Small Is Beautiful: A Study of Economics as if People Mattered (15 page)

'Similarly, the price of fuel oil will be something of the order of $17-19 per ton, while estimates of various kinds are given for natural gas and nuclear energy. Being in the possession of these (and many other) "facts", the authors find it an easy matter to calculate how much of the Community's coal production will be competitive in 1970, and the answer is "about 125

million, i.e. a little over half the present production",

'It is fashionable today to assume that any figures about the future are better than none. To produce figures about the unknown, the current method is to make a guess about something or other - called an "assumption" - and to derive an estimate from it by subtle calculation. The estimate is then presented as the result of scientific reasoning, something far superior to mere guesswork. This is a pernicious practice which can only lead to the most colossal planning errors, because it offers a bogus answer where, in fact, an entrepreneurial judgment is required.

'The study here under review employs a vast array of arbitrary assumptions, which are then, as it were, put into a calculating machine to produce a "scientific" result. It would have been cheaper, and indeed more honest, simply to assume the result'

As it happened, the 'pernicious practice' did maximise the planning errors; the capacity of the western European coal industry was virtually cut down to half its former size, not only in the Community but in Britain as well.

Between 1960 and 1970 the dependence on fuel imports of the European Community grew from thirty per cent to over sixty per cent and that of the United Kingdom, from twenty-five per cent to forty-four per cent. Although it was perfectly possible to foresee the total situation that would have to be met during the 1970s and thereafter, the governments of western Europe, supported by the great majority of economists, deliberately destroyed nearly half of their coal industries, as if coal was nothing but one of innumerable marketable commodities, to be produced as long as it was profitable to do so and to be scrapped as soon as production ceased to be profitable. The question of what was to take the place of indigenous coal supplies in the long term was answered by assurances that there would be abundant supplies of other fuels at low prices 'for the foreseeable future', these assurances being based on nothing other than wishful thinking.

It is not as if there was - or is now - a lack of information, or that the policy-makers happened to have overlooked important facts. No, there was perfectly adequate knowledge of the current situation and there were perfectly reasonable and realistic estimates of future trends. But the policy-makers were incapable of drawing correct conclusions from what they knew to be true. The arguments of those who pointed to the likelihood of severe energy shortages in the foreseeable future were not taken up and refuted by counter-arguments but simply derided or ignored. It did not require a great deal of insight to realise that, whatever the long term future of nuclear energy might be, the fate of world industry during the remainder of this century would be determined primarily by oil. What could be said about oil prospects a decade or so ago? I quote from a lecture delivered in April 1961.

'To say anything about the long-term prospects of crude oil availability is made invidious by the fact that some thirty or fifty years ago somebody may have predicted that oil supplies would give out quite soon, and, look at it, they didn't. A surprising number of people seem to imagine that by pointing to erroneous predictions made by somebody or other a long time ago they have somehow established that oil will never give out no matter how fast is the growth of the annual take. With regard to future oil supplies, as with regard to atomic energy, many people manage to assume a position of limitless optimism, quite impervious to reason.

'I prefer to base myself on information coming from the oil people themselves. They are not saying that oil will shortly give out; on the contrary, they are saying that very much more oil is still to be found than has been found to date and that the world's oil reserves, recoverable at a reasonable cost, may well amount to something of the order of 200,000

million tons, that is about 200 times the current annual take. We know that the so-called "proved" oil reserves stand at present at about 40,000 million tons; and we certainly do not fall into the elementary error of thinking that that is all the oil there is likely to be. No, we are quite happy to believe that the almost unimaginably large amount of a further 160,000 million tons of oil will be discovered during the next few decades. Why almost unimaginable? Because, for instance, the great recent discovery of large oil deposits in the Sahara (which has induced many people to believe that the future prospects of oil have been fundamentally changed thereby) would hardly affect this figure one way or another. Present opinion of the experts appears to be that the Saharan oil fields may ultimately yield as much as 1,000 million tons. This is an impressive figure when held, let us say, against the present annual oil requirements of France; but it is quite insignificant as a contribution to the 160,000 million tons which we assume will be discovered in the foreseeable future. That is why I said "almost unimaginable", because 160 such discoveries as that of Saharan oil are indeed difficult to imagine. All the same, let us assume that they can be made and will be made.

'It looks therefore as if proved oil reserves should be enough for forty years and total oil reserves for 200 years - at the current rate of consumption.

Unfortunately, however, the rate of consumption is not stable but has a long history of growth at a rate of six or seven per cent a year. Indeed, if this growth stopped from now on, there could be no question of oil displacing coal; and everybody appears to be quite confident that the growth of oil - we are speaking on a world scale - will continue at the established rate.

Industrialisation is spreading right across the world and is being carried forward mainly by the power of oil. Does anybody assume that this process would suddenly cease? If not, it might be worth our while to consider, purely arithmetically, how long it could continue.

'What I propose to make now is not a prediction but simply an exploratory calculation or, as the engineers might call it, a feasibility study. A growth rate of seven per cent means doubling in ten years. In 1970, therefore, world oil consumption might be at the rate of 2,000 million tons per annum. (In the event, it amounted to 2,3-73 million tons.) The amount taken during the decade would be roughly 15,000 million tons. To maintain proved reserves at 40,000 million tons new proving during the decade would have to amount to about 15,000 million tons. Proved reserves, which are at present forty times annual take, would then be only twenty times, the annual take having doubled. There would be nothing inherently absurd or impossible in such a development. Ten years, however, is a very short time when we are dealing with problems of fuel supply. So let us look at the following ten years leading up to about 1980.

If oil consumption continued to grow at roughly seven per cent per annum, it would rise to about 4,000 million tons a year in 1980. The total take during this second decade would be roughly 30,000 million tons. If the "life' of proved reserves were to be maintained at twenty years - and few people would care to engage in big investments without being able to look to at least twenty years for writing them off- it would not suffice merely to replace the take of 30,000 million tons: it would be necessary to end up with proved reserves at 80,000 million tons (twenty times 4,000). New discoveries during that second decade would therefore have to amount to not less than 70,000 million tons. Such a figure, I suggest, already looks pretty fantastic. What is more, by that time we would have used up about 45,000

million tons out of our original 200,000 million tons total. The remaining 155,000 million tons, discovered and not- yet-discovered, would allow a continuation of the 1980 rate of consumption for less than forty years. No further arithmetical demonstration is needed to make us realise that a continuation of rapid growth beyond 1980 would then be virtually impossible.

'This, then, is the result of our "feasibility study": if there is any truth at all in the estimates of total oil reserves which have been published by the leading oil geologists, there can be no doubt that the oil industry will be able to sustain its established rate of growth for another ten years; there is considerable doubt whether it will be able to do so for twenty years; and there is almost a certainty that it will not be able to continue rapid growth beyond 1980. In that year, or rather around that time, world oil consumption would be greater than ever before and proved oil reserves, in absolute amount, would also be the highest ever. There is no suggestion that the world would have reached the end of its oil resources; but it would have reached the end of oil growth. As a matter of interest, I might add that this very point appears to have been reached already today with natural gas in the United States. It has reached its ail-time high; but the relation of current take to remaining reserves is such that it may now be impossible fur it to grow any further.

'As far as Britain is concerned -- a highly industrialised country with a high rate of oil consumption but without indigenous supplies - the oil crisis will come, not when all the world's oil is exhausted, but when world oil supplies cease to expand, If this point is reached, as our exploratory calculation would suggest that it might, in about twenty years' time, when industrialisation will have spread right across the globe and the underdeveloped countries have had their appetite for a higher standard of living thoroughly whetted, although still finding themselves in dire poverty, what else could be the result but an intense struggle for oil supplies, even a violent struggle, in which any country with large needs and negligible indigenous supplies will find itself in a very weak position.

'You can elaborate the exploratory calculation if you wish, varying the basic assumptions by as much as fifty per cent: you will find that the results do not become significantly different. If you wish to be very optimistic, you may find that the point of maximum growth may not be reached by 1980 but a few years later. What does it matter? We, or our children, will merely be a few years older.

'All this means that the National Coal Board has one over- riding task and responsibility, being the trustees of the nation's coal reserves: to be able to supply plenty of coal when the world-wide scramble for oil comes. This would not be possible if it permitted the industry, or a substantial part of the industry, to be liquidated because of the present glut and cheapness of oil, a glut which is due to all sorts of temporary causes....

'What, then, will be the position of coal in, say, 1980? All indications are that the demand for coal in this country will then be larger than it is now.

There will still be plenty of oil. but not necessarily enough to meet all requirements. There may be a world-wide scramble for oil, reflected possibly in greatly enhanced oil prices. We must all hope that the National Coal Board will be able to steer the industry safely through the difficult years that lie ahead, maintaining as well as possible its power to produce efficiently something of the order of 200 million tons of coal a year. Even if from time to time it may look as if less coal and more imported oil were cheaper or more convenient for certain users or for the economy as a whole, it is the longer-term prospect that must rule national fuel policy. And this longer-term prospect must be seen against such worldwide developments as population growth and industrialisation. The indications are that by the 1980s we shall have a world population at least one-third bigger than now and a level of world industrial production at least two-and-a-half times as high as today, with fuel use more than doubled. To permit a doubling of total fuel consumption it will be necessary to increase oil fourfold: to double hydro-electricity: to maintain natural gas production at least at the present level; to obtain a substantial (though still modest) contribution from nuclear energy, and to get roughly twenty per cent more coal than now. No doubt, many things will happen during the next twenty years which we cannot foresee today. Some may increase the need for coal and some may decrease it. Policy cannot be based on the unforeseen or unforeseeable. If we base present policy on what can be foreseen at present, it will be a policy of conservation for the coal industry, not of liquidation....

These warnings, and many others uttered throughout the 1960s, did not merely remain unheeded but were treated with derision and contempt - until the general fuel supplies scare of 1970. Every new discovery of oil, or of natural gas, whether in the Sahara, in the Netherlands, in the North Sea, or in Alaska, was hailed as a major event which 'fundamentally changed all future prospects', as if the type of analysis given above had not already assumed that enormous new discoveries would be made every year. The main criticism that can today be made of the exploratory calculations of 1961 is that all the figures are slightly understated. Events have moved even faster than I expected ten or twelve years ago.

Even today, soothsayers are still at work suggesting that there is no problem. During the 1960s, it was the oil companies who were the main dispensers of bland assurances, although the figures they provided totally disproved their case. Now, after nearly half the capacity and much more than half the workable reserves of the western European coal industries have been destroyed, they have changed their tune. It used to be said that OPEC - the Organisation of Petroleum Exporting Countries - would never amount to anything, because Arabs could never agree with each other, let alone with non-Arabs: today it is clear that OPEC is the greatest cartel-monopoly the world has ever seen. It used to be said that the oil exporting countries depended on the oil importing countries just as much as the latter depended on the former; today it is clear that this is based on nothing but wishful thinking, because the need of the oil consumers is so great and their demand so inelastic that the oil exporting countries, acting in unison, can in fact raise their revenues by the simple device of curtailing output. There are still people who say that if oil prices rose too much (whatever that may mean) oil would price itself out of the market: but it is perfectly obvious that there is no ready substitute for oil to take its place on a quantitatively significant scale, so that oil, in fact, cannot price itself out of the market.