Friday, July 27, 2007

Chapter 4 from: J.J. Ray (Ed.) "Conservatism as Heresy". Sydney: A.N.Z. Book Co., 1974

The Doomsters Rise Again


'Australia with its minerals is like the bride with the very large dowry. She can wait to be wooed.'

With this little simile Rex Connor, Minister for Minerals and Energy, sums up his policy philosophies. He has never used his analogy in any public medium, only in private conversation. Perhaps his reticence is due to the rather archaic social context of the analogy. Possibly he is biding his time so that departmental work on a major energy policy statement can be finalised, submitted to the cabinet and endorsed as the guidelines within which Australia's minerals will be developed under Labor.

But the allusion to an Australia possessing very rich resources in a world where they will become inexorably scarcer and more intensely needed, is the key to the minister's approach to policy development.

Connor has said he believes there is a developing 'energy crisis' in the world and in the U.S.A., western Europe and Japan in particular. Australia's general strategy should be to quietly take stock of its energy resources and only export them in such quantities and at such a time as his department's planning suggests will maximise the benefits for the nation.

The minister envisages a new regime of government planned and controlled development of Australian energy reserves, based on a judicious exploitation of the 'world energy crisis' and the addition of 'resources diplomacy' to the traditional tools of foreign policy.

The idea of a long-range plan for Australian energy resources is not new and not particularly a Labor Party idea. Commonwealth government officials under the previous regime started work some time ago on the plan which Connor intends to unveil later in the year.

Lloyd Bott, head of the Department of National Development which ran minerals policies in the Liberal era, said in an address last year: 'We will need to decide just what our future fuel needs are likely to be ... my department is in the process of undertaking a major study of energy demands to the end of the century, and I expect that this study should be completed by the middle of the year (1973 presumably). Australia's total energy resources must be balanced against our forecast needs . . .'

That project has been taken over by the new team-Connor, his new tough-minded departmental head of Gorton-era fame, Sir Lenox Hewitt, and the small band of all-purpose under-officers he trails around with him in his jumps from department to department. Asking a government official to estimate mineral reserves is rather like asking a police chief to estimate undetected crime. He has a vested interest in under-estimation, and since no one can possibly know the answers anyway he can throw his figures around confident that no one will be able to prove him wrong. At least, in the case of the minerals crystal ball gazer, his errors will not be provable until he is personally long forgotten.

In 1938, the chief geological adviser to the Commonwealth government, Dr Woolnough, declared Australia's reserves so poor that it would 'in little more than a generation become an importer of iron ore.' By the mid-1960s Australia should have run out of iron ore, and so it was considered imperative in 1938 that there should be a prudent husbanding of the nation's scarce resources. The Lyons government intervened and placed an embargo on iron ore exports, which lasted until the balance-of-payments crisis in 1960 forced its abandonment. It was the Liberals who placed a ban on the export of natural gas and oil and who severely restricted export permits for uranium.

Government restriction on minerals and energy has a long and bi-partisan tradition in Australia, and Connor is merely treading in familiar political footsteps. But he seems to intend to go further along the same track. It is probably good politics. It looks like conserving our resources against covetous, money-making foreigners. But is it good sense? Is there really an 'energy crisis' which requires such action?

Most of the people in America who are talking about an energy crisis there are talking about the next ten to fifteen years. Beyond 1985 or 1990, most people agree there will be new sources of technology available to provide for energy needs-fast-breeding nuclear reactors that need almost no fuel, solar energy, geothermal and tidal power, possibly fusion reactors and fuel cells.

True, some particularly pessimistic scientists calling themselves the Club of Rome played around with potential growth rates of demand and a potential tailing away of technological advance and produced predictions of disaster in a widely publicised book called The Limits to Growth. This work, described by the distinguished British economist Wilfred Beckerman as 'such a brazen, impudent piece of nonsense that nobody could possibly take it seriously', was taken seriously by the World Bank which has produced a painfully long but very thorough demolition of this classic in doom-mongering. Indeed, apologists for the Club of Rome have been reduced since to saying: 'At least they promoted lively discussion.'

Most serious forecasters think that population growth and demand for material resources will decline after 1985 and that radically new technologies will be available to serve energy needs. In any event the problems of the world fifteen years and more ahead are so highly speculative that little purpose seems to be served by predictions.

It follows from this alone that any Australian policy based on the assumption of the world energy shortages lasting into the 1990s and beyond is likely to be ill based. Uranium is not likely to remain in strong demand because of breeder reactors and even oil and gas (not to speak of crude old coal) are likely to be regarded as obsolete and inefficient energy sources.

Over the long span of economic development real energy costs have gone down as technology has advanced rapidly to improve world energy productivity, although there have been periodic episodes when a trend to scarcity appeared for a short while, during which people of very pessimistic nature have each time predicted an eventual 'run out' of reserves.

There have been two surprising counter-attacks against the conservationist policy of the minerals planners in the Federal Government. One came from the Treasury and the other from the Bureau of Mineral Resources.

The Treasury, in a publication 'Economic growth, is it worth having?' has published a major criticism of the idea of an imminent energy crisis and made a powerful attack on export restraint. Connor's idea that Australia might hold back certain minerals for sale in the future is argued against in these terms by the Treasury: 'Possible future gains are being weighed against certain current losses: those in whose interests it is suggested that a certain mineral should be conserved might not turn out to want it at all, or might want it only at a fraction of its current real price. The idea of measuring the scarcity of minerals by extrapolating demand from currently proven reserves is described as "a fallacy of the crudest kind".'

Supporting the Treasury is Mr L. C. Noakes, assistant director of the Bureau of Mineral Resources. The bureau, although an agency which operates within the Connor empire, has a degree of independence.

Noakes in the latest issue of the departmental journal, Australian Mineral Industry Quarterly Review, says: 'It will never be possible to predict confidently either availability of or demand for minerals for years ahead because ore yet to be found cannot be estimated with any confidence, and demand although more amenable to estimation is likely to be controlled by complex factors such as per capita income, population, relative price, substitution and technology . . .' He, too, describes predictions that certain minerals, will 'run out' as 'oversimplistic'.

In relation to coal, Noakes reviews the world and the Australian situation and concludes: 'There is little sense in conserving Australian coal.' Proven reserves are equivalent to 260 years' supply at current production rates, and there would be very many times that if there was any need to go out and prove more. In any case the world coal situation is one of sheer plethora. Already identified reserves of coal amount to about ten trillion tons or many centuries' supplies.

Australia's best strategy for coal is to sell as much as we can as quickly as we can before the Japanese get around to exploiting the vast coal reserves closer at hand in China and Russian Siberia. In the longer term, looking to the 1980s, the market for all kinds of coal seems likely to be steadily undercut by improved methods of electricity generation and steelmaking technology.

Similarly, there isn't any case for keeping our uranium in the ground, because conservationist policies merely encourage other countries to find their own supplies and accelerate progress toward fast breeder reactors and other technology which devalues our reserves.

The petroleum situation is somewhat different. Again there is no question of the world suddenly 'running out' as the dramatists and catastrophists would have us believe. Vast reserves of oil are being proved offshore on continental shelves. Petroleum-poor Britain has suddenly become rich, thanks to oil found under the North Sea, and there is no reason why this discovery should not be repeated in many other places if the necessary drilling is encouraged. Existing wells can be exploited more intensely. But costs are going up and the geological experts agree that demand is pressing more heavily on oil supplies than on supplies of other fossil fuels."

Proven reserves of oil under Australian control are only about 300 million tons or something over ten years' supply at current rates of use. But the prospects for finding more oil are generally agreed among the experts to be good. An oil and' gas specialist of the Bureau of Mineral Resources, Mr M. Konecki, in a paper presented to an Institute of Fuel conference in Canberra last year presented figures suggesting that there could be something like sixteen billion tons of oil on Australia's continental shelf, or 500 years' supply at the current rate of use.

The problem is to find the stuff. The trouble with conservationist measures is that they deter oil search. If the government will not allow you to sell the good oil on the world market, why bother looking for it? The greater the conservationist tendency of the government the more risk there will be for oil searchers that they will not get rewards for even successful drilling efforts. The conservationist policies toward iron ore deterred the proving of reserves for decades and deprived Australia of tens of millions of dollars of export income in the late 1950s, when the economy very badly needed it. The Japanese bought their ores from the Philippines and India when they would have been buying them in Australia but for the local conservationists.

Former PM John Gorton introduced restrictive conservationist principles into Australian oil production, with his enforcement of an arbitrary price freeze and export ban on Australian oil.

It is just this kind of suppression of the price mechanism which has led to the so-called energy crisis in the United States. Connor appears to want to follow the same path with his promise of nation-wide uniformity of natural gas prices. This is the introduction of vague social welfare concepts at the cost of severe distortion of economic resource allocation and a general increase in cost levels.

Connor is also continuing the ban on exports of natural gas, despite evidence that Australia has supplies beyond any conceivable needs. At least, he says he is continuing the ban 'until our reserves are established'. The trouble with this approach is that reserves can never be finally established. In any case Connor's own advisers say that there is a plethora of natural gas. Oil and gas specialist Konecki says: 'Not only will Australia's needs be satisfied, but also considerable volumes of gas will be available for export.'

But government policy towards gas is unlikely to be based on careful, rational analysis. The most striking evidence for this pessimistic prediction is Connor's commitment to a vastly expensive national pipeline grid ahead of any benefit-cost study whatever. Connor has already spelt out how the pipeline at millions of dollars a mile will be extended to Brisbane and Melbourne from central Australia and backwards to the Pilbara, Kalgoorlie and Perth. He is prepared to commit Australia to the most expensive civil engineering project in its history without any expert analysis of the returns which might be expected.

Melbourne stockbrokers, Williams, Tolhurst and Co. who specialise in mineral affairs, say in a recent report that the project 'could be the greatest white elephant this country has seen'.

'Resources diplomacy' is a bright new phrase which is being played with like a toy by government ministers. No one will spell out what they mean by it, but it seems there is a vague idea that Australia may be able to exploit its minerals riches to extract special concessions --of economic and other kinds-- from minerals importers. It seems unlikely that this will be possible, even if it were desirable. Even though Australia is relatively rich in many minerals, it has nothing like a monopoly of any item and prices will be determined by the world market. The withholding of supplies because the government does not like the price offered will merely mean reduced sales by Australia and the diversion of customers elsewhere.

Resource surplus does not give Australia any particular bargaining power as implied by the concept of 'resource diplomacy'. Australia could never threaten to withhold supplies of minerals and expect to make gains. Certainly Japan, for example, is heavily dependent on Australia for supplies of iron ore and coal and could become heavily dependent on Australian liquefied natural gas. But Australia has become just about equally dependent on Japan as a market. We would have just as much as they to lose by disruption of minerals sales, so what diplomatic power do the resources provide? The answer has to be: very little indeed.

The sheiks of the Middle East are at least bargaining for realistic prices for their superb oil reserves. But they are just about as dependent on the oil importers as the importers are on them, and the idea of the U.S.A. being 'held to ransom' or more wittily 'put over a barrel' by the Arabs is rather unreal. The sheiks have had the opportunity to exercise 'resources diplomacy' for a couple of decades, and it has not amounted to much. The U.S.A., for example, continues to sell armaments to their obsessive hate-object, Israel. If 'resources diplomacy' cannot stop that, what can it stop?

Australia is not heading towards any genuine energy crisis but could be facing crises of government policy and regulation, due to woolly thinking and prejudice.

An energy crisis will come if the proposed government minerals authority, staffed by rule-bound public servants and financed in competition with welfare funds, is unable to perform up to the standard of the free-wheeling entrepreneurs with their risk capital, who have traditionally produced the mineral and energy goods.

This chapter originally appeared as an article in "The Bulletin", 14 July 1973, pp. 23-25.

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