Back to the Future: Creating Long Term Growth Energy and Resources

Back to the Future: Creating Long Term Growth Energy and Resources

H. M. Morgan _*

Ninth Annual Corporate Conference
Hong Kong, May 8, 1998

Speeches and Transcripts: 1998

Energy Use and Urbanisation as the defining characteristics of development

1. Prior to the Industrial Revolution which began in Britain and Holland during the 18th century the standard of living of all the world1s peoples was constrained by the fertility of available land. Most people lived and worked on the land, producing food for eating and fibers for clothing; and because land transport was very expensive, opportunities for trade beyond the coal community were restricted to sea born cargoes. The power used to cultivate the land was provided by horses or oxen. Water-wheels and windmills provided the only other source of non-human power.

2. With the Industrial Revolution came the steam engine, a device which enabled the thermal energy stored within coal to be transformed into mechanical power. And so steam engines began to replace horses and oxen; railways and steam locomotives enabled large volumes of goods to be cheaply transported over land; factories using steam engines began to produce textiles and fabrics at extremely low prices; mines were able to be de-watered using pumps powered by steam engines, with huge gains in recoverable ore; and thus the modern era was born. Two centuries later per capita consumption of non-organic energy is an accurate indicator of the standard of living of the mass of people within a society. In Sub-Saharan Africa annual per capita energy consumption is typically 0.2 tonnes of oil equivalent (TOE). In North America the figure is 8 tonnes. The ratio is 40 to 1. The current global figure, for the world1s population of 5.8 billion people, is 1.45 TOE.

3. Within Asia energy consumption figures vary widely. Japan has a per capita figure of 4 TOE. Other S.E. Asian countries have between one eight to one quarter of that figure. China and India are about 0.5 TOE equivalent. As these countries convert their organic economies into mineral-based energy driven economies, demand for fossil fuels within their economies will grow, and grow significantly.

4. Projections for coal consumption in the Asian region have been carried out by a number of agencies. The Energy Information Administration within the US Department of Energy has predicted global coal consumption to lie between 6.2 and 8.7 billion short tons by the year 2015. Current coal consumption is approximately 5 billion short tons. Most of this increase will occur in non-OECD Asia, rising from 1.8 billion short tons to 4 billion short tons in 2015.

5. There are no arguments concerning the availability of coal reserves to meet this anticipated demand. China1s recoverable reserves are currently estimated at 126 billion short tons. India1s at 60 billion short tons. So even if one were to discount the great benefits which international trade in energy resources provides, there can be no question that the two prospectively largest consumers of energy in the world, India and China, have within their borders the resources to meet any conceivable energy demand for centuries to come.

6. One cannot discuss coal production and energy consumption without some reference to the Kyoto Protocol and the commitment within it to reduce carbon dioxide emissions. China and India have been resolute in refusing to agree to any suggestion that they should curtail their coal production in accordance with the Kyoto Protocol. At this point it seems most unlikely that the US Senate will agree to ratify the Kyoto Protocol. Three weeks ago 15,000 scientists, mostly within the US, signed a petition calling on the US government to reject the Kyoto Protocol. An accompanying letter by Dr. Frederick Seitz, a past president of the US National Academy of Sciences contains the following: “The treaty is, in our opinion, based upon flawed ideas. Research data on climate change do not show that human use of hydrocarbons is harmful. To the contrary, there is good evidence that increased atmospheric carbon dioxide is environmentally helpful.” Soon after, the National Academy of Sciences took the extraordinary step of disassociating itself from Dr. Seitz1s statement and from the petition. The NAS said that “the petition does not reflect the conclusion of experts reports of the academy”. There is, clearly, a robust debate going on within the US scientific community.

Scarcity versus Abundance: The Ongoing Debate

7. For many centuries prior to the Industrial Revolution the issue of resource scarcity dominated political thinking. When the capacity to produce weapons made of bronze, and subsequently iron, meant the difference between victory and defeat in war, access to high grade deposits of copper, tin, and then iron, were extremely important. In the 18th century, when naval power was a determining factors, access to tall, straight trees, suitable for ship1s masts, was as important to the governments of Britain and other European powers as access to oil was during the first part of the 20th century. So ideas of resource scarcity, and the linkage to national security, are deeply embedded in the political traditions of every major nation.

8. In 1798 the Rev. Thomas Malthus, an English clergyman, published a book entitled “An Essay on the Principle of Population as It Affects the Future Improvement of Society”, and in so doing gave his name as a generic description to doctrines of inevitable scarcity and impoverishment. Despite the fact that in the West, since 1798, both population, and standards of living, have greatly increased, Malthusianism retains a large number of adherents, particularly among the wealthiest sectors of Western society.

9. As a society moves away from biological sources of energy to fossil fuels, the number of people required to produce food for society declines dramatically. Over a century ago more than 60% of the people of Europe were engaged in food production. Today it is less than 6% and over-production in agriculture is a major political problem in Europe. As this major change in food production technology takes place, people move from the country to the cities. Most of the world1s cities are recent in origin and as the shift from an organic economy to a minerals based energy economy takes place in the developing world, so many cities will be born and grow, and existing cities will also grow in numbers and in geographic spread.

10. Within the West we have been experiencing a resurgence of Malthusian sentiment. In 1972 the Club of Rome produced its notorious report “Limits To Growth” , which predicted imminent shortages of virtually every important mineral. That report, and its conclusions, rapidly became the conventional wisdom of the day and few people felt courageous enough to challenge it. It is a curious fact that precisely when the Rev. Thomas Malthus wrote his gloomy prognosis, the steam engine and other inventions of the Industrial Revolution were dramatically invalidating his conclusions. In the same way the Club of Rome report came just at the time when the technology of discovering orebodies and mineral deposits, and of producing metals from lower grade ores, was undergoing a major transformation. The result of those changes is that the world is awash in minerals; prices keep on falling; and the only thing which change this long term trend is an outburst of irrational, Malthusian sentiment, which politicians find impossible to ignore.

11. An Australian example of such irrational behavior was the pre-World War II ban on exports of iron ore. Australian sentiment at that time was that we needed to preserve the then known resources for our own use. This in turn led to a cessation of exploration activity which compounded the problem and it was not until after the War, and considerable lobbying by the mining industry, that the ban was lifted and Australia soon became one of the world1s major exporters of iron ore, with immense reserves to call upon.

12. Another, more serious outburst of irrationality occurred in the 1970s. In my view the oil crises of that decade were driven to a large degree by Club of Rome sentiment, and the world paid a very high price in terms of mistaken investments based on false expectations of increasing shortages and, consequently, escalating prices for raw materials. As we look at current developments in the resource industries we find, all around us, rapid changes in technology which are driving costs down. If we put the possibility of political upheaval to one side, then resources will continue to become cheaper and more abundant.

13. Let me cite some figures from my own industry which reflect this cornucopia. About 20 years ago it was common knowledge within the nickel industry that the long term steady state price for nickel would be about US$4. Within a decade, market experience of supply and demand had brought that figure back to $3.50. By 1990 it was less than $3. Today we are talking about $2.50. These figures are not adjusted for inflation. If you multiply by the inflation index the decline in price is even more compelling.

14. This experience in nickel is characteristic of other base metals and of commodities more generally. But political sentiment is still often driven by pre-Iindustrial Revolution ideas of limited resources, particularly of strategic resources such as oil, and metals that are important in weapons manufacture. The disjunction between this traditional concern for resources that are mistakenly believed to be scarce, and the reality of a world in which supplies are increasing, and prices are falling, is a matter of concern.

15. If there is one single point which needs emphasis in this debate is that Asian consumption of fossil fuels, and minerals generally, is going to increase very substantially over the next half century, as Asia catches up with the developed countries. This increasing consumption will, nevertheless, be accompanied by increasing supplies, and falling prices, of all resources. If any one commodity begins to increase in price, substitutes will immediately appear, as if by magic. The only caveat to that prediction is that if governments, driven by irrational fears of scarcity, adopt policies that of themselves create scarcity; then we could return to a world where Malthusianism is self-fulfilling.

The Asian Crisis

16. Currently our attention is taken up with the monetary and then the economic crisis which has engulfed a number of the Asian economies during the last nine months. If this crisis leads to enduring reform in the monetary regimes which operate in these countries, then it will not be long before Asian economic growth resumes its pre-crisis course. The fundamental drivers of the Asian economic miracle have been political stability; the rapid growth of literacy and the spread of communication networks throughout the region; the replacement of organically based energy sources with fossil fuels and electricity; the concomitant spread of urbanisation; the opening up of these economies to international trade, foreign investment and access to metropolitan markets; and the growth of commercial confidence and popular aspirations which have accompanied these things.

17. In this unexpected crisis situation there are forces working for rapid return to economic growth and forces against. It is easy to recognise the forces working against, but there are some very positive factors which are rarely discussed. The first is the low level of taxation in these countries. In the West we have somehow managed to cope with very high levels of taxation and at the same time maintain modest growth. The Asian economies are much better placed than the West in this regard. The second positive factor is the demographic structure of the Asian economies. They are young countries. And that is a plus.

18. The key fact in the Asian economic miracle has been eagerness within Asian societies to engage in the global economy. It is important to keep up the momentum for reducing trade barriers and increasing direct foreign investment. In that context I am pleased that the Multilateral Agreement on Investment (MAI) has been abandoned. I detected some nasty hooks in that agreement concerning the prospect of interference by the major powers in the environment and labour market regimes of other countries; in effect a re-run of the Article XX debate prior to the WTO Ministerial Meeting in Singapore in December 1996. Competition between nations for foreign investment will, in the end, produce an investor friendly environment. The amount of money involved in foreign investment will be small compared with local savings and domestic investment. But the transfer of know-how, and the influence of close connections to world markets which direct foreign investment and foreign participation in domestic economic life brings in its train, is of great value.

19. Globalisation has become, for some in the West, a word embodying fear and loathing. But the evidence shows that globalisation means expanding opportunity and increasing prosperity around the world. Furthermore, I am convinced that the growth of economic interdependency which takes place as international trade expands is an important factor in maintaining world peace. I am aware that this argument of economic interdependency was widely used at the end of the 19th century and the beginning of the 20th century to predict the impossibility of war and that the substantial trade links between Germany and Britain at that time had no effect in preventing the outbreak of war in 1914. Nevertheless, continuing commercial intercourse, which by definition is of benefit to all of those who are engaged in it, has to tilt the balance of probabilities for peace rather than war.

20. In summary, then, although the rapid sustained economic growth which has characterised much of Asia over the last forty years has come to an abrupt halt, the underlying cultural and political forces which have sustained that process are still there. It will not be long before most of the Asian countries resume their growth trajectory, perhaps at a lower rate but on a more secure foundation than hitherto. This means that the demand for energy, for metals, and the other materials of urban and industrial life will continue to expand and that development of orebodies with the Asian region, some newly discovered, others waiting to be found, will be part of that pattern. This will take place in a world where resources become ever more abundant, and prices continue to fall.

21. Whilst economic recovery in Asia may take longer than the most cheerful optimists predict, any delay will not be caused by lack of energy or mineral resources. Once effective reforms are in place the powerful potion of dedication to family, work and education, will ensure that the Asian miracle will resume its previous course.

*: Hugh M. Morgan is the Managing Director of the Western Mining Corporation Ltd. and a Trustee of the Asia Society. Back.