Bubbles past and future
The march of folly never ends
There’s a theory investors refer to called “The Greater Fool” theory.
Simply put, people will hang onto a bad investment in the hope they will sell it to a “greater fool” for profit. Indeed, some use it as a viable investment strategy to maximise short-term profits.
The collapse of the sub-prime market in the US is often cited as a recent example of the Greater Fool Theory in operation. Investment firms realised the entire repackaging of untenable loans into collateralized debt obligations (CDOs) was a house of cards bound to fail.
And yet those same firms continued to pump out “financial products” to unwary buyers (usually national, state and local governments) in order to maximise short-term profitability.
We all know how that played out in the end.
Alternatively some academics choose to explain speculative bubbles in terms of sociology and neuroscience, defining the actions of investors as “herding” behaviour. Rather than making rational decisions individually, investors will simply follow trends:
“Herding can be defined as the phenomenon of individuals deciding to follow others and imitating group behaviours rather than deciding independently and atomistically on the basis of their own, private information.”
Whatever the reasons for the emergence and collapse of speculative bubbles, it’s now widely accepted that markets and individuals are far less “rational” than was supposed.
And what is true in markets, is true for human nature.
Individuals, governments and organisations will often pursue courses of action that compromise their own self-interest.
History bears this out: the march of folly never ends.
Elites will frequently pursue policies contrary to their own self-interest, deluding themselves they “had no choice” or that it “really was in their interest”. Thus some argued – and continue to do so – the invasion of Iraq was in America’s best interest. The Soviet’s invaded Afghanistan believing it was in their national interest to do so.
The Trojans rather liked the look of that marvellous looking wooden horse parked just outside their walls, thinking it would make a splendid addition to their collection of public art. Irony or folly, sometimes there is little difference between the two.
In Australia the march of folly is playing itself out once again.
It is driven by the desire for short-term economic and political gain. In other instances it’s about winning the “culture wars” that have raged between the old left and right since the mid-1980s.
And this new march, both foolish and sadly predictable, is fuelled by coal.
Herd of greater fools: Australia’s coal rush
Currently we are witnessing a spectacular march of folly in recent Australia’s “coal rush”.
It’s all based upon a simple premise: we’ve been digging the stuff out of the ground and flogging it for the last 30 years. Ergo, we’ll keep digging it out and making a profit for years to come.
Thus we are now seeing conservative governments in the states of Victoria and Queensland expanding coal mining in the hope it will prompt economic growth, employment and refill their emptying state coffers.
In Victoria, the increasingly unpopular Premier Ted Bailleu has agreed to expand the mining of brown coal – 40 billion tonnes of the stuff – in the La Trobe valley:
The State Government says talks to export brown coal from the Latrobe Valley have progressed quickly.
Earlier this year, the Government announced it was opening up Victoria’s vast brown coal reserves to export, if a company is able to develop technology to allow it to be dried and transported safely.
The Government says it is already in talks with an international consortia about a project to dry coal for export.
It is estimated the project could create 3,000 jobs during the construction phase, on top of about 300 on-going jobs.
Resources Minister Michael O’Brien says the proposal shows there is significant interest in a potential brown coal export market.
“When we met with a consortia last year to discuss Victoria’s brown coal, the Exergen and Tata groups were very positive about it,” he said.
Martin Ferguson, the Federal Minister Energy and Resources and known climate change sceptic, is cheering it on:
ABC News reports Ferguson backed the plans at an international energy conference in Melbourne this week.
Victoria Minister for Energy and Resources Michael O’Brien also supported the plans and said there was a “massive interest” in VIC brown coal.
In Queensland, conservative Premier Campbell Newman is prepared to risk the health of the Great Barrier Reef in a rush to open up mining and ports:
A WORLD Heritage mission wants tough new environmental conditions placed on coal and gas port expansion applications, pending the outcome of a strategic review into the combined threat they pose to the Great Barrier Reef.
Developers could be forced to accept new “precautionary” environmental rules or withdraw their applications and resubmit them when the strategic review has been completed in 18 months.
The co-ordinator of the UNESCO World Heritage Centre’s marine program, Fanny Douvere, yesterday declared that the Great Barrier Reef, one of the world’s most important environmental assets, was “at a crossroads”.
These governments are simply hoping to emulate their compatriots in Western Australia, where mining has not only been booming, but delivering handsome royalties to government coffers (and wealth for certain mining billionaires).
Nor is it the conservatives alone extolling the wonders of coal.
Prime Minister Julia Gillard has been touring Queensland in the hops of bolstering support for her flailing government by promising coal with have a long-term future:
Ms Gillard told Fairfax Radio coal jobs would increase under her plan.
“There will be growth in jobs in coal,” she said.
“The demand for coal will continue very strong. In terms of the impact of carbon pricing on coal mining the average impact is $1.40 per tonne.
“This is in the situation where coal prices have more than doubled, so we will see continued growth in coal mining.”
Across the political spectrum, it appears our leaders share the same set of assumptions.
How should we respond to climate change?
Dig up more coal.
How can we prompt alternative sources of energy?
Dig up more coal!
How can governments continue to fund essential services like education, healthcare and police forces?
Why, dig up more coal!
Is it me, or do our leaders seem rather unimaginative?
March of folly redux.
Permit me to mix up metaphors and popular culture: we’ve set sail on a ship of fools, herding us off the map, all the while drawn by the promises of coal.
Locking in the march of folly: the coming of peak coal
According to BP, there are enough global reserves of coal for us to happily burn through for the next 150 years.
And yet even now there are whisperings of peak coal with production peaking coming much sooner than anticipated, perhaps in the next few decades (2025 by some estimates).
Australian reserves at around 75,000 million tonnes are thought to be viable (that is the cost of extraction remains profitable) to about 2050. Indeed, some research suggests peak coal could hit us sooner:
Professor Geoffrey Evans and PhD student Steve Mohr from the University of Newcastle have developed a new mathematical model to predict the future of coal production.
Their research reveals that the world’s coal production could peak between 2010 and 2048, and Australia’s coal production sometime after 2050.
The researchers applied their new model to all coal-producing countries and, unlike previous models, took into account supply and demand influences.
“We need to start thinking now about the future supply of coal and how best to manage the resource. This is another warning that we cannot wait for coal to peak, we need to act now to plan for the future.”
Thus there can be no greater monument to folly than an open-cut coal mine or breaking ground for a new coal-fired generator.
That we continue to ignore coal’s environmental impact is madness.
The International Energy Agency (IEA) warns we are playing a dangerous game, and that we should be alarmed about rising levels of investment for fossil fuelled power stations:
The world is likely to build so many fossil-fuelled power stations, energy-guzzling factories and inefficient buildings in the next five years that it will become impossible to hold global warming to safe levels, and the last chance of combating dangerous climate change will be “lost for ever”, according to the most thorough analysis yet of world energy infrastructure.
Anything built from now on that produces carbon will do so for decades, and this “lock-in” effect will be the single factor most likely to produce irreversible climate change, the world’s foremost authority on energy economics has found. If this is not rapidly changed within the next five years, the results are likely to be disastrous.
“The door is closing,” Fatih Birol, chief economist at the International Energy Agency, said. “I am very worried – if we don’t change direction now on how we use energy, we will end up beyond what scientists tell us is the minimum [for safety]. The door will be closed forever.”
Despite these risks of locking in significantly dangerous levels of warming, governments continue to willfully turn a blind eye to the problem.