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The Oil Price Collapse, & why No-One Starves in the West.

Two years after the fall of Soviet Communism, a visiting Russian official seeking to learn about how free market systems worked, asked the Cambridge economist Paul Seabright “Who is in charge of Bread Supply in London. He was astonished by the answer: “No-One”.

No-one has starved in a free market system since the Potato Famine in Ireland in the 1840s, which happened because of the failure of a staple crop, and despite significant Government initial efforts to alleviate it. The free market failed there, for a huge number of reasons but that remains the only example, and much has been learned since. Many of the other famines in what were nominally free-market systems, like the Bengal Famine of 1943 can be put down directly to interventions in the markets such as the (democratically elected) Punjabi Government preventing the export of food to Bengal, whose other major source of food, Burma, was having a little local difficulty which became known to history as World War 2. Because of this intervention by the Punjabi government in the market in response to shortages, and subsequent inaction by the Indian Government, over a million people died.

The oil price rose throughout the ’00s in response to the rise of Chinese demand, lower interest rates and increased car use in the developed and developing world. Then people started to hurt. Oil price protests rocked the world. The cost of maintaining subsidised petrol in the non-petro-state middle-east is one of the sparks that lit the ‘Arab Spring’. In the west, cars got more efficient as the price (and taxes on petrol) rose. People bought smaller and more efficient cars. Highway speeds fell, as cars started to have ‘fuel economy’ displayed on the dashboard and people realised how much more it cost to drive at 90mph than 70. People changed their behaviour and drove less: ‘Peak car’ was in 2005 in the USA.

Meanwhile, engineers went looking. We had long known about ‘Tight oil’ (oil soaked into porous shale or tar-sands), but it was expensive to produce, and uneconomic to extract, until the prices rose. And when they did, engineers sought means to improve production efficiency. And they were successful. The spike of Oil prices in response to cheap money and the recovery from the credit crunch led to an enormous explosion of production in Texas and North Dakota in particular. The USA became the world’s largest oil producer in 2013. Cost of tight-oil production in Texas is around $40 and falling. In much of the traditional reserves in the North Sea, it’s $35.

There is the equivalent of five Saudi Arabias worth of reserves in the Eagle Ford shale in East Texas alone. (1.25tn Barrels of Oil Equivalent vs 255bn BOE) . And it is ALL economically viable to extract so long as oil remains above $50 per barrel. And there’s the Bakken in North Dakota and others. Peak Oil? Um… no.

So the response to a temporary shortage of Oil was for people to use gradually less in response to a price signal, and for people to go looking for more, in response to the same price signal. And the result is the glut of Oil the world is currently enjoying as oil that was prospected when the price was $120 is now hitting the market. My guess is we can expect $45 or so and then stabilisation around $50-70. Having got used to Oil at twice that price, it will feel like a tax cut for the world. (Except Nigeria, Venezuala, and Russia…).

What is true of Oil – the price goes up when demand exceeds supply – is true of wheat, and pork bellies, and olive oil, and corn or Tea. And the substitutes, barley, chicken, rape-seed oil, Sorghum, coffee, and so forth get used instead. People economise and substitute. So long as the market remains, it will become increasingly profitable to move stock from places of low value to places of high value where things are scarce.

Even the much-maligned speculation, or what used to be called ‘hoarding’ helps, by creating a reserve  in anticipation of higher prices to come, to be released onto the market in response to shortages. Hoarding ensures the commodity is always available at a price. And so no-one starves.

And the lessons: how to grow crops or burn fuel more efficiently, cannot be unlearned. So when supply returns, prices often collapse, the speculators often get badly burned, but the economy as a whole is richer as a lot is being done more efficiently.

Ah… I hear you say… but what about Africa: how can Africans pay the same prices as Europeans? But 21st century famines in Africa are almost never SUPPLY problems, but DISTRIBUTION problems. This isn’t about cash-crops being removed even as people starved, like Ireland in the 18th Century. We in the rich west are not taking African food because we can pay more, indeed quite the opposite. There’s often plenty of food, grown in the region or supplied as Aid, but due to poor infrastructure or more often, war and banditry, it cannot get to where it is needed. Where the rich west is holding Africa down is by preventing much of the continent from developing a cash-crop economy. The Africans are actively prevented from supplying our markets with cheap food by rich-world Farm subsidies, So roads aren’t built, and when the crops fail, food cannot get in from outside, either in response to rising prices or even Aid. Aid which often as a by-product, destroys the livelihoods of local farmers by undercutting them.

The European Union, USA and Japan, to name the most egregious examples have their boots on the face of Africa, keeping him down, but not in the way you’d think. African farmers cannot compete against our heavily subsidised farmers and so cannot invest or develop their production, even if they wanted to. The market for the end product isn’t there. Without that bottom rung, the rest of the development ladder is much harder to climb. Then, by demanding Africa opens up their economies to everything, except the one thing they have a comparative advantage, African economies struggle to compete and struggle to develop.

The fact Africa now contains some of the Fastest-growing economies on earth is a testament to the triumph of the human spirit in the face of adversity. Imagine how much better it’d be if we’d not retarded African development by to appease French farmers’ selfishness. Every famine since 1840-41, everywhere in the world is BECAUSE, not despite a Government somewhere intervening in the market. And the same is true of poverty. The African governments and their trade partners who’ve worked this out are doing well. But it took millions of lives, and is still not widely understood.

Rising prices are merely the means by which no-one starves and the pumps still have petrol. Would you rather we ran out occasionally?

Manufacturing Jobs Wibble.

I was talking to a Farmer recently (until about 1750, any job which wasn’t involved in agricultural production wasn’t “real”). He was telling me about how his new Tractor (he had one of the four-tracked Leviathans that Richard Hammond chose in that episode of Top Gear) could plough. Basically, the GPS could be set to have the furrows overlap within a few inches. The productivity gains mean that he can plough an extra field or two a day just from not ploughing the same bits twice by eliminating overlap. The Tractor is then hired out at profitable rates to other, smaller farmers. The same is true for Combine harvesters and the like. The relentless focus on efficiency drives productivity improvements, and has done since the industrial revolution.

A small cadre of highly skilled professionals do the jobs with enormous machines once done by vast armies of peasant labourers; which is what’s happening to manufacturing. British industrial production is rising barring recessionary glitches, UK industrial production has kept rising for most of the last 100 years. We are still producing lots of things that can be dropped on a foot. It’s just it’s no longer done by the descendants of those peasants who left the land during the industrial revolution to seek work in factories. Those factories still exist, but they employ a small number of highly paid people to operate machines which do the riveting, welding, assembling and polishing. Each machine takes does the job of hundreds of people.

That’s what happened in Agriculture, and is happening in Manufacturing. And THIS IS A GOOD THING. Because all those people not employed in riveting in Tyneside shipyards or Scything Lincolnshire corn fields are employed doing something else for someone else. All that productive labour has been freed, but we’re still getting the food produced, in abundance the Lincolnshire harvestman would have thought impossible.

The majority of Western economies are now services. Even the Germans, who’ve a niche in Machine tools and Automobiles have only 21% of their economy in making things they can drop on their feet.

And this reflects another point. Manufactured products are getting cheaper, so to have material wealth unimaginable to our Lincolnshire harvestman requires far fewer hours of Labour to achieve. Thus cars, the most expensive manufactured products most of us buy, are getting cheaper relative to average earnings, decade by decade. A reliable runaround would have been beyond the means of a WW2 factory worker, but is available to a cleaning lady now. So the same car forms a smaller part of the economy. Having spent less on the car, we can spend more on clothes, shoes, music, computers, kitchen appliances etc, and in so doing provide jobs to people supplying those things. Above all we can pay for people do do things for us – cut our hair, serve us food in restaurants, mediate for us legally, invest our surplus production into other productive activities, heal our illnesses and so on.

And because more of our money goes into buying services than it does in buying manufactures, it stands to reason most of us will specialise in providing services.

The ultimate logic of Adam Smiths division of Labour is that people will, over time, supply our needs with fewer and fewer inputs as we get better at doing it. Thus an activity, agriculture, which occupied the lives and productive energy of 90% of the population 400 years ago, now only occupies 2%. 100 years ago, people made things. Now we make more, but use fewer people to do it, and instead provide services which so far can’t be done by machine. This list is shrinking.

In time, just as in agriculture, high paying jobs will come from managing machines which produce with extreme efficiency, or by exploiting a niche where people pay an excess for a craft built object. So you can either have a farmer managing an expensive machine, or running an organic farm and charging a premium to people who want to know the name of the cow they’re eating. You can get your clothes mass produced relatively cheaply, or you can pay through the nose for a Tailor on UK wages. You can have your car put together by machines in Nissan’s famous Sunderland plant, or you can buy an Aston Martin, hand-built in Warwickshire.

So the next time you see someone opining of dear old blightly that “we don’t make anything anymore”, remind yourself that we do, it’s just it takes fewer of us to do it. Then ignore everything else that person says, because they clearly know nothing.

Western unemployment is at a high, following a series of financial crises, but to blame this on the death of manufacturing is idiotic. There are structural, cultural and political reasons for excess unemployment, but trying to hold back the tide which has seen manufacturing shrink as a proportion of the economy is wrong, because the very process which sees people replaced by machines is the process by which we all get richer. We’re simply falling down Maslow’s hierarchy of needs. 400 years ago we banished famine, 100 years ago we banished material want. The developing nations, by simple dint of abandoning anti-market orthodoxies, followed us and are achieving in 10 years what took us 100. They are copying us. Chinese growth will slow when they have to innovate to grow. There’s nothing remarkable about their growth, it’s just what happens when you lose the dogmatic Marxist idiocy, take the choke hold off and let people get rich.

Globalisation, the search for efficiencies in production, and international trade has led to countless millions of people dragging themselves out of poverty by embracing the opportunities of trade. Korea and Japan joined the west on the technological frontier. China is catching up. As a result the 70m population of a small, damp, foggy Island of the North coast of Europe had a GDP in the same ball-park as a nation 14 times as populous just a few short years ago, but is now dwarfed by the Asian giant. This isn’t a threat, nor is it evidence of Britain’s “decline”.

The next challenge is to banish stress and misery from our lives. I suspect this will be harder. The only caveat is that I have a great deal more faith in Adam Smith’s “invisible hand” (a much maligned and misunderstood idea) than the idiotic ideas of politicians. Politicians still seem to think manufacturing jobs are special, which suggests they don’t understand why we’re rich. The only limitless resource is man’s ingenuity. Markets aren’t an ideology, they’re simply what works in the absence of one, by deploying that one limitless resource to everyone’s benefit.