ENERGY TAXES, OIL PRICES AND ECONOMIC ILLITERACY

I have had numerous emails challenging my arguments against wasting scarce resources on grossly inefficient alternative energy projects. One of these people wrote that I must be wrong because Alan Wood, economics writer for The Australian’s, also believes that the state should use taxation to discourage the consumption of oil. Just to make sure I got the message she sent me Wood’s article (Excise feud fuelled by hypocrisy). It made for very depressing reading.

Wood seems to have swallowed the green line that by raising the excise on petrol the country can conserve oil thus giving the market an incentive to develop an alternative. At this point I’m about to take an aspirin because this nonsensical line never ceases to give me a headache, particularly when it’s publicised by someone who is paid to know better. (But then again, this is the same bloke who honestly believes that the gold standard was bad socially and economically).


Wood ought to know that free markets, not taxes, conserve resources. This is really basic stuff. When the supply of any resource falls its price rises. Eventually the price could reach a level where the cost of producing an additional unit exceeds the demand. In other words, the point at which production further units of the product become uneconomic. This is why we never run out of resources in a free market. If, however, a resource is treated as a free good, as in the case of fish, then complete exhaustion is possible. This is obviously not the case with oil.

If the price of oil signals a secular increase this will act as a signal to consumers and producers that greater conservation is needed. The supply situation for any resource is always revealed by the interplay of supply and demand. The free play of market forces means that one does not need resources taxes to economise on the use of any resource. The market process will always bring about economisation in a way that no politician, green organisation or government agency could ever hope to emulate let alone better.

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