Muldoon Vindicated

Muldoon’s Think Big Projects are still vilified as all that is wrong with government getting involved in Commerce.  Muldoon spent a fortune (in those days) on a wide range of projects that were intended to make the country energy self-sufficient.   The process was not always well considered and it was hugely inflationary, though that was also caused by more than Think Big.  Much of what was wring with Think Big was more a failure of execution than of logic as Muldoon did unfortunately have the habit of surrounding himself with some of the worst stooges in politics.

Muldoon foresaw the need for this country to address the scarcity of energy that a growing world population and shrinking resource base would create.  He was reinforced in those views by the oil price shocks of the 1970’s.  These shocks arose from the occurrence of the oil production peak in America.  It was then that America lost control of the global price of oil.  When this happened the oil rich middle-eastern countries decided to get the real value of their product out of the market place. There were lots of political reasons as well but it wasn’t until America became an oil importer in 1970 that OPEC had the power to affect the US domestic oil price.

Muldoon initiated hydrocarbon exploration in Taranaki.  He drove investment in hydroelectricity, thermal power stations and reticulated gas networks.  He pushed for the electrification of the North Island Railway.  He also drove the conversion of a large part of the vehicle fleet to run on compressed or liquefied natural gas. 

What neither Muldoon nor the Oil Sheiks expected was the American response.  This was to install puppet regimes in places that allowed the oil companies open access to much of the world’s oil.  And also the Alaskan and North Sea finds.  This allowed America to eventually get the price back from US$40+ per barrel to below US$20.

Oil Price 1861 2010 Source EIA

That stuffed Muldoon’s calculations completely.  He had done his sums on the price staying high.  Instead we had a thirty-year glut of cheap oil.  All his projects looked like white elephants or worse – a vast drain on the economy.

But Muldoon wasn’t wrong, just that his timing was bad.  In hindsight he wasn’t even that wrong with his timing as nearly everything he caused to be built has contributed hugely to the economy over that period.  The real problem was that no one understood the true value of what he had built until now, when the cost of energy is being priced closer to its real value to society.

Now the time has come when the true farsightedness of his investment decisions are becoming evident.  This paper released this week by the International Monetary Fund puts it quite succinctly (for a paper of this sort) in the introduction to the paper.

The Future of Oil: Geology versus Technology IMF Working paper 12/109

We discuss and reconcile two diametrically opposed views concerning the future of world oil production and prices. The geological view expects that physical constraints will dominate the future evolution of oil output and prices. It is supported by the fact that world oil production has plateaued since 2005 despite historically high prices, and that spare capacity has been near historic lows. The technological view of oil expects that higher oil prices must eventually have a decisive effect on oil output, by encouraging technological solutions. It is supported by the fact that high prices have, since 2003, led to upward revisions in production forecasts based on a purely geological view. We present a nonlinear econometric model of the world oil market that encompasses both views. The model performs far better than existing empirical models in forecasting oil prices and oil output out of sample. Its point forecast is for a near doubling of the real price of oil over the coming decade. 


http://www.imf.org/external/pubs/cat/longres.aspx?sk=25884

The point this paper makes is that regardless of price, oil is getting harder to find and more expensive to extract. This simple fact is made more complicated by billions more people expecting to have an oil-supported lifestyle. 

Here in NZ the problem is compounded by the fact that we are also getting poorer relative to those who want to buy oil.

The simple fact is that if we don’t have energy we don’t have a modern economy.  Muldoon saw that.  He also saw that renewables such as hydro-power were an investment that produced what is in effect a perpetuity.  The value of the output only grows with time while the historical cost diminishes.  Unfortunately accountants and economists apply discount rates to perpetuities that emphasizes the short-term cost and undervalue the long-term benefits.  The same narrow view overlooks the fact that society and the economy that feeds it needs energy and the availability of energy to the economy has a value far greater than its market price.

And as for leadership, name one prime minister since Muldoon that has left a legacy that would be particularly missed as much as the assets built during the Think Big era.  There are none.  Indeed in most cases the loss of their legacy would be an improvement.

As with much of human endeavour there was plenty that was wrong about Muldoon and his reign but there were some things he did that we should be forever grateful for.  As with all things we should look at this time when government did serious visionary stuff and wonder why we are now so supine infront of a government who's only strategy is to sell us to the highest bidder.

Interestingly enough most of what they are now selling as so valuable an investment are the very Think Big assets that Muldoon has so long been ridiculed for.


How quickly we forget the inconvenient bits.