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How high can it go? Petrol that is

By Nicholas Gruen - posted Monday, 14 November 2005

Instinctively unable to believe our luck, we’ve been predicting the imminent exhaustion of our resources since the industrial revolution first took hold.

When you’re predicting a long way out you won’t have much to say unless you understand the fundamental logic of the problem.

Thus over two centuries ago Thomas Malthus argued that population grew exponentially (2, 4, 8, 16) whereas food production grew arithmetically (2, 4, 6, 8). In 1865 another great economist William Stanley Jevons focused on the issue of non-renewability. “Some day our coal seams [may] be found emptied ... Our fires and furnaces ... suddenly extinguished, and cold and darkness ... left to reign over a depopulated country.” Malthus and Jevons may turn out to be right, but not anytime soon.


Someone who’s already wrong is the shameless self-publicist Paul Ehrlich. In the late 60s he predicted global mass starvation within a decade. As one prediction after another was falsified, he segued unblushingly onto the next predicted catastrophe.

By then economists were becoming much more optimistic, again appealing to the underlying logic of the situation. Julian Simon - who subsequently proved himself almost as simplemindedly optimistic as Ehrlich was alarmist - showed how well markets handled resource depletion problems. Technical innovation reduces costs, improves quality, finds and harnesses new resources and or economises on the resources that remain.

Responding to Ehrlich’s comment, “If I were a gambler, I’d take even money that England will not exist in the year 2000”, Simon famously challenged Ehrlich to nominate a basket of five commodities that would rise in real price over the next decade. Every one fell!

Even so, oil is the first major global commodity showing signs of exhaustion. US Government geologists have production peaking somewhere between 2021 and 2112. Meanwhile China and India’s demand surges as they more than quadruple the number of rich people on earth!

So where will it all end? First the good news. Like Simon says, those old pals, capitalism and technology will handle resource scarcity admirably.

Oil prices could stay high for quite a while. (I guess you were hoping I wouldn’t say that.) That would slow our economies as we adjusted to the new scarcity. But adjust we would - by reducing demand and improving the viability of alternatives - both fossil fuel and renewable. And the alternatives will keep getting cheaper.


So I’m with Simon on resource scarcity. But the thing that really scares me is about too many resources, not too few - in our atmosphere that is. While there’s lots of uncertainty about how much effect we might be having, it’s looking increasingly like greenhouse gas emissions from mining and using fossil fuel burning are changing our climate. And that’s a problem that can’t be solved by market forces until there’s the political will to “internalise” the cost of greenhouse gas emissions by taxing or otherwise limiting them.

You wouldn’t think we’d need to wait till we’re certain we’re stuffing up our planet, before we’d sacrifice a per cent or two in economic growth - that means waiting another quarter or so to reach any given increase in our income - to buy some insurance against climate change.

But a truly global agreement, which is what we need, is hugely difficult politically. It’s not made any easier by the intransigent sanctimony of developing countries wagging their fingers at the rich countries - “You created the problem, you fix it” - and the soft-headed credulity of those who swallow such nonsense. (Imagine exempting the poor from water restrictions in a drought!)

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First published in The Courier-Mail October 5, 2005 as “No pain at the bowser, no gain on global warming”.

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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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