price of p1 for it. In the absence of an increase in demand on the part of the general public, the speculators would then have to sell back their supply at a price of p0, if they sold it back all at once.
The fact that they would probably buy the quantity AB in increments and sell it back in increments changes nothing fundamental, because the purchase and sale of each increment is described by exactly the same analysis.
In addition, there is the further problem of a likely movement of the quantity supplied to somewhere to the right of the line SS, in response to the rise in price.

Naturally, this is a problem somewhat helped in the case of oil by the natural tendency of governments to place extensive restrictions on supply.

And just so you know, this is the first, and probably the last, time this blog will play host to a supply-and-demand diagram. It's posted here so all the intelligent Treasury types who read this blog and who do use such diagrams can download it and use it in their submissions to Dalziel's inquiry. (If you want the page reference for your footnotes, you can read the argument in Reisman's book Capitalism, p217-218, and 224-225. You can find a PDF copy of the book online here.)

On fuel prices

There's a great letter in the Herald this morning from Libz member Shaun Holt:

On Fuel Prices
Why don't petrol stations advertise the cost of petrol as $1.25 plus taxes? That way everyone would see who is to blame for high prices - not the oil companies who find, collect, process and distribute the petrol, but the Government who takes nearly half of the cost, just because they can.

Shaun Holt

Tear down this tax, Dr Cullen!

I'm pleased to be able to correct an earlier negative of assessment of ANZ economist Cameron Bagrie by noting that he's come off the fence to make the obvious point that while the NZ government can do nothing at all about the international supply and demand problems pushing up the international price of oil, they can do something about the local price of petrol which is made up in large part by a large payment to government.  Says Bagrie:

ANZ Bank chief economist Cameron Bagrie says the Government should cut petrol taxes by 10 or 20 cents a litre to reduce the squeeze on incomes and help reduce inflation.

Bravo, sir.  I agree with you.

Our weekly oil woes

It's worth reminding ourselves once a week who's responsible for the rise of oil prices. It's not oil companies, it's the government, who takes more out of each litre than local retailers:
                        

If that pisses you off, then joining in Callum's email campaign is just one small thing you can do for mankind. And it's not just governments taking taxes who are to blame -- that's just the big fat red chunk band above -- it's also governments restricting refinery capacity and restricting new drilling and exploration who have made the blue band fatter than it needs to be, and oil resources lower than they should be.   And why do you think they've done that?  Brian Simpson explains:

    What do oil companies do? They spend hundreds-of-billions of dollars each year exploring for, drilling for, and transporting oil. They also spend vast sums refining oil into gasoline. Without oil companies there would be no gasoline, no plastics for myriad products (including appliances, packaging, and pace makers), no electricity generated with oil, and so on.
    In other words, our standard of living would be drastically lower. 
    What do environmentalists do? They prevent drilling in Alaska and offshore, which leads to less supply and higher prices...
    Environmentalists have also prevented new refineries from being built in the U.S. through lawsuits and regulations, to the point where no new refineries have been built in over thirty years. As a result, refining capacity has actually declined in the last few decades while demand has increased. This has contributed significantly to the high gasoline prices we now experience.
    In short, environmentalists have done everything they can to make oil and gasoline more expensive and our standard of living lower...

It's all a worryingly familiar parallel to New Zealand's own energy woes, isn't it?  And entirely consistent with the explicit misanthropy of modern environmentalism. 

Meanwhile, on the subject of refineries, the redoubtable Gus van Horn records that a county in South Dakota has approved via referendum the construction of what would be the United States's first new refinery since 1976.  1976! That's the good news.  However, while the large print giveth, the small print notes:

Despite a favorable referendum outcome ... opponents say the refinery has many hurdles to clear before construction begins...
    "There's probably a hundred pressure points that they have to pass through," said Ed Cable of Citizens Opposed to Oil Pollution, which currently has a lawsuit pending against the rezoning decision, Cable said.

Shades of New Zealand's Marsden B non-power station, don't you think, permanently mothballed by ecstatic local Greens.  Think about them this winter as the country struggles to maintain any semblance of a power supply.

Oil "profiteers"

Yes, we've all received those economically illiterate emails in our inboxes telling us to boycott BP/Mobil/Shell/Caltex to "send a signal" that their "profiteering" has to end, and pump prices come down.

Profiteering?  If you want to know who takes the largest chunk of local pump prices, take another look at the information posted by Bernard Hickey this week -- it's not the oil companies who take the largest slice of every litre sold, it's your government.

And as Stephen Hicks points out, it's the same situation in the States.  Despite economic illiterates bleating about the "exorbitant profits" oil companies are making, the rake-off ripped of by the US Government from oil and petrol dwarfs the amount earned by the oil companies who produce the stuff.  Says Hicks:

    So I paid $4.15 a gallon to fill up my car today. I'm happy to contribute to rising profits of American oil corporations and I thank them for delivering the goods successfully. At the same time I am ticked off at the politicians, both domestic and foreign, who are hobbling production efforts, collecting enormous taxes, and emoting false sympathy for the consumer's pain. The Tax Foundation notes that between 1977 and 2004 the 29 largest energy companies in the US earned $630 billion in profits. A nice big number. During the same period, however, the US federal government collected $2.1 trillion in taxes ($1.5 trillion in excise taxes on gas and diesel, $518 billion in corporate income taxes, and $40 billion in taxes on "windfall profits"). So at whom should we be pointing fingers of blame?

Note that for that $2.1 trillion -- $2.1 trillion! -- the motorist gets the joy of watching most of his hard-earned head down the black hole of big government to buy even bigger government -- a government with even greater powers to hobble production, collect even more enormous taxes, and cry even more crocodile tears over the motorist's plight.

While this $2.1 trillion windfall goes to government as payment for being a meddling intrusive behemoth that all but makes oil production illegal, the $630 billion of oil company profits heads to them as their only payment for the risk, enterprise and diligence in exploring, drilling, transporting, refining and selling the stuff that is the lifeblood of industrial civilisation -- it's not just reward for delivering the goods successfully, it provides the funds needed to reinvest in producing even more oil, which in the end is the only way pump prices are going to come down.

As Matt B. pointed out a few weeks back in my comments section:

   How different peoples' reactions would be if, instead of reading "high prices," they read "scarcity".
    It would transform the debate. The immediate question that follows would not be demands for price controls or export restraints ,etc., but instead, "how do we raise supply?"

What we certainly shouldn't be supporting is a huge windfall gain to the very people who make raising supply impossible.

Think about this next time you pull up at the pump, or receive one of those illiterate emails. Would you rather give more money to those whose goal appears to be the long-term strangulation of oil production?  Or to those who make the long-term reduction of oil prices possible? 

In fact, don't just think about it: do something.  Next time and every time you hear a politician saying there's nothing they can do about high oil prices, write a letter saying "Bullshit!"

UPDATE: British truckies have blockaded streets around London in protest at the UK Government's grab, snatch and take through fuel taxes, which are the highest in Europe.  Liberty Scott has the news.

Oil, oil everywhere

Punters complaining about the exorbitant profits petrol companies are supposedly making with rapidly rising pump prices should look at the charts Bernard Hickey published yesterday to see how local companies have in fact been squeezed between the international price of refined oil, and the amount that governments gouge from motorists in taxes, duties and GST.
                        
It doesn't require a rocket scientist to realise that if anger should be directed anywhere then it's at the government, who take more from every litre delivered at the petrol pump than the owners of the petrol pumps do.

And here's more good oil on oil prices:

• George Reisman exposes the ignorant and dishonest politicians who heap blame on wary oil executives for the consequences of their own reckless and destructive policies.  See  In the U.S. Senate the Guilty Repeat Their Interrogation of the Innocent.
• Robert Murphy on the "big lie" the US Government is telling on inflation.  Murphy fisks the news that "slower than expected overall inflation was due to falling energy prices and flat food prices. Energy fell 0.2 pct, the largest drop since December, while food was unchanged in the month. Within the energy sector, gasoline fell 4.6 pct, the largest drop since December."  And guess what?  It's not exactly true.  See The Government's Statistical Whopper of the Year.
• Ed Cline exposes the facts about the US relationship with Saudi Arabian oil producers that fatarse film-maker Michael Moore might have found if  he had a brain bigger than his stomach.  See Waging the War of Words.

Petrol Porkies

As petrol at NZ pumps head towards two dollars per litre, commerce minister Lianne Dalziel says his morning there's nothing her government can do to lower prices.

Au contraire, Lianne.  Since the government is taking a fairly savage proportion* of the cost of every litre in tax (which is far more than the profits the oil companies make on every litre of their own oil every litre, and with GST on top) I'd say there's something very tangible the government can do, don't you?  

And this is not to mention the extra twenty-five cents per litre (plus GST) that the government is about to levy to pay for feelgood anti-global warming measures, and for its latest bout of constructing public transport infrastructure that few people want to use.

So frankly, Lianne, there's something very simple your government could do to lower petrol prices: Stop stealing.

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* Last I checked this was something of the order of forty-seven percent, and that was before the extra five cents per litre 'green' tax added on April Fool's Day this year.  Perhaps someone with a calculator and access to an accurate account of the theft could let me know this morning what it amounts to now?

UPDATE:   Thanks to commenters JC and 'Spam,' who've come up with these figures:

    Going back to early 2007, taxes were $0.50 excl GST.
    GST is charged on the total price of fuel, and with a total price at around $2 / litre, the GST component is about $0.22. Now, with the importer margin being only around $0.18 the government is making more money out of GST ONLY than the oil companies are making on a per-litre basis!
    [On top of that there's] the ACC levy of 7 cents, soon to be 9 cents on each litre. 
    So you have a 50 cent levy, a 9 cent ACC levy plus 22 cents GST... in round figures [that's about] 80 cents per litre to the government.
To put that in perspective, the government's take is about what we used to pay for petrol around 1997/98.