Governments trampling the ‘invisible hand’

Tuesday, 22 August 2017
Melbourne, Australia
By Bernd Struben

  • The big stick approach
  • All electric Down Under?
  • The impact on oil and gas

I have never known much good done by those who affected to trade for the public good.’

Adam Smith, The Wealth of Nations, 1776

The future of transportation, we are told, is electric.

Like the horse and carriage, the combustion engine will be relegated to the history books. And, perhaps, rolled out at local fairs as a novelty ride for the kiddies.

In the early 1900s, free market forces pushed the horse and carriage out of mainstream use. Consumers saw the advantages offered by automobiles, and they chose to buy them instead.

People acting in their own best interests would not have surprised Adam Smith. He coined the term the ‘invisible hand’ in 1776. You’re probably familiar with his theory. It states that when everyone pursues their own individual interests, this ultimately benefits society as a whole.

And the widespread adoption of cars over the last century has clearly benefited societies across the world as a whole.

Of course, today’s cars are nothing like the ones your great grandparents drove. Free market forces have meant they need to constantly evolve to remain competitive. In 2017, cars are generally more efficient, safer, and faster than ever before.

A small percentage are even powered by electricity. And, if nations stick to the Paris climate accord, that percentage could top 6% of the world’s total cars by 2030.

That’s an admirable goal. In fact, 100% electric is an admirable goal too. All companies need to do is create electric vehicles that are superior to their fossil fuel-powered cousins. The invisible hand will take care of the rest.

Unfortunately, that’s unlikely to happen.

More after the markets…

Markets

Overnight, the Dow Jones Industrial Average gained 29.24 points, or 0.13%.

The S&P 500 gained 2.82 points, or 0.12%.

In Europe, the Euro Stoxx 50 index closed down 22.50 points, or 0.65%. Meanwhile, the FTSE 100 fell 0.07%, and Germany’s DAX index lost 0.82%.

In Asian markets, Japan’s Nikkei 225 index is up 1.91 points, or 0.01%. China’s CSI 300 is up 0.33%.

In Australia, the S&P/ASX 200 is up 22.35 points, or 0.41%.

On the commodities markets, West Texas Intermediate crude oil is US$47.52 per barrel. Brent crude is US$51.78 per barrel.

Gold is trading for US$1,290.69 (AU$1,624.33) per troy ounce. Silver is US$17.02 (AU$21.42) per troy ounce.

One bitcoin is worth US$4,010.46.

The Aussie dollar is worth 79.46 US cents.

The big stick approach

As you know, governments are rarely content to watch the ‘invisible hand’ play out. They’re filled with bureaucrats, after all, who know better than their constituents. And they’re not shy about legislating their beliefs into law.

This is the path governments are taking to ensure you’ll have an electric vehicle parked in your garage. Or, better yet, have an app that can summon a shared electric vehicle at the push of a button.

From the Guardian:

France will end sales of petrol and diesel vehicles by 2040 as part of an ambitious plan to meet its targets under the Paris climate accord, Emmanuel Macron’s government has announced…

Nicolas Hulot, the country’s new ecology minister, said: “We are announcing an end to the sale of petrol and diesel cars by 2040.” Hulot added that the move was a “veritable revolution”. 

He said it would be a “tough” objective for carmakers but France’s industry was well equipped to make the switch…

Other countries have floated the idea of banning cars powered by an internal combustion engine to meet air quality and climate change goals…

The Netherlands has mooted a 2025 ban for diesel and petrol cars, and some federal states in Germany are keen on a 2030 phase-out.

India, where scores of cities are blighted by dangerous air pollution, is mulling the idea of no longer selling petrol or diesel cars by 2030, and said it wants to introduce electric cars in “a very big way”.

Since the above article was published in late July, the UK has also announced it will ban all new petrol and diesel cars starting in 2040. The ban includes hybrid vehicles.

The move is, in part, intended to address serious air pollution issues in Britain’s major cities. Now, we can all agree that clean air is a good thing. But the government’s big stick approach is the wrong way to achieve it.

First, it seems they made the decision without consulting the people it will have the most immediate impact on. As The Australian reports:

Manufacturers complained that they had not been warned about the government’s proposal in advance, and said that it jeopardised the livelihoods of 170,000 workers in the motor manufacturing sector.

One angry car industry executive told The Times last night: “It’s a shambles. We haven’t been consulted. Who’s in charge?”…

Hybrid vehicles and pure electric cars accounted for only 4.2 per cent of all new cars sold in the UK over the past 12 months, with petrol and diesel still responsible for the vast majority of sales.’

It’s worth noting the 4.2% figure quoted above includes hybrid cars. And hybrids will also be banned by the UK in 23 years.

That means a heck of a lot of enforced change is ahead for the British car industry. Not to mention the vast majority of drivers, who clearly prefer petrol and diesel models to the current electric offering.

All electric Down Under?

The Aussie government, rarely one to take the lead, has been mostly watching events from the sidelines. But the first rumblings that we, too, need to be legislated into driving the ‘right’ kind of car are already emerging.

And that’s despite the fact Australia’s coal dependent power plants negate any positive impact for cleaner air.

Also from the Guardian:

It is only a matter of time until every Australian car is all-electric. But while other countries are speeding up the transition, with plans to ban petrol cars within a couple of decades, Australia is stuck debating even modest cuts to vehicle emissions, let alone policies to encourage zero-emissions cars…

According to Michael Bradley, chief executive of the Australian Automobile Association, Australia should be cautious in embracing all-electric cars.

“All the signs point to electric vehicles making up a significant proportion of the global fleet but in Australia we have some unique challenges,” he tells the Guardian. He says the distances Australians travel and the reliance of our electricity grid on coal means electric cars are neither convenient for consumers, nor a solution to climate change…

Many consumers who are considering electric cars have environmental concerns at the front of their minds…

But Bradley says in the Australian context, when it comes to climate change and emissions of CO2, electric cars are not a solution. “Driving an electric car on Australia’s grid at the moment is dirtier than driving a comparable petrol car.”

Of course, as more of Australia’s power is generated from renewable and cleaner fossil fuel sources, the environmental impact of electric cars should reduce. Though Australia’s shift to renewables in itself has been rushed. And you’ve seen how that’s playing out with your power bills.

And that’s the point here.

When governments push through measures the market is not ready for, it inevitably leads to bigger problems than they tried to solve.

If car makers are told they only have 23 years left to make petrol cars, their incentive for further innovations evaporates. The efficiency and performance improvements you’ve seen over the past 23 years will not be repeated. The invisible hand has been slapped back.

Sure, car companies will have to pour money into producing better electric vehicles. And I don’t doubt they will be superior to today’s mediocre offerings.

But the fact that, even in 23 years, you’ll need to be forced to buy one should tell you something. Global governments, at least, expect electric vehicles to remain inferior.

The impact on oil and gas

The mainstream likes to trumpet that the end to oil is nigh. And if by ‘nigh’ we’re talking 100 years, that may be so.

But investors would be wise not to discount oil and gas stocks just yet. The demand for diesel, petrol, and natural gas isn’t going to fade for many decades yet.

 From today’s Australian Financial Review:

As the head of Australia’s only natural gas producer in China, Glenn Corrie has a better insight than most into the world’s fastest growing major energy market, and the future is looking bright for the commodity that drives his business.

The Sino Gas & Energy chief executive says the evidence of China’s policies to drive a switch to gas from coal has become unequivocal since the start of the year.

In what is traditionally a soft demand period for gas, consumption is accelerating.

June saw gas demand growth of about 27 per cent from the same time last year, about triple the rate of economic growth, while second quarter consumption was up 22 per cent.’

That’s natural gas. And with petrol and diesel vehicles continuing to make up over 95% of the world’s newly produced models, the demand for oil isn’t going down anytime soon.

But what about the supply?

According to colleague Greg Canavan, editor of Crisis & Opportunity, the oil supply looks like it will get quite tight over the next year.

Part of that has to do with some smoke and mirror games being played by the US shale oil industry. And part of it has to do with the Saudis. They have about 100 billion reasons to want to see the oil price soar into 2018.

Greg has just, today, released his latest detailed report on the developing situation. It’s a real eye opener. And he’s recommended three ASX listed small-caps that could see their share prices surge between 37% and 216% within the next two weeks.

And Greg tells me those eye-popping gains may just be the beginning.

Now Greg Canavan’s not one to make these types of bold profit claims lightly. So, when he does, it’s worth following up on. You can do so here.

Cheers,
Bernd