Airs – Ian Lance Taylor

Future Payments

One of the ways that pure capitalism fails is an inability to price limited resources. There is a real sense in which oil, a limited resource, is almost certainly worth more today than people are paying for it. It seems likely that people in the future will be aghast at the way we are wasting this precious resource, one that has taken millions of years to create, by simply burning it to drive a few blocks to the grocery store. Those people in the future would gladly pay far more than $100 a barrel, and their bids should drive the price up. Unfortunately, those people do not yet exist, and their bids don’t count.

Companies can take future pricing into account, of course. However, future prices will always be taken at a discount, due to uncertainty and because it’s better to have money in hand. Also, companies are run by people, and few people take a truly long range view: few people care much about what a company will be like in 150 years. Those people who do take a long range view are rarely chosen to be in charge of company decisions.

Of course there are no pure capitalist societies. Real societies address this issue via some sort of regulation, such as taxing the resource to increase its price, or regulation to limit its use, or a cap-and-trade and system which does both. Not that the U.S. is doing any of those things for oil, but at least there is a possible answer to this flaw of capitalism, an answer that relies on some sort of government.

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Ian Lance Taylor

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8 responses to “Future Payments”

  1. fche Avatar
    fche

    Interesting point.

    Are you sure that capitalism per se can’t apply to this, for example by having oil speculators hoard oil somewhere (perhaps in unused underground formations), until a future time when they bet the price will go up? Or do you think that the timeline for that inevitable price rise is much longer than normal business contracts (like 30-year mortgages)? Are there no futures markets with that long an maturity date?

    I wonder if federal impediment to oil drilling in/around the US is an expression of just this sort of speculation: that today we can get other people’s oil relatively cheaply; someday later we’ll need these “off-limits” resources much more, so let’s save them. If so, non-drilling in ANWR etc. might be only notionally about animals and more about long-term resource conservation.

  2. Ian Lance Taylor Avatar
    Ian Lance Taylor

    Yes, I think the timeline is too long. I don’t know what the longest futures market is, though.

    I agree that it makes sense to preserve fields like ANWR for later use. I’m not sure how many people really take that view.

  3. Simetrical Avatar
    Simetrical

    The problem here isn’t capitalism, it’s people. Any process where decisions are made by people will do little to account for anything that will only occur after the decision-makers are dead. Democratic governments tend to be about as short-sighted as corporations — they routinely create future problems to make voters happier now (e.g., running persistently large deficits until they collapse).

    Of course, if most voters happened to strongly feel that some future problem needed to be averted, a democratic government could take long-term action at short-term cost. But so could a market, if enough participants in the market assigned enough utility to some future problem’s non-occurrence. For example, many governments make a show of doing something to combat global warming, to appease voters concerned about that long-term problem (while actually not doing anything that would cost them much in the short term, as much as they can get away with). But many businesses also make a show of being green and low-carbon, for the same reason (while, again, spending as little actual money on it as possible).

    So I don’t think this particular case is really a market vs. government problem at all. Future people can’t be given a voice because they don’t exist yet, and present people will tend not to care so much about future people, however you configure the system. You can take into account people a few decades from now via speculation, but not people 150 years from now.

    (It’s not actually obvious to me that it’s advantageous to limit consumption of oil, though, leaving aside global warming. Eventually it will become too expensive and we’ll have to switch to other sources of fuel. Inflating oil’s price now and subsidizing it later will delay that switch-over point, but why is the cost necessarily worth it? The only advantage of oil in the first place is that it’s cheaper than alternatives. What you say makes more sense for a resource that has no substitutes, rather than just being cheap, but I can’t think of any examples offhand.)

  4. etbe Avatar
    etbe

    Let’s assume for the sake of discussion that I want a 10% annual return on my investment. In that case if bonds were offered that would have a value of $13780 at maturity in 100 years time then I would be prepared to buy them for $1 each.

    For that to be a viable way of delaying petrol use then the petrol price would have to be 13780* the current price which is about $1.30/L in Australia. So we are talking $17914 for liter. So delaying petrol use when a return on investment of 10% per annum is desired would require that petrol price per mass approach the price of gold (which at $865 per troy ounce is $27903 per kilo).

    Given that the price of petrol will be limited by the cost of making other fuel sources (such as Ethanol which is being produced cheaply in Brazil right now) and the price of using other forms of transport (such as horses) I can’t imagine petrol becoming so expensive.

    Now if I only wanted 5% return on investment then we are talking about a factor of 131 over 100 years. That would mean petrol prices of about $170 per liter. Much more affordable but I still think it will always be cheaper to make ethanol.

    Now lubrication grease is another issue. We still haven’t got a good renewable source for that AFAIK and even with today’s economy it would be quite viable to use $170/L oil in a car engine and bearings – at Australian prices that would probably about double the cost of routine car servicing which is currently mostly wages for the mechanic. But it would be rather risky to bet an investment on the next 100 years not developing a good renewable source of lubrication grease and also still having cars that need it.

    In terms of storing oil, the only way to do that is to buy drilling rights to a region and then not drill. There is no effective and economical way of storing a lot of oil once it’s been removed from the ground.

  5. Ian Lance Taylor Avatar
    Ian Lance Taylor

    Simetrical: I don’t think it’s simply a problem of people. Look at the great cathedrals of Europe, which took generations to build. It’s possible for people to think long-term, it’s just not common these days.

    And I’m not really talking about companies or governments taking small steps to be green. I’m talking about how capitalism strongly encourages limited resources to be used up. Yes, if all members of society decided to stop using oil, then it would very quickly stop being used. But that’s a difficult proposition when it is so much cheaper.

    Oil is a potentially very valuable substance. There are many things we can do it other than burn it. But because it is so cheap, we are burning it. Future generations are going to have live without it, even if they would prefer to have it.

    That said, it’s really just an example of the general phenomenon: that future people have no say in our use of limited resources. In the specific case of oil, I’m feeling optimistic these days about biotechnology finding ways to produce oil equivalents with fairly low energy input.

  6. Simetrical Avatar
    Simetrical

    Your example of cathedral-building nicely illustrates that governments are not needed for long-term thinking. Cathedrals were and are built by private organizations like the Catholic Church. The problem is not about capitalism vs. governments. However you slice it, the decision-makers decide whether to conserve the resources, and the decision-makers are roughly the same for markets and (democratic) governments — the general public.

    The issue that future people have no say in what we do (whether in a capitalist or non-capitalist system) is a real one, of course. But I can’t see any conceivable way to give nonexistent people a say in anything, so I find it hard to worry about.

  7. etbe Avatar
    etbe

    What is the longest time that a cathedral has been in-progress but not usable as a matter of plan?

    Most of the examples of cathedrals that have taken a long time to build have been in use not long after they were started. I’m sure that there were some that were abandoned during construction and then resumed many years later. But I’m not aware of any that were planned to be in an unusable state for 100+ years.

    A common design pattern for churches seems to be to create the part at the front first (or a wing in the case of a cathedral) and then some years later extend the body when the congregation grows.

    Spires can be added hundreds of years later.

    http://en.wikipedia.org/wiki/Cologne_Cathedral#Medieval_beginning

    The Cologne cathedral was in use 74 years after the foundation stone was laid, but then had a crane on top for hundreds of years after work was halted. 74 years is less than one lifetime (but more than one generation).

  8. al Avatar
    al

    Reacting late but anyway. The problem I see is that people are hypocrites. They do not want not to have petrol. Petrol made their life so easy, why would they make their own life more difficult by rationing its usage ? That would mean to make their life a lot more difficult than it is today.

    This situation is similar at some point with IPv4 vs IPv6. IANA knew since the beginning of the 90′ that IPv4 address space was to exhaust. IPv6 has been designed and standardized. We had 12 years to deploy. Result: IPv4 is now exhausted and IPv6 is still far from usable.

    The similarity with petrol stops here. We can still live with IPv4 exhausted, growth is just constrained. Today, there is still no large scale replacement to petrol. All electric is no solution; you’ll never fly an A380 on battery (at least not within the next 30 to 40 years). This only thing means that transport will become a lot more restricted. Lots of other “solution” do not scale either. Electric car development will be bounded by lithium availability.

    The risk is to only start to really think about replacing petrol when it will be so expensive that development will be so expensive that it will not happen.

    On the political point of view, if US (and the whole occident) keeps not innovating much, and continue to live on the innovation of the 70′, it is doomed.

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