Monbiot’s Mistake

July 3, 2012

George Monbiot has today announced his discovery of economics. Well, that’s perhaps not precisely what he meant, but it’s certainly what this means:

“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.”

You see, there’s no such thing as supply-and-demand as discrete quantities. What there is is ‘demand-at-a-price’ and ‘supply-at-a-price’. Until oil passed the $70/barrel price – and looked to remain there for the long term – there was no additional supply, because there was no demand for oil at $70/barrel. Now the market price is reaching over $100/barrel, there certainly is.

Monbiot is interpreting this to mean that peak oil, which he seems to conceive of as actually running out of the stuff, is not going to happen. However, this isn’t what peak oil actually is. Rather, ‘peak oil’ is a price of oil so high that other commodities fulfilling a similar role become cheaper by comparison. This includes, for example, renewable sources of electricity, hydrogen or electric cars, and non-oil based plastics and lubricants. In economics, these are known as ‘substitute goods’.

The increasing supply of oil from non-traditional sources spurred on by the high oil price is beginning to foster a market in substitute goods. For example, the US firm Metabolix has been in the business of producing plant-based plastics for several years now, and is the brainchild of ex-oil and pharmaceutical types. This stands outwith any Government subsidy programme, although I’m sure significant amounts of subsidy for corn in the US helped. We can expect this to continue as the price of oil rises.

As a result of this, there will not be one ‘peak’ for oil – there will be multiple plateaus and transitions in the price, as one substitute good replaces demand for oil from a particular sector. Eventually, our economy will no longer be dependent on it, as the price rises so high that we substitute it entirely. This will be long before it actually runs out; as has been said, the stone age did not end because we ran out of stones.

The above is not an argument against environmental activism, or leaving everything to the market – far from it. ‘Peak Oil’ will not come soon enough to prevent dangerous climate change, and so activism, both for subsidies for cleantech which bring forward the date at which they’re cheap enough to be a substitute good and against oil production fromthe likes of the tar sands, which increases the cost of gaining permits and so on, makes a difference. This fundamentally economic difference made by environmental activists may yet be the difference between dangerous climate change and climate change we can just about adapt to.

George Monbiot is continuing to provide a source of disappointment for me personally. Given that I’ve based significant chunks of my opinions on decarbonising the economy on his book Heat, the mistakes made in his current attempt to bring the entire economy under his analysis are somewhat dispiriting.

Another example is out today. George is – in an entirely laudable fashion – pointing out to the people marching with the TUC that they should probably be in favour of something too rather than simply against anything they don’t like. Hilariously, he’s already got some blowback from comedy leftie Cath Elliot, whose main purpose in life appears to be to fulfil every Daily Mail stereotype of a slightly ridiculous uber-feminist. She – without realising it – has demonstrated to George why his endeavour cannot possibly succeed, as the people he’s talking to want to be against specific bad things without ever having to make hard choices about how they work. This is a genuine quote from the piece:

“I’m marching because I support nurses, teachers, care assistants, Sure Start centres and libraries. For the voluntary and community sector, for hospitals, midwives and schools. I’m marching because I believe that the state has a responsibility to take care of all of its citizens – not just those who can afford to pay but everyone, no matter who they are or what they’ve done. I’m marching because I’m for universal benefits from the cradle to the grave, and because I believe that disabled people, the young and the elderly have just as much right as everyone else to live lives free from poverty and stigma.”

I’m sure Cath believed this sounded ever-so-inspiring when she wrote it. However – and quite typically – it glosses over any possible distinction between types of provisions of services. There’s actually nothing in there that Cameron or Clegg would disagree with, it’s that vague.

This unthinking emotive response to policy is what George is up against in trying to persuade the ‘radical left’ in having some concrete policies they could fight for. Tim Worstall has already done an evisceration from the classical liberal perspective, but there’s one thing I’d like to pick up on. It’s this bit:

“…with a commensurate reduction in the income tax and national insurance paid by people with low earnings.”

Tim notes with glee that George is endorsing a policy of the Adam Smith Institute and UKIP, all haters of the notion that the State should compel you to take out insurance. NI, as originally conceived, is the contribution you make towards any benefits you might require from the state – Jobseekers’ Allowance, the state pension, Bereavement Allowance and so on. It also partly funds the NHS. Although it’s drifted away from its original intention, it still represents an important – and liberal – principle – that everyone should pay to look after themselves.

It’s a fund to which everyone contributes and to which everyone is entitled as a consequence. The private alternative – unemployment insurance – would be unaffordable to the least well off, as their premiums would constitute a significant fraction of their income. However, an insurance model based on universal contributions ensures that an affordable safety net exists for everyone, regardless of income.

George wants to turn this into a de facto redistributive tax, which will only serve to decrease support for the principle of universal contribution to a hedge against universal risk. It’ll send a message to those who aren’t the worst off, but are getting there, of ‘Don’t worry about looking after yourself – there are people better placed than you to decide how you should be looked after’. I’d argue, by contrast, that National Insurance should be extended to a greater fraction of PAYE contributions and be used as a true universal form of health insurance. Labelling it ‘regressive’ is to miss the point – insurance is something you do because you need to guard against risk, and if working with other people can reduce your costs in this regard, then it’s a great thing for everyone. The only thing I’d add in this regard is the provision of different packages of benefits – the ones listed above may not be appropriate for you, as you may get more value out of a system of vouchers. You should have the option to hedge against differing types of circumstance, rather than having those circumstances mandated from on high. This may involve some kind of private provision, but as long as the risk remains distributed across the population, shielding high-risk groups from excessive premiums, that’s no bad thing.

Global Warming is Bad News

February 17, 2011

I’m surprised that I even need to say this, but global warming is a bad thing that we don’t want to happen. This simple message appears to have been lost as a consequence of the rise of climate scepticism. And so, when we get further confirmation that a bad thing looks almost certain to happen, our response shouldn’t be to be ever so slightly smug that it looks like we were right about the bad thing happening. It certainly shouldn’t be:

“…we can say, with an even higher degree of confidence than before, that climate change makes extreme events more likely to happen.”

It should be:

“…we can say, with an even higher degree of despair than before, that climate change makes extreme events more likely to happen.”