Change you can believe in?

Barak Obama asked us “to believe not just in my ability to bring about real change in Washington, but to believe in” the ability of the American people to do so.

So what exactly will the election of President Obama change?



Not the face of administration, clearly!

European Parliamentary Party expects Lib Dem activists to listen and learn

What an organiser writes bout the event they are organising says a lot about them and how they view their audiance.

Consider the break-out session at tomorrow’s One Day Policy Conference being run by the Liberal Democrat European Parliamentary Party entitled The European Dimension. Unlike the other five sessions, which set out the broad parameters of the issue they would seek to discuss and then propose some questions, the description of The European Dimension consists of a very long paragraph extolling the virtues of the European Union. This seems to be a case of preaching to the converted at a Lib Dem conference, but may be designed to deter any doubters from attending.

There follows a paragraph in which we are told that “Three of our MEPs will speak about their work and that of the ALDE Group in the European Parliament… This workshop will tell you why and how Europe matters to Liberal Democrats” (emphasis added).

Note who is doing the talking here, and who is expected to listen and learn. Pity the naive activist who thought that policy conferences were an opportunity for the grass roots to influence policy.


Fortunately, the rest of the sessions appear to have been organised by more concensual bodies. From taxing women to the Home Affairs team on drugs, it looks like being an interesting day.

Taxpayer loans to people who want new cars: Labour's latest bail-out wheeze

When I find myself in agreement with both Friends of the Earth and the Church of England I know that something truly bizarre is happening.

And bizarre is the nicest word I can find for the Government’s plan to lend taxpayers money to private citizens so that they can buy new cars.

Apparently, the British borrow a staggering £20 billion a year to finance the purchase of new cars. And with credit drying up and sales down 36.8% on the previous year, motorcar manufacturers have been left with thousands of unsold (some might say “unwanted”) cars.

Step forward Lord Mandleson, scourge of savers and friend of the spendthrift.

The Times reports that car-buyers are to receive loans from the taxpayer: finance companies linked to the auto industry will be given access to the Bank of England’s special liquidity scheme so that they can continue to offer loans.

It is bad enough that the government intends to underwrite mortgages at a time when the assets underpinning them are falling in value. At least a house will continue to have some value; few houses will not cover the majority of a person’s mortgage. Cars, by comparison, are not assets but consumption goods, and lose value from the moment they roll off the forecourt. What is more, the collapse in new car sales has been shadowed by a parallel collapse in the sale of second hand cars that has pushed down the price of used cars and so will hasten the depreciation of the value of new cars.

Where is this madness to end?! Will the government soon be offering interest free credit at Dixons? How long before one can sign up for an HM Treasury credit card (26.5% APR and balance transfers of up to the sum of your mortgage, interest free until the next financial year).

The fact that Britons were borrowing £20 billion a year to finance the purchase of new cars is not an admirable state of affairs to which we should be aspiring, but a symptom of the extent to which the UK had become a buy-now-pay-later culture. As the government held down interest rates so as to stoke an unsustainable boom, saving became unattractive while borrowing was made all-too-easy. The result was that economic growth and personal consumption were based on unsound foundations. The dangerous credit bubble that was created has now burst, throwing millions out of work and causing the economy to shrink by over 2% in just six months, and we cannot avoid these tragic consequences by trying to recreate the failed system.

The solution to the current crisis, and the way to avoid returning to boom and bust, is not to pour millions of pounds worth of taxpayers’ money into the hands of people who want to buy a new car. That the car manufacturers mistook inflationary demand for real demand is a tragedy, and reality will hit shareholders and employees hard. But restoring the credit flow will only push them back into fantasy, while depriving the taxpayers of the money that they would otherwise spend on other things, saving or creating other jobs. If the only way to maintain a car industry at the size it operated in 2007 is for consumers to borrow £20 billion a year, then the car industry will have to contract.

There is a recession on. People are right not to buy new cars. If the need to replace their cars, the second hand showrooms are full of good cars at great prices. If they really must buy new, they should be willing to pay the market rate of interest – which in these uncertain times is suitably high. For the government to deny this is unbelievably stupid. But then, what did I expect?

Making the civil service more businesslike

This is all the more amusing for having been written in the 1930s!

Officialdom classifies activity according to the capacity for undertaking it formally acquired by means of examinations and a certain period of service. 'Training' and 'length of service' are the only things which the official brings to the 'job'. If the work of a body of officials appears unsatisfactory, there can be only one explanation: the officials have not had the right training, and future appointments must be made differently. It is therefore proposed that a different training should be required of future candidates. If only the officials of the communal undertaking came with a business training, the undertaking would be more business-like. But for the official who cannot enter into the spirit of capitalist industry this means nothing more than certain external manifestations of business technique: prompter replies to inquiries, the adoption of certain technical office appliances, which have not yet been sufficiently introduced into the departments…, the reduction of unnecessary duplication, and other things. In this way 'the business spirit' penetrates into the offices of communal enterprise. And people are greatly surprised when these men trained on these lines also fail, fail even worse than the much-maligned civil servants, who in fact show themselves superior at least in formal schooling.

It is not difficult to expose the fallacies inherent in such notions. The attributes of the business man cannot be divorced from the position of the entrepreneur in the capitalist order. 'Business' is not in itself a quality innate in a person; only the qualities of mind and character essential to a business man can be inborn. Still less is it an accomplishment which can be acquired by study.... A man does not become a business man by passing some years in commercial training or in a commercial institute, nor by a knowledge of book-keeping and the jargon of commerce...

When these obvious truths became clear in the end the experiment was tried of making entrepreneurs, who had worked successfully for many years, the managers of public enterprises. The result was lamentable. They did no better than the others; furthermore they lacked the sense for formal routine which distinguishes the life-long official. The reason was obvious. An entrepreneur deprived of his characteristic role in economic life ceases to be a business man. However much experience and routine he may bring to his new task he will still only be an official in it. It is just as useless to attempt to solve the problem by new methods of remuneration. It is thought that if the managers of public enterprises were better paid, competition for these posts would arise and make it possible to select the best men. Many go even further and believe that the difficulties will be overcome by granting the managers a share in the profits… But the problem is not nearly so much the question of the manager's share in the profit, as of his share in the losses… To make a man materially interested in profits and hardly concerned in losses simply encourages a lack of seriousness…

(Ludwig von Mises, Socialism, pp215-7.)

Peter Riddell slams Labour and Tory “peripheral initiatives” on economy

Peter Riddell is the doyen of Times columnists and his insights into politics are usually pretty spot-on. It was therefore gratifying to see him arguing in yesterday’s column that the “irrelevant initiatives and hectic trips around the country” of Gordon Brown and David Cameron are merely a substitute for action, and that their many and varied proposals are economically flawed and designed to buy-off political constituencies rather than achieve macro-economic recovery.

Brown's pledge to create 100,000 jobs and Mr Cameron's new savings package do not address the cause of the deepening recession: the lack of credit. Everything else is secondary… [T]he job and savings initiatives are distractions. They address symptoms not causes…

Both the Brown and Cameron initiatives are about political positioning: to demonstrate their concern about the recession and to show they are doing something. The most damaging charge now is of inaction. The plans are also aimed at potential supporters, with Mr Cameron generating a positive response from Tory websites and activists seeking tax cuts, even though he has been criticised by independent commentators.”

Riddell is entirely correct. The only way this recession will end is if the equilibrium between borrowing and lending is established, and preferably at a level that sees interest rates reflecting real time preferences, rather than being massaged down by governments in an effort to stimulate short-lived but vote-winning “booms” (today rebadged as “soft-landings” and even “recoveries”).

I am not entirely sure I agree with his thrust that this should be achieved by the Government pumping vast sums of extra money in to the banking sector: today’s Times headline brings tears to the eye. Excess credit expansion is what brought us to this sorry state and further credit expansion is only going to bring us her again in the future (‘If you are in a hole, the first thing to do is stop digging’). However, whether one accepts that the economy needs to go through a period of readjustment or you believe that masses of liquidity needs to be pumped into the banking sector to stop an outright collapse, the fact remains that bail-outs for car companies, government make-work schemes and financial gestures are not only going to fail in their objectives, but will in the process make the situation a lot worse.

Riddell is not nearly firm enough in this, however, and occasionally lapses into Keynesian fantasy. “Bringing forward capital projects makes sense,” he claims, before admitting that it “is unlikely to have more than a marginal impact.” Similarly, he thinks that “There is a case for boosting saving in the long term, but not in the short term when the need is to raise spending,” ignoring the fact that money saved equals money spent: banks can’t hang onto money for long, and sooner or later it has to be invested in businesses or – as the result of more misguided government intervention – used to buy government bonds, which means that either way it ends up in the “real economy”. One man’s saving is another man’s (or company’s) borrowing and spending.

He also gives his blessing to the idea of extended state guarantee for loans that has been proposed by both the government and the Tories. But this is an extremely dangerous proposal for two reasons. Firstly, businesses are currently going bust because lenders are not willing to extend credit to them for fear that they will go bust anyway and thus default. If government guarantees these loans, banks will have no reason to exercise one of their primary roles – as arbiters of who is credit-worthy and who is not – and will be inclined to loan money to all and sundry, knowing that the bank is shielded from loss. The result will be that the government will end up with huge numbers of loan defaults to cover.

And that creates the second problem, which is the moral hazard facing the government as a result of these loans. According to Riddell, “The answer is not unconditional bailouts, as in the 1970s, but some way of breaking the credit logjam”. But once a firm that has outstanding loans backed by government guarantee is faced with bankruptcy, it will have a far more powerful hold over government when it seeks a bail-out. The argument that a subsidy of a few million will avert a collapse and default that saddles the taxpayer with a debt of tens of millions will be hard for government to resist. Conversely, the flood-gates of industrial policy will be open as government will expect influence in return for its largesse: as Riddell himself admits, “the larger that government guarantees become - and they could be enormous - the greater the demand for specific commitments in return.”

Haven't I already said all this?

This all sounds very familiar!



In the words of Ludwig von Mises, "a government can spend or invest only what it takes away from its citizens... Its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity."

A few words from Gordon Brown

"Under this Government, Britain will not return to the boom and bust of the past."
Pre-Budget Report, 9th November 1999

"Britain does not want a return to boom and bust."
Budget Statement, 21 March 2000

"Mr Deputy Speaker, we will not return to boom and bust."
Budget Statement, 7 March 2001

"As I have said before Mr Deputy Speaker: No return to boom and bust."
Budget Statement, 22 March 2006

"And we will never return to the old boom and bust."
Budget Statement, 21 March 2007


Hat-tip to Eamon Butler for pulling all these together. I'm sure that there were more!

Che: the prequal?

It might be worth watching this before indulging in any two-part encomiums for Che Guevara.



Not sure about the diversion into Mao, but the theme song's pretty funny, too.

Another reason to like Paul Walter

Perhaps we should set up a small factory making these.

The pot calling the kettle black

According to the Daily Mail, the Pope has been accused of spreading fear about homosexuals.

Imagine!

Are our leaders misrepresenting Keynes?

Central Banks appear to be citing Keynesian monetary policy as a reason for pushing down interest rates to dangerously low levels.

Yet it is far from clear that the dead economist would himself have approved of low or no interest rates.

According to his General Theory of Employment, Interest and Money, when the "rate of interest has fallen to a certain level… almost everyone prefers holding cash to holding debt which yields so low a rate of interest," as a result of which central banks can "lose effective control over the interest rate" (p. 207).

The problem, as I have noted repeatedly, is that if interest rates are low, there is no incentive to lend money, thus furthering the very “liquidity trap” that the Central Banks believe they have to resolve. As Keynes understood, people have no incentive to hold bonds (or deposits) rather than cash. In fact, the rational investor would shift their money abroad.

Rather than resolving the problem, today’s low interest rate policy is sowing the seeds of the next economic crisis by encouraging further credit expansion which, in turn, will lead to further misallocations of resources and requiring future punitive interest rate rises.

The role of the economist as policy advisor

Economists are not traditionally popular as policy advisors. Economics teaches that resources are limited, that choices made imply opportunities forgone, that our actions can have unintended consequences. This is typically not what government officials want to hear. When they propose an import tariff to help domestic manufacturers, we economists explain that this protection will come only at the expense of domestic consumers. When they suggest a minimum-wage law to raise the incomes of low-wage workers, we show that such a law hurts the very people it purports to help by forcing them out of work. On and on it goes. As each new generation of utopian reformers promises to create a better society, through government intervention, the economist stands athwart history, yelling "Remember the opportunity cost!"
Peter G. Klein: Why Intellectuals Still Support Socialism.

The Green Road to Nowhere

History is repeating itself, though whether as tragedy or farce awaits to be seen. As our economy enters another of its periodic recessions, caused as ever by government meddling in the economy, politicians race to solve the problem with further doses of the same poison.

Sadly, in an age where politicians fear differentiating themselves from one another and parties squabble over a consensus they disingenuously call the middle ground, there seems to be no real debate over how best to ensure that the recession that we are now in is as brief as possible. Just as President Hoover’s failed interventions were succeeded by President Roosevelt’s even greater interventions, so today politicians seem to be in a bidding war to intervene in the economy.

The latest dose comes from the Liberal Democrats, who have joined the chorus with their latest call for action. Nick Clegg has announced a Green Road Out of the Recession that is built on the same errors that underpin Labour’s proposals and the $4.61 trillion US bailout.

It is a simple error, summed up by Henry Hazlitt when he notes that “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” It is the error of looking at the immediate results of what one does but not the damage that doing it causes; specifically, of believing that one can utilize a resource (in this case, money) for one purposes without denying it to another.

So let us be utterly clear: when the Lib Dems say “Now is the time for big investment to get the wheels of the economy turning again”, any rational observer should immediately ask “From where is the money coming, and what will be sacrificed so that this investment can be achieved?”

It is an impressive list the Lib Dems have compiled: new trains; new railways; new track; social homes; insulated lofts; smart meters. It will “create jobs and ensure that once this recession is over, we have something to show for the money we borrowed.” All of which is true, but what it does not show is all the jobs that will not be created because the money that would have been spent creating those jobs has been siphoned off by government to pay for its own projects.

There is absolutely no reason why government spending of £12.5 billion (as the Lib Dems propose) should create more jobs than private spending of £12.5 billion. On the contrary: while markets operate specifically to maximise economic efficiency – by, for example, allowing people to spend money on projects that will maximise their own utility – government’s have no such built-in discipline and no means of weighing the efficiency or efficacy of different projects. In fact (as the sorry litany of failed government projects demonstrates) governments all too often blow vast sums of taxpayers’ money on projects that promise big benefits but deliver dubious or disappointing outcomes.

I should add that this is not a criticism of any individual project and certainly not of the environmental (“green”) thrust of the proposals. That the “road out of recession” is “green” is irrelevant. We could as easily talk about the white heat of technology or indulge in some blue-skies thinking. The point is that this is being sold on economic, not environmental, grounds; if the Lib Dems were as keen on agriculture as we are on environmentalism, we could as easily advocate policies akin to President Hoover’s New Deal farm programme, and the proposals would be no less flawed. Government cannot spend the country out of recession.

The reason for this is that government money must come from somewhere, and not matter what its source, it merely transfers money from one use to another. If we spend £12.5 billion on new trains to “create jobs” and “stimulate industry” then the money, workers and materials that are diverted to those ends are no longer available to make shoes, televisions, meals or whatever else we might buy. The net effect in jobs created, wages spent and economic activity stimulated is zero.

Indeed, while we may scoff at the 2.5% cut in VAT and say that the £12.5 billion could be better spent insulating lofts, it ignores the fact that the £12.5 billion would otherwise have been spent by consumers on (for example) carpets. The criticism that the VAT cut would not in fact encourage people to buy is valid in as far as an individual price reduction of 2.13% is not going to make a product hugely more attractive to buy. But the fact that the money remains in people’s pockets means that it will eventually be spent somewhere. It will still represent an increase in consumer demand and so will stimulate growth.

Thus the one part of the Green Road Out of the Recession which is sound is the bit that promises “big, permanent tax cuts”. It is the bit that has been policy for over a year and upon which conference voted. It would transfer spending from inefficient governments to efficient consumers and so allocate resources in the marketplace (that is to say you and me and our respective savings) most efficiently.

A couple of additional points need to be made, to head off possible comments (welcome though all comments are, of course!). Firstly, it makes no difference if the government gets the money through taxation, inflation or borrowing. Borrowing has exactly the same effect as taxation in as much as it diverts savings from being invested in industry and instead invests it in public services; there is still no net gain. It also lands future taxpayers with a bill, so diverting money from future generations to the present. Inflation is effectively a flat tax: if we “print” an additional 1% of money, we are reducing the value of everybody’s savings and wages by 1% - an “inflation tax” that falls as heavily on the poor as it does on the rich (except that rich people are more likely to own commodities or foreign assets that are inflation proof, so inflation may actually be regressive). It also creates imbalances in the economy that will lead to further crises in the future.

Secondly, it makes no difference that this is supposedly “investment” rather than mere “spending”. It is certainly true that this sort of government spending will ensure that “once this recession is over, we [will] have something to show for the money we borrowed.” I have a house to show for the money I borrowed in December, but it does not follow that I made a sound “investment”. Had my internal chancellor not borrowed and spent, my internal taxpayer would not now be saddled with debt.

As Adam Smith noted over two centuries ago, “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom”. What is more, the fact that we can see what the borrowing has financed should not blind us to the fact that we cannot see the things that the borrowing has denied us: other investments will have been sacrificed. And finally, even spending on consumer fripperies stimulates long-term investment: if demand for MP3 players and trainers increases, so does investment in the production and retailing of these (so creating jobs) and in the infrastructure needed to move them about. Indeed, as taxes/inflation/borrowing tend to make it particularly hard for new businesses to arise, because capital formation (i.e. saving) is harder and credit is absorbed by government, new start-up businesses such as those marketing new solutions to environmental problems struggle to get off the ground. Big government spending may therefore be counter-productive even environmentally!

I also ought to add that members of other parties shouldn’t’ take too much pleasure in seeing me demolish my own party’s latest policy initiative. Neither Labour nor the Conservatives have exactly covered themselves in glory during the present economic crisis and both are participating in the flawed concensus politics outlined above. This article focuses on Liberal Democrat policy only because errors are doubly galling when they come from within one’s own camp and I would like to see the Lib Dems taking a braver, more distinctive and more honest approach to the current crisis that did not argue that more government can get us out of a problem that government made in the first place. The alternative norm of passing money through the hands of politicians instead of citizens has been Labour and Conservative policy for the last century and it has been a tragic disappointment.

Gordon Brown: Superhero!

Gordon Brown saves the world!

Tories: if it’s fun, ban it; if it delivers papers, spy on it!

The Conservatives sometimes like to think that they believe in freedom. I’m not entirely sure where they get this delusion, but I am always assured that sooner or later they will expose themselves as the paternalistic autocrats that they naturally are.

So a hat tip to Conservative Home for highlighting

• the Tory council that has banned a lollipop man from adorning his lollipop with tinsel,
• the Tory council that is using anti-terror laws to spy on paper boys, and
• the Tory council that is trying to outlaw swearing.

The generosity of T-Mobile and other retailers

I received an email from T-mobile today telling me that they were kindly passing the 2.5% cut in the VAT rate on to their customers and I would see the reduction in my next bill. They are not the first to make this statement.

Excuse me, but is somebody a bit confused here?

T-mobile is not my bank. Nor are any of the retailers now offering to pass the VAT cut onto customers.

The 2.5% cut in the rate of VAT is not a shift in the rate at which they buy energy from the government, which they may then choose to pass on or not depending on their own whim and the details of my contract.

VAT is a tax on consumption of luxuries (at least in theory). In fact, at the bottom of every receipt it says how much of the bill is tax. Therefore, a cut in VAT should automatically be passed onto consumers.

In fact, it is not the phone company or the retailer that is charging me the 17.5% (or now 15%) VAT in the first place. It is government. So for the retailers to “not pass it on” they would have to raise their prices by just under 2.5%.

So let us thank T-mobile and other retailers for not taking the opportunity of a reduction in VAT to raise their prices in a manner that would either have left them individually less competitive or collectively guilty of operating a cartel.

CEBR forecast 30% rise in property prices

Like second marriage, this looks like an example of hope triumphing over experience!

Why the Government’s plans to rescue the economy don’t seem to be working

The Times captures the mood perfectly: “The economy is plunging deeper into recession despite emergency tax cuts and the multibillion-pound bank bailout, the Bank of England said yesterday.”

What it fails to mention is that this is all utterly predictable and indeed inevitable. The reason that “Cutting the base rate to its lowest level in more than 50 years, the Bank said the outlook now was worse than a month ago, with manufacturing and consumer spending in sharp decline” is that cutting the base rate is not going to have much impact.

The base rate is just one driver of credit, and it is not by far the most important. What is more, it does not address the real problems in the economy, which is that the credit expansion of the last decade has fooled entrepreneurs into thinking that investments were viable when in fact they were not. In some cases, whole businesses will now need to be liquidated as reality crashes in on those who had been fooled by artificially-low interest rates.

Reducing interest rates again cannot solve the problem. Just as the first rule when one finds oneself in a hole is to stop digging, so the first rule when one finds oneself facing the inevitable crash following an inflationary spike is to stop inflating. Further interest cuts (as preached by all political parties) are simply attempts to stimulate more credit expansion, which means further inflation. This will lead to more poor decisions by entrepreneurs and more unviable businesses being created, expanded or propped up. That can only lead to an even bigger crisis in the long run.

“The Bank of England pinned much of the blame for the economy’s slide on the borrowing drought that high street banks have inflicted on consumers and businesses alike” according to The Times, but in doing so the Bank misses the point. The borrowing drought is the result of banks making sensible economic decisions in avoiding making the same kind of loans that got us into this mess in the first place.

For let’s be clear about this: the loans that the banks are currently proving reluctant to make are those that they fear may not be repaid; those that, in American parlance, are “sub-prime”. In a market where asset prices are falling, many homeowners are in negative equity and many businesses are destined for bankruptcy, further lending would not only be stupid, it would be irresponsible.

Far from cutting interest rates, the Bank of England should be raising them so as to reduce the demand for credit and increase the desire of savers to provide it. In doing so, it will not only redress the massive imbalance between saving and borrowing that has led the West to borrow trillions of dollars of the (thrifty) Asians as well as creating money through government-backed central banks, but it will also accelerate the reallocation of “factors of production” between unviable and viable industries. As a result, it might just make this a sharp but short recession, instead of another painfully-drawn-out one.

Henry Hazlitt on the so-called “free market”

I have recently been reading Economics in One Lesson by Henry Hazlitt, and this section from the end of Chapter XVI particularly caught my attention:

[B]y the greatest miracle of all, this postwar world of super-international controls and coercions is also going to be a world of "free" international trade! Just what the government planners mean by free trade in this connection I am not sure, but we can be sure of some of the things they do not mean. They do not mean the freedom of ordinary people to buy and sell, lend and borrow, at whatever prices or rates they like and wherever they find it most profitable to do so. They do not mean the freedom of the plain citizen to raise as much of a given crop as he wishes, to come and go at will, to settle where he pleases, to take his capital and other belongings with him. They mean, I suspect the freedom of bureaucrats to settle these matters for him. And they tell him that if he docilely obeys the bureaucrats he will be rewarded by a rise in his living standards. But if the planners succeed in tying up the idea of international cooperation with the idea of increased State domination and control over economic life, the international controls of the future seem only too likely to follow the pattern of the past, in which case the plain man's living standards will decline with his liberties.

So much for “peak oil”

It seems a long time ago, now, but just prior to the recent recession the price of oil reached new heights and wild predictions of $200 a barrel and more were flying around. At the time, many energy- and environment-pundits, including some among the Liberal Democrats, believing that we had now reached “Peak Oil”, that mythical time when the increase in our rate of consumption outpaces the increase in our rate of discovery and so initiates an accelerating decline in supply until the oil runs out and civilisation as we know it ceases to exist.

Those who talk about it often have a slightly excited look upon their faces, as though they cannot wait for the final cataclysm to come so that they can say “I told you so” as the cities begin to go up in flames and people collect together in small bands to try to eke out some semblance of survival in the mountains.

They appear to have gone rather quiet recently, however. Once again, “peak oil” has turned out to be nothing more than a foothill in the great undulating range of energy prices. Oil prices have fallen by two thirds in the past six months to end up $100 a barrel below their Summer peak at just $50 a barrel.


Of course, peak oil is nonsense anyway. Firstly, it is based upon a deliberate obfuscation of known, economically viable reserves on the one hand, and what is in fact under the crust on the other: oil companies only list the reserves that they have so far identified, and they do not list reserves that are, at current prices, too expensive to be viable, while at a higher price they would be worth drilling for. As Russell Lewis explains,

Oil reserves are never remotely equivalent to all the oil in the earth’s crust.
The proven reserves are what the oil companies have decided to look for and
which are known to be exploitable under prevailing technical and economic
conditions. They are designed to provide the oil industry’s working inventory of
oil stocks. There is a limit to the amount of money the oil companies can spend
on searching for more or deeper wells because prospecting and drilling are
expensive, and there are other competing obligations which affect their
long-term profits, such as advertising, marketing, research, building refineries
and distribution. The best indicator of whether oil is getting scarcer is its
price, and though prices have risen sharply in the last two years [and bearing
in mind that this was written before the collapse in prices in the last six
months], that fact does not necessarily point to a long-term upward trend.

This does not mean that oil could never run out, however. That is left to the price mechanism. As the supply of oil diminishes, the price will inevitably rise. This will not, however, trigger a mad rush to capture ever shrinking reserves until the oil economy collapses; rather, it will lead to a steady rise in prices that will encourage greater efficiency, spur research into make alternatives more cost-effective. For example, if fossil fuels quadrupled in price, wind turbines would be able to generate electricity more cheaply and so they would become a viable alternative. The increase also pushes up the cost of high-energy products and services (such as flights) and so discourages consumption. And finally, as we have already seen, rising fuel costs encourage consumers to pay more attention to the miles-per-litre that their car can achieve and so encourage producers to invest in more efficient engines.

In fact, this last points to another flaw in the peak oil theory: it ignores human ingenuity. Even accepting that there is a set amount of oil, it is irrelevant to our ability to produce power from it. By inventing an engine that is twice as efficient, or a new means of producing plastics that requires half and many hydrocarbons, we have effectively doubled the amount of fuel available even if we have the same number of litres. If we invent alternative technologies, lakes of oil are made available for the remaining needs. In truth, we will never run out of oil, because before that ever happens human action and rising prices will have rendered oil surplus to requirements.

So the next time you see that fuel prices are rising and hear somebody mutter about peak oil, you can rest assured that new research is underway that will soon bring prices back down, and that there is plenty of oil left under the ground. More, in fact, than we will ever need.