This is nonsense and assumes that politicians and commentators like himself know better than the market. He is also implying that oil is ‘too cheap’. But in economic terms if a good is ‘too cheap’ then there must be a shortage, meaning that the price of the good has been forced below its market clearing level. Only a fool would argue that this is the case with oil.

Furthermore, in a free market prices are the result of supply and demand. However, it’s obvious that Colebatch is not talking about free market prices but prices distorted by taxes. He inadvertently admits this by recognising that cutting petrol taxes would increase consumption. But if we are running out of oil, as he insists, then an increase in demand will result in raising the price of petrol.

Not only does Colebatch fail to see the contradiction in his own argument he also does not seem to realise that he is arguing for a conservation tax. Such taxes are based on the easily refutable opinion that governments are more efficient at conserving resources than markets. In any case competent economists know that such taxes have undesirable effects.

By artificially restricting the use of a resource, whether it is renewable or not, these taxes force producers to increase their inventory of the resources at the expense of living standards. The effect on oil, for example, would be to reduce the rate of consumption and direct investment into costly substitutes.

But this policy would be a sheer waste of resources, a grotesque malinvestment, because artificially extending investment to the conservation of oil — or any natural resource — to the point where the opportunity cost of investing in alternative fuels exceeds the cost of investing in oil in the absence of the tax is truly wasteful¹. But as I pointed out earlier, if Colebatch and his ilk are right about the world running out of oil then there is absolutely no need for them to use taxes to induce further scarcity as to encourage the development of alternative energy sources.

Apart from attacking the living standards of the masses — something that doesn’t seem to bother the compassionate and exceedingly well paid Colebatch — this policy would cause premature investments to be made in nascent or uncertain technologies. We live in a wonderful world (apart from the existence of Islamofascists and fanatical leftists), one in which rapid technological change is not only taken for granted it is treated almost as if it is part of a natural and enduring process.

Instead of allowing politicians to strong-arm investment into alternative energy sources by deliberately raising the price of oil we should allow supply and demand full sway. Doing this allows more time to improve existing technology and weed out the failures while at the same time developing new technologies. Despite what brilliant economists like Colebatch think the market has been incredibly successful in developing substitutes when they are needed. This is a fact that history fully vindicates.

It wasn’t politicians or journalists who successfully developed coal as a cheap substitute for charcoal in eighteenth century England. When whale oil for lighting lamps was becoming so scarce in the nineteenth century that the poor could no longer afford it, it was not a journalist who learnt how to extract kerosene from oil and make it so economical that that even the poorest no longer gave any thought to the cost of fuelling their lamps.

It was entrepreneurs, not journalists, politicians or bureaucrats who discovered how to substitute steam for wind, animal and waterpower. It was innovating entrepreneurs like Edison who found out how to substitute electricity for steam, aluminium for cast iron pots and pans, transistors for valves and optic fibres for copper cables, and so on. Any one with a reasonable knowledge of economic history knows that the market has created an abundance of resources.

What journalists like Colebatch cannot grasp is that economic growth is not a crude process of piling up homogeneous capital goods: it is a resource generating process. And the prime mover in the market process is the entrepreneur, the actor who has to be free to explore and experiment. It is entrepreneurship that makes the market’s dynamic discovery process so successful. And it is the vital role of entrepreneurship that is always missing from the nostrums of posturing politicians and ignorant journalists.

There have been many warnings in the past of an imminent exhaustion of resources. The 1946 Paley report is one of the better known ones. It was sponsored by the US government and glumly predicted that the country’s supply of domestic minerals was dwindling to the point where the demand for foreign supplies would soon accelerate and so turn terms of trade against the industrialised world.

The prediction was confounded by the market process. People, particularly journalists, who make these predictions do not truly comprehend the vital role prices play in the market place any more than they grasp the essential role of entrepreneurship. It is market prices that prevent the complete exhaustion of natural resources. By allowing the price to continue to rise it would eventually reach a point where it becomes uneconomic to use the resource.

This is why the world will never run out of oil. It also explains why industrial development would have been greatly retarded if past warnings of the imminent exhaustion of natural resources had been heeded. Imagine the enormously wasteful investments that would have been made if politicians had forced industry into trying to develop substitutes for these resources.

It’s strange that Colebatch neglected to include any figures pertaining to oil reserves. I call it strange because Colebatch has never been shy about producing statistics whenever they support his argument. Well, I’m a generous sort of bloke so let me do it for him.

Cambridge Energy Research Associates (CERA) recently released a report predicting that by 2015 oil and natural gas production capacity will have risen by 25 per cent. Peter Jackson, CERA’s director of oil industry activity, is quoted as saying that

[t]here is not really a supply problem in our view….We see no reason why any reasonable demand level won’t be met.

How can this be? Didn’t the remarkable Mr Colebatch assure his readers that the demand for oil could not be met? Then we have the expert opinion of Mr Leonardo Maugeri, vice president of the Italian energy company ENI. In his article Two Cheers for Expensive Oil, (Foreign Affairs, March/April 2006), he estimates current economic oil reserves at 1.1 trillion barrels, enough to satisfy the world’s oil needs for the next 38 years. In addition there are some 2 trillion barrels of recoverable reserves².

Then there is the US Interior Department’s Minerals Management Service. It estimates that the country’s outer continental shelf contains over 419 trillion cubic feet of natural gas and 85 billion barrels of oil. The oil estimate is four time bigger than the country’s current reserves and is large enough to eliminate the demand for foreign oil for the next 20 years. (It should be pointed out that US oil reserves have been artificially lowered by Congregational bans on oil exploration).

Now for something that will give the self-righteous Mr Colebatch a bad case of heartburn. Michael Lynch of the Massachusetts Institute of Technology estimates that the world has over 6 trillion of recoverable oil. Additionally 15 trillion barrels of what is called unconventional oil (excluding coal liquefaction) have been identified. That gives the world over 21 trillion barrels of oil that we know of.

So why in heavens name is Colebatch calling himself a journalist?

1. A simple example should suffice to explain the argument. If resource investment A yields a return of 15 per cent while project B yields 10 per cent investors will move from B to A. Assume that politicians have decided that investment A is destroying the planet (meaning they hope to get greenie votes by damaging A) and so they heap an 80 per cent tax on it. Investors will now move to B in violation of opportunity costs. This lowers society’s welfare.

2. ‘Economic reserves’ of any resource do not represent estimates of the total amount of that resource in existence. They only represent reserves that are worth finding at a certain price, including price expectations and the current state of technology. This is why estimates of resources change with prices.

Productivity, wages and jobs — more economic stupidity from the media, part I

Productivity, wages and jobs — more economic stupidity from the media, part II

Lefty journo Tim Colebatch screws up on Australia’s resources boom and exchange rates

The underconsumption myth is back again

The Age slimes the free market — again

Getting it right on recessions and the ‘wealth effect’

A lefty reporter admits excessive wage rates cause unemployment

Gerard Jackson is Brookes’ economics editor