Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Dow 30k before End of 2020? - 13th Jul 20
Credit Market Investments Turned Into End-User Risk Again - 13th Jul 20
Investors Are Going All-In on This Coronavirus Proof Industry - 13th Jul 20
5 Vital Insights That You Can Gain From Instagram Trackers - 13th Jul 20
Stop Believing The 'Economy' Is The Same As The Stock Market - 12th Jul 20
Spotify Recealed as The “Next Netflix” - 12th Jul 20
Getting Ahead of the Game: What Determines the Prices of Oil? - 12th Jul 20
The Big Short 2020 – World Pushes Credit/Investments Into Risk Again - 11th Jul 20
The Bearish Combination of Soaring Silver and Lagging GDX Miners - 11th Jul 20
Stock Market: "Relevant Waves Vs. Irrelevant News" - 10th Jul 20
Prepare for the global impact of US COVID-19 resurgence - 10th Jul 20
Golds quick price move increases the odds of a correction - 10th Jul 20
Declaring Your Independence from Currency Debasement - 10th Jul 20
Tech Stocks Trending Towards the Quantum AI EXPLOSION! - 9th Jul 20
Gold and Silver Seasonal Trend Analysis - 9th Jul 20
Facebook and IBM Tech Stocks for Machine Learning Mega-Trend Investing 2020 - 9th Jul 20
LandRover Discovery Sport Service Blues, How Long Before Oil Change is Actually Due? - 9th Jul 20
Following the Gold Stock Leaders as the Fed Prints - 9th Jul 20
Gold RESET Breakout on 10 Reasons - 9th Jul 20
Fintech facilitating huge growth in online gambling - 9th Jul 20
Online Creative Software Development Service Conceptual Approach - 9th Jul 20
Coronavirus Pandemic UK and US Second Waves, and the Influenza Doomsday Scenario - 8th Jul 20
States “On the Cusp of Losing Control” and the Impact on the Economy - 8th Jul 20
Gold During Covid-19 Pandemic and Beyond - 8th Jul 20
UK Holidays 2020 - Driving on Cornwall's Narrow Roads to Bude Caravan Holiday Resort - 8th Jul 20
Five Reasons Covid Will Change SEO - 8th Jul 20
What Makes Internet Packages Different? - 8th Jul 20
Saudi Arabia Eyes Total Dominance In Oil And Gas Markets - 7th Jul 20
These Are the Times That Call for Gold - 7th Jul 20
A Reason to be "Extra-Attentive" to Stock Market Sentiment Measures - 7th Jul 20
The Beatings Will Continue Until the Economy Improves - 6th Jul 20
The Corona Economic Depression Is Here - 6th Jul 20
Stock Market Short-term Peaking - 6th Jul 20
Gold’s Major Reversal to Create the “Handle” - 5th July 20
Gold Market Manipulation And The Federal Reserve - 5th July 20
Overclockers UK Custom Build PC Review - 1. Ordering / Stock Issues - 5th July 20
How to Bond With Your Budgie / Parakeet With Morning Song and Dance - 5th July 20
Silver Price Trend Forecast Summer 2020 - 3rd Jul 20
Silver Market Is at a Critical Juncture - 3rd Jul 20
Gold Stocks Breakout Not Confirmed Yet - 3rd Jul 20
Coronavirus Strikes Back. But Force Is Strong With Gold - 3rd Jul 20
Stock Market Russell 2000 Gaps Present Real Targets - 3rd Jul 20
Johnson & Johnson (JNJ) Big Pharma Stock for Machine Learning Life Extension Investing - 2nd Jul 20
All Eyes on Markets to Get a Refreshed Outlook - 2nd Jul 20
The Darkening Clouds on the Stock Market S&P 500 Horizon - 2nd Jul 20
US Fourth Turning Reaches Boiling Point as America Bends its Knee - 2nd Jul 20
After 2nd Quarter Economic Carnage, the Quest for Philippine Recovery - 2nd Jul 20
Gold Completes Another Washout Rotation – Here We Go - 2nd Jul 20
Roosevelt 2.0 and ‘here, hold my beer' - 2nd Jul 20
U.S. Dollar: When Almost Everyone Is Bearish... - 1st Jul 20
Politicians Prepare New Money Drops as US Dollar Weakens - 1st Jul 20
Gold Stocks Still Undervalued - 1st Jul 20
High Premiums in Physical Gold Market: Scam or Supply Crisis? - 1st Jul 20
US Stock Markets Enter Parabolic Price Move - 1st Jul 20
In The Year 2025 If Fiat Currency Can Survive - 30th Jun 20
Gold Likes the IMF Predicting a Deeper Recession - 30th Jun 20
Silver Is Still Cheap For Now - 30th Jun 20
More Stock Market Selling Ahead - 30th Jun 20
Trending Ecommerce Sites in 2020 - 30th Jun 20
Stock Market S&P 500 Approaching the Precipice - 29th Jun 20
APPLE Tech Stock for Investing to Profit from the Machine Learning Mega trend - 29th Jun 20
Student / Gamer Custom System Build June 2020 Proving Impossible - Overclockers UK - 29th Jun 20
US Dollar with Ney and Gann Angles - 29th Jun 20
Europe's Banking Sector: When (and Why) the Rout Really Began - 29th Jun 20
Will People Accept Rampant Inflation? Hell, No! - 29th Jun 20
Gold & Silver Begin The Move To New All-Time Highs - 29th Jun 20
US Stock Market Enters Parabolic Price Move – Be Prepared - 29th Jun 20
Meet BlackRock, the New Great Vampire Squid - 28th Jun 20
Stock Market S&P 500 Approaching a Defining Moment - 28th Jun 20

Market Oracle FREE Newsletter

AI Stocks 2020-2035 15 Year Trend Forecast

Crude Oil Prices, Monetary Stability and Credit Expansion

Economics / Credit Crisis 2008 Jul 22, 2008 - 07:25 AM GMT

By: Gerard_Jackson

Economics Best Financial Markets Analysis ArticleI would like to say that economic commentary on the present energy situation is an improvement on what has gone on before. As I said, I would like to. The media message is an old one. Whether it be America, Australia or Europe the cry from greens is that rising oil prices are good for us because they conserve oil and speed up alternative energy and transport technologies. So successful has this line of attack been that some so-called free-market commentators have mindlessly parroted it, oblivious to the fact that it flies in the face of economics.


Alan Wood, an economics writer for Rupert Murdoch's Australian , immediately springs to mind. He now warns that current energy prices are "an early portent of the forces that will shape the 21st-century global economy". ( No benefit in leading , The Australian , 2 July 2008). It was the same Alan Wood who some years ago pushed the green line that if politicians raise the excise tax on fuel we could conserve oil giving the market an incentive to develop an alternative. It never occurred to him that he was making technical progress a function of price. Taken to its logical conclusion, the higher the taxes on resources the greater will be the number of inventions and innovations.

What so many commentators fail to grasp is that free markets, not taxes, conserve resources. This is really basic stuff. When the supply of any resource falls its price rises. Eventually the price reaches a point where the cost of producing an additional unit exceeds the demand. This is why we never run out of resources in a free market. If, however, the resource is treated like a free good, as in the case of fish, then complete exhaustion is possible. This is obviously not the case with oil.

At the time that Wood was writing there were no zooming oil prices. If he had been right about oil in the near future this would have been reflected in a continuous rise in real oil prices, something that eluded him. He does of course refer to the situation as it stands today, but once again he is missing the obvious question: why did oil prices suddenly take off?

This point needs further elaboration. An increasing scarcity of oil would cause prices to rise, signalling to consumers and producers that greater conservation is needed. The supply situation for any resource is always revealed by the interplay of supply and demand. The free play of market forces means that one does not need resource taxes to economise on the use of any resource. The market process will always bring about economisation in a way that no politician, green organisation or government agency could ever hope to emulate let alone better.

But let us examine the matter in a little more depth, something our journalists never seem to do. (Is that because it requires a little thought?) Although rising prices directly act to conserve natural resources, including oil, the process does not stop there. Higher prices stimulate conservation and investment in exploration, new technologies and substitutes. Market processes, therefore, expand the supply of resources by discovering and exploiting new reserves and by substituting new materials for old resources.

In short, increasing scarcity reflected in higher prices eventually reverses itself by increasing supply. This is how market processes overcame an emerging energy crisis in eighteenth century England: coal was substituted for wood, quickly expanding the supply of energy. A similar thing happened in the latter half of the nineteenth century when kerosene was substituted for whale oil which had become increasingly expensive as the whale population shrank.

Now it is invariably overlooked that it is always in the interest of the entrepreneur to maximise the present value of his capital assets, which includes natural resources. (Strictly speaking it is the internal rate of return that an entrepreneur will try to maximise). This means that entrepreneurs will try to avoid excessive depletion of their resources because it would reduce the market value of their assets, the present value of which is the present value of an owner's assets is the sum of their discounted future rents.

Market processes tend to bring these rents into equality with the rate of interest. The irony here is that capitalisation now becomes an argument for the privatisation of state owned lands.

Some greens realise what rising prices can do and that's they push energy taxes under the guise of creating cleaner and cheaper alternative energy sources, when their real aim is to slash energy use. But surely you just said that rising costs eventually lead to an increased supply? Yes, but only if market forces are allowed to do the pricing and allocation of resources. Otherwise the effect of so-called resource taxes would be to lower general welfare.

The likes of Wood should have realised that by restricting the use of 'depleting' resources the state would be forcing companies into making excess investments in their stock. This would generate a false market signal to invest in replaceable resources. For example, if the tax on oil were raised high enough demand would fall, directing investment into substitutes of one kind or another. But this would be wasting resources, what the Austrian school of economics calls creating a malinvestments.

The reason should be obvious to anyone with some economic training. If these alternative economic activities were profitable under free-market conditions companies would have already invested in them. That they don't is a clear demonstration that the necessary resources are more valued elsewhere. In simple terms, these investment would not cover their costs and so forcing them into existence lowers total output and raises costs. This is why greens love 'em, the more intelligent ones, that is.

We can see that extending investment in the conservation of oil to the point where the return is lower than the opportunity cost of the investment is truly wasteful. Yet this is what resource taxes would force us to do. Another effect of these taxes is to extend the conservation of resources beyond the point where they become obsolete, a possibility with an oil 'conservation tax.'

In fact, Industrial development would have been greatly retarded if past warnings of the imminent exhaustion of natural resources had have been heeded. At the end of the day, so-called conservation taxes, especially on oil, are a vicious deceit by which living standards for the masses can be lowered by edict under the pretence of preserving the 'quality of life'. (This is why greenies are jumping with joy over energy prices).

So how come the energy markets — especially oil — did not pan out according to economic reasoning? The answer is a very simple one. This line of reasoning assumes monetary stability. A fact that very few commentators are aware of. Once upon a time the majority of economists had no problem in making the link between a booms and surges in the demand for commodities even though they did not agree on the causes of the boom-bust cycle.

Once we factor in credit expansion another explanation for rapidly rising energy prices comes into play. Over the last few years there has been a massive increase in bank credit. This credit fuelled the booms and drove up the global demand for energy. So great was this expansion that surplus bank credit in the form of deposits started to emerge world-wide. Our economic pundits immediately labeled these deposits surplus savings, adding another fallacy to their erroneous views.

It is now beginning to look like the bloom is off the boom (I couldn't resist that) as indicated by rising short-term interest rate futures.

See Dr Frank Shostak's Commodity prices and inflation — is there a connection?

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Copyright © 2008 Gerard Jackson

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules