Taxing consumption of natural resources, rather than labor, would not only be smarter economics, it would be fairer. As the original owners, the people have the right to decide how much of their natural resources they want to sell to the private sector, how much pollution of public water and air they wish to tolerate, and for whatever reasons (environmental concern, profit, esthetics etc…).

Consumption tax, whether by auction of a fixed amount, or by a fixed rate tax, maintains free market principles, as opposed to the “cap-and-handout-and-trade” system that European nations adopted following the Kyoto Protocol. Handing over marketable carbon credits to some players but not to others is not only unfair, it is ineffective. One reason that the Kyoto Protocol failed to achieve its goal (justified or not) of curbing CO2 emission is that, by allocating carbon credits without hosting a fair competition for them, it avoided establishing a true value for fossil fuel.

The argument mouthed by some that taxing consumption would slow down the economy is inapplicable here. We are talking about shifting from income and corporate tax to consumption tax, so the public has at least as much money to spend as before.  By making exhaustible resources more expensive to the individual, the tax would generally increase the amount spent on labor. (Why? Because if a material-intensive method of producing something costs less, before the tax is invoked, than a less material-intensive method, then the latter costs more because it spends more on labor.) The tax thus stimulates employment.

Why is replacing at least some of the existing tax burden with a fossil fuel tax so taboo that it is hardly even discussed in the media, even in the throes of what is widely perceived as an economic cataclysm? Apart from the usual reasons (denial, numbness, self-delusion, stupidity, powerful interest groups intimidating politicians and news media, etc.), there may be an additional factor at work – low self-esteem among the public. Americans have been taught from birth that a tax is something they have to pay, not receive. And they have been taught that oil is something that oil companies sell to them. So they end up fearing both high oil prices and high taxes. The view that they own the fossil fuel in the public domain, and that the revenue collected from an energy tax belongs to them, might make them keener on such a tax.

Wouldn’t the cost of a fossil fuel tax on the energy companies simply be passed along to the consumer? Of course it would be; that’s the point. But the point is also to simultaneously return those revenues to the public. A $100 per barrel tax, while raising current prices from the present value to those of June 2008, would provide the American family of four over $25,000 annually (tax free). This would easily cover most income taxes and the added energy costs. And that would be just our oil revenues. There is plenty more exhaustible wealth in the world. A nation’s citizenry could rake in further revenues for all the metals mined from public territories, and for allowing public land, water and air to be used as dumps.

Would powerful energy and mining companies lobby to quash the establishment of a natural resource tax? If they were smart and honest, they would see the tax as a benefit for themselves too. The added cost of the tax would in any case be passed along to the public, their private holdings would become worth more, and risk entailed by future ventures would be lowered. Currently, corporate bids on, say, drilling rights are surely limited by uncertainty. They can’t be sure of how much they can extract from any given site, so they have to either take a risk or assume the worst in deciding how much they are willing to bid. On the other hand, if they are paying for the drilling rights in exact proportion to the amount they eventually extract, nothing is left to chance.

This is yet another advantage of a natural resource tax: It is harder for corrupt civil servants and other insiders to evade the tax than to evade public scrutiny. Bids can be rigged, government administrators who award drilling rights, etc., can be bribed, but a tax fills in the difference – on which corruption could otherwise thrive – between true value and production costs.

If the word “tax” is too painful, let’s at least demand the right to keep our hard-earned income as well as our natural resources. Then we can spend the former on what we truly desire, and sell the latter for what they are truly worth.

Sincerely,
David Eichler

March 19, 2009

David Eichler is a professor of physics at Ben Gurion University in Israel. He received his Ph.D. in 1976 from the Massachusetts Institute of Technology. Further biographical information can be obtained here.

Taxing Consumption, Not Production: Ethical Foundations was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It’s also fitting that it sits close to the center, because Africa is a big part of the future of natural resource exploration and production. In some sense, it’s retaking its historical pre-eminence. For instance, consider the former rich trading cities in the East.

Zanzibar, Dar es Salaam, Mombasa, Mogadishu, Mumbai, Mangalore… all trading cities along the fabled rim of the Indian Ocean. “I’ve visited to them all and more,” says an old sailor named Bwama Shafi Ahmed. The quote comes from an older issue of National Geographic I stumbled on while helping clean out my son’s room. “From here in Africa, we sailed with ivory, mangrove, coconuts, tortoise and cowrie shells. From Arabia, we brought dates, whale oil, carpets and incense. From India, pots, glassware and cloth. Trade was our life, you see.”

A little more from the old sailor, who speaks poetically of his trade: “The wind in our sails made us rich, just as it did our ancestors. In the season, dozens of foreign dhows would arrive – booms 100 feet long or more, great sails white against the sky. And at night! Hundreds of dhows big and small anchored in the harbor, their cooking fires shining like stars in the night.”

The east African trading cities thrived between the 12th and 18th centuries, with ships sailing in and out on monsoon winds.

Africa had good harbors and plentiful fish and lots to trade with India and Arabia. Ties between India and Africa, especially, strengthened under the common influence of Islam and the Portuguese. (Portugal colonized both Goa and Africa’s coast.) Africa is also home to a large population of ethnic Indians, which helps bridge trade further. One of Africa’s better known industrialists – Manu Chandaria – was born in Kenya, but his parents are from the Indian state of Gujarat.

These historical ties and those old trade routes are reviving once again. In the spring, Delhi hosted the first Indian-African summit. Trade between India and Africa tops $25 billion per year. Nigeria, for example, accounts for 10 percent of India’s crude oil imports. But China’s trade with Africa is a lot more – $55 billion annually. The reason for this boom in trade? A hunger for the natural resources of Africa.

Africa increasingly is right in the middle of the global quest for natural resources. It has the highest ratio of light and sweet crude in the world – the best-quality stuff you can find. And most of its oil – some 83 percent – comes from large fields that produce at least 100 million barrels per day. Meaningful amounts of premium oil in large fields explain why Africa attracts so much investment. Between 2002-2006, the big oil companies tripled their spending in Africa.

The recent discovery of oil sands in the Congo by Eni, a big Italian oil group, lends more credence to the idea of Africa as the future of global oil supply. Eni hasn’t said how much resource its vast acreage might hold. But the Financial Times reports early samples suggest that “The area as a whole could hold more oil than Eni’s entire reserves of 7 billion barrels of oil equivalent.” That would put Eni’s resource on par with the huge Kashagan field in Kazakhstan. Eni potentially doubled its oil reserves with this one African find.

Right now, Africa puts out only about 12 percent of the world’s oil output. By 2012, that could be 30 percent. No wonder, then, that it has become such a competitive battleground for the oil companies. In a recent auction, India’s state oil company bid $321 million for an Angolan oil block. A Chinese oil giant bid $725 million. Guess who won?

It’s not just about oil, either. Africa holds tremendous amounts of natural gas, minerals and natural resources of all kinds. Much of it is in places that are easy to do business in. But there is often a fragile social fabric, which seems ever on the brink of civil war or a coup or worse.

In Niger, for example, you will find some of the world’s largest deposits of uranium. Niger plans to double its output over the next several years. Companies from all over the world – Australia, Canada, China, India and France – scramble to lock down claims. But the uranium deposits lie in the ancestral home of the nomadic Tuareg. The Blue Men of the Desert (so-called due to the color of their favored indigo dyes) return to old ceremonial grounds to find red flags marking uranium deposits. The result is predictable – battles between the Niger army and Tuareg fighters, and bloodshed.

Yet the rewards dangling before the world’s eyes are so great. Many companies will walk the edge of that precipice for a shot at glory.

Regards,
Chris Mayer
July 28, 2008

P.S. Companies willing to work in troubled and often dangerous parts of Africa are putting themselves at great risk. But the rewards they could be in store for more than outweigh any potential risks they may encounter. But while we wait for Africa to burst forth with its natural gifts, a similar investment renaissance has taken place in another untapped continent. The rewards here are already pouring in, and many people have been made very wealthy in the process.

African Resources was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Everyone seems to have a relative who took a beating in the commodities market, and this fact (or fiction) is considered sufficient reason that no sane person would ever risk playing around with such dangerous things. That this particular victim was also a professional economist makes the warning seem even more ominous. I, however, couldn’t help laughing.

Billions of dollars are invested in the commodities market every day. Without the commodity futures markets, many of the things that you depend on in life, from that first cup of coffee in the morning to the aluminum in your storm door to the wool in your new suit, would be either scarce or nonexistent, and certainly more expensive.

There are several other bromides out there for why “ordinary people” should not invest in commodities, and I want to lay these myths to rest, once and for all, so that we can get on with the more interesting business of how you can begin to make some money investing in the next-generation asset class.

About That Relative of Yours Who Got Wiped Out — He was inexperienced. You can learn. Most likely, he was buying on thin margin — the minimum deposit a broker requires to take a position in a particular commodity — and when the market went against him he lost big-time.

Here’s how it happens: Like stocks, commodities can be bought on margin. Unlike stocks, however, where by law you have to put up at least 50 percent of the price of the shares, the margins on commodities can be even lower than 5 percent: You can buy $100 worth of soybeans for $5. If soybeans go up to $105, you’ve doubled your money. Beautiful. But if soybeans go down $5, you’re wiped out. Not so beautiful.

Experienced, smart speculators can make tons of money buying on margin. They also know that they can lose tons, too. But they can usually afford it. Your relative was in over his head. If he had bought $100 worth of soybeans in the same way that he can buy IBM — for $100 (or maybe even $50) — he would be happy when it goes up $5 and a lot less sad should it go down $5.

Whenever I mention commodities in public, someone always points out that we now live in a high-tech world where natural resources will never be as valuable as they were when we had a smokestack economy. But if you read your history you’ll discover that technological advances are as old as history itself: The introduction of the sleek and beautiful Yankee clipper ship dazzled the world in the mid-nineteenth century, loaded with cargo, sailing down the trade winds at 20 knots and more, averaging more than 400 miles in 24 hours and able to make it from U.S. ports around Cape Horn to Hong Kong in 80 days; within a decade, the clippers had been replaced by the steamship, no faster but not dependent on wind power; and before long the next big thing in transport had taken over, the railroad, which, of course, was the original Internet — and prices in the commodities market still went up.

In the twentieth century came electricity, the telephone, and radio (three more Internets) and then television (a fourth Internet). There was also the automobile, the airplane, the semiconductor — and in the midst of all of these truly revolutionary technological breakthroughs came periodic, multiyear commodity bull markets.

When the supply and demand in raw materials is seriously out of whack, the emergence of new technology will not necessarily restore the balance quickly. To be sure, changes in technology, for example, have made the economy less dependent on oil. But we still use plenty of it, and whenever there isn’t enough prices will rise. Computers or robots may do amazing things, but they cannot find oil or copper where there is none or make sugar, cotton, coffee, or livestock grow faster than nature allows. We can put in orders all day long on our computers for lead, but all that Internet technology will be in vain if there are no new lead mines. Technology can neither feed us nor keep us warm, and the demand for commodities will never disappear.

“But My Stock Broker Tells Me That Investing in Commodities Is Risky.”

Tell me again about all those Cisco shares you owned back in 2000. Or JDS Uniphase, or Global Crossing? So many risky stocks made the turning of the new millennium a not so happy time for many, who watched their portfolios evaporate.

If you do your homework and remain rational and responsible, you can invest in commodities with perhaps less risk than playing the stock market. You don’t need me to emphasize that investing in anything is a risky business. But let me point out something that you might not have realized: There has been more volatility in the NASDAQ in recent years than in any commodities index. Cisco, Yahoo! and even Microsoft have been much more volatile than soybeans, sugar, or metals. Compared with the risk record of most tech stocks, commodities look safe enough to be part of any organization’s “widows and orphans fund.”

And let me remind you of one more important difference between commodities and stocks: Commodities cannot go to zero, while shares in Enron can (and did).

Regards,
Jim Rogers
May 7, 2008

Commodities Investing was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

"I have been investing in African countries such as Ghana, Botswana, Zambia and Zimbabwe for years. Botswana was rich in diamonds, Ghana in cocoa and gold, Morocco in phosphates… Zamibia, with its emeralds and copper, and Cameroon awash in oil."

— Jim Rogers, Adventure Capitalist

ACROSS THE VAST CONTINENT of Africa, lurking underneath the soft red soil is a promise. The promise lies beneath the dirt, in the land that gave birth to civilization. The promise is of riches, riches given by the world to its people in the awesome form of natural resources.

Africa holds some 99% of the world’s chrome resources, 85% of its platinum, 70% of its tantalite, 68% of its cobalt and 54% of its gold. Africa has vast resources of timber and bauxite. Diamonds, too, with nearly half of the world’s production. At various times in history, it has been a geopolitical playground as nations and companies compete to pry loose Africa’s natural gifts.

So far, success has been hit or miss. Nasty political regimes, corruption and incessant violence — and a long history of it — hamper any effort at a stable and rich Africa.

Despite the wild uncertainty of the place, some companies have had success there. They’ve built up good businesses and have made plenty of money. It’s all of matter of exactly where, of course, and in what commodity.

The idea I have for you here is an oil company with its primary assets in West Africa. It’s a small company, but it’s enjoyed ample success in the region. I’ve followed the company for years with interest. Recently, the shares have come down well off their highs, for reasons I think are temporary. At less than $5 per share today (the old high was nearly $9), you have a good shot at doubling your money.

Let me give you more of an idea about how I’m thinking about Africa these days.

Specifically, I think Africa will play a more important role in slaking the thirst of the West’s oil-guzzling economies. It’s already more important than you may realize, as I wrote in the September issue of my paid newsletter, Capital & Crisis. The U.S. already gets about 18% of its crude oil from Africa, mainly from Nigeria, which makes up about half of that total. Some estimates say we’ll get 25% or more of our oil from Africa by 2015.

That’s not far away — a mere eight years off. My son is eight years old, and that time has flown by like nothing.

If Africa is going to make up 25% of U.S. oil supplies, that implies a lot more growth and interest and money in African oil assets. In particular, West Africa — that band of countries snaking along the Atlantic Coast — Nigeria, Chad, Cameroon, Gabon, Equatorial Guinea, Sao Tome and Principe, Congo and Angola.

West Africa has plenty of oil. Angola alone has proven oil reserves of over 25 billion barrels. (Interestingly, Angola is also one of China’s principal oil suppliers.) Also, in West Africa, new discoveries happen more frequently than anyplace else.

Again, no doubt the oil is there. The question is getting to it profitably. That’s the problem. But there are a few points here that take some of the edge off. For one thing, the U.S. government likes West Africa as a supplier. In many ways, it’s better than the Middle East, especially the offshore oil.

Kevin Phillips makes this point in his book American Theocracy. West Africa is easily controllable by U.S. naval power — much more so than oil supplies in the Middle East. Phillips opines that the waters of the West African nations could be "a middling rival to OPEC." The U.S. already has bases and agreements in place with Senegal, Mali, Ghana, Gabon and Namibia.

Then it gets hard talking about these African countries as one big undifferentiated group. No one likes Nigeria, it seems, which has all kinds of problems. But Gabon, for example, is different. Gabon is one of the most prosperous countries in Africa. Gabon has a per capita income four times that of the rest of the sub-Sahara. It’s rich in manganese and timber — and oil. Explorers discovered oil offshore in Gabon in the 1970s. Oil is now about half of the economy.

Gabon also has the longest serving head of state in Africa — El Hadj Omar Bongo Ondimba, who has been in power since 1967. That doesn’t mean Gabon can’t screw up. It has and will do so again, I’m sure. In the 1990s, the country suffered through massive currency devaluation thanks to inept government policies.

Still, you can soften the risks somewhat by what country you invest in. There are big differences between some of those West African countries, as big as the differences between a bullfrog and a French poodle.

Nonetheless, where there is oil, there is the promise of riches. And where there is the promise of riches, there are people who will try to get them. It’s the lure and romance of buried treasure. It brings fortune hunters like water holes attract wandering elephants across the arid African plains.

Sincerely,
Chris Mayer

October 26, 2007

Out of Africa was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.