The so called “super tax” announced over the weekend, to apply to mining companies with huge profits, has been the subject of a well-orchestrated scare campaign already. I expect this retaliation from the mining industry has only just begun. I personally think its fair to demand these huge multi-national companies return a decent slice of profit back to the country of origin of the raw materials they are exporting. After all, these resources are Australia’s resources, not the shareholders’.
Aside: I’m not defending the Government’s otherwise fairly unimpressive tax “reform”. I think (and hope) there is still more to be seen on that front.
The main scare tactic used has been about the potential to lose investment in mining. I doubt that is going to happen as a result of this tax (and if you don’t believe me, ask Peter Switzer). But when you think about it, why would we want to increase investment in coal and oil production anyway? The entire world economy will eventually shift to more environmentally friendly energy sources (whether we have an international treaty or not), simply because climate change is real and will only get worse. Investment in renewable and nuclear options will become cheaper, and coal will become increasingly unpalatable and outdated.
A large part of our coal export demand comes from China. But China’s economy at present is unsustainable and will not persist at the current rate:
Historically, one is able to observe two phases of growth in a country’s development. The first phase is the early growth and command economies such as China have been very good at this – arguably better than western economies, simply because they are able to marshal resources perhaps using techniques that democracies are loath to employ. China’s employment of capital, its education and migration policies reflect this early phase growth. This early phase of growth is characterised by expansion of inputs. The next stage however only occurs when people start to work smarter and innovate, becoming more productive. Think Germany or Japan. This is growth fuelled by outputs and China has not yet reached this stage.
China’s economic growth is thus based on the expansion of inputs rather than the growth of outputs, and as Paul Krugman wrote in his 1994 essay The Myth of Asia’s Miracle, such growth is subject to diminishing returns.
So how sustainable is it? The short answer; it is not.
So given that the coal industry is unlikely to face increased demand beyond the next decade, there is little reason to spend huge amounts of money on coal mining infrastructure. I predict the recently commissioned billion dollar third Newcastle coal loader will probably be our last.
And from the perspective of oil drilling, I think there is merit in the assertion that we have already passed peak oil production, which by definition, means investment in more infrastructure is likely to give poor returns:
Dr Michael Lardelli from the University of Adelaide looks at how the bulk of the world’s oil production comes from a relatively small number of very large fields discovered decades ago. The rate of world oil production has been maintained at current levels only by finding and bringing on line an increasing number of smaller fields, but the financial cost and the energy required to find and develop these new fields is constantly increasing. According to Dr Lardelli the so-called peak of oil production was actually in 2008.
We can no longer afford to sit around discussing whether or not we have passed the peak of oil production. We cannot wait, complacently, for price signals to stimulate the development of alternative sources of energy since oil prices will fluctuate wildly. Every time the economy tries to grow, oil demand will exceed supply, causing the oil price to spike up. This will strangle the economy, reduce oil demand and cause the price to fall. Oil companies cannot invest in the face of these wild fluctuations in price. Most importantly, we must remember that to do anything at all requires energy. So, while oil is still relatively abundant, we must invest as much as we can to develop the energy sources of the future. Once the oil supply starts to decrease significantly, we will be too busy just trying to keep food production and essential services running to have any energy left over for building expensive high-tech alternative energy infrastructure.
The peak of oil production was two years ago. For the sake of my children, and your children, we need to just accept that fact and deal with it. When it comes to investing in energy alternatives, do it now, because it will not be possible later.
Thankfully, in the area of transport, we are able to appreciate the advantages of fuel efficiency in our cars and trucks. Cars are getting more and more fuel efficient, and brands are using this attribute as a major selling feature. The main-stream Toyota Camry of this year features a hybrid engine and it shouldn’t be too many years until this is more commonly seen. So hopefully we can survive long enough until we find a technology to replace oil before there isn’t any left.
But in conclusion, don’t fall for the predictable story from mining executives and shareholders, that a “resources rent” tax will prevent investment in jobs and harm our economy. It won’t. But it may affect shareholder dividends.