Tuesday, January 10, 2006

Why Real Peaceniks Like Free Markets

Putin's message is clear: Russia's energy resources, now completely under the control of the state, provide it with a new weapon, petropower. And Putin is willing to use it to restore Russia's influence to levels that existed when it was a superpower. That's what the destruction of Yukos was all about and that's what the renationalization of Russia's energy infrastructure is all about. Putin reasons that if oil could be used for decades to mute American criticism of Saudi domestic policies, Russian oil and gas can be used to shut down Western criticism of his increasingly dictatorial policies at home....

Irwin M. Stelzer, Petro power, The Weekly Standard, 1/16/2005

One of President Ronald Reagan's first acts in the White House was to end oil price supports in the United States. It was a daring, bold move, bolder by far than firing striking air traffic controllers, and one that suggested just what kind of President he would be. But, for those who can remember back 24 years, expectations from a then much smaller list of commentators were grave: prices would triple, bankrupting not only the average automobile driver but whole industries; the domestic oil business would collapse; the US economy would go promptly to hell.

Oil price supports, a mainstay of politicians for generations, including Democrats throughout the Southwest, were designed to enable domestic oil producers to compete with producers overseas by, in effect, funding the difference between domestic and overseas costs. Funny thing--after Reagan issued the order, the price of oil dropped sharply. When markets were functioning normally, OPEC's price was unsupportable. The primary beneficiaries of oil price supports were not US producers but OPEC's! Some have argued that Reagan's act put off a war in the Mideast by a decade; an unarguable point is the domestic energy costs declined in relative terms for years and are still below their peak in the 1970s. This is not surprising.

As any good business executive can tell you, war is really bad for business, and a fast way to get the war drums banging is to undercut the normal functionings of markets. What some people think should be cheap, because the government subsidizes the price, other people think should be expensive, because they produce it. Things go rapidly downhill once a market is replaced with a government artifice or is damaged by war. The insistence of Iraqi insurgents on blowing up Iraq's oil pipelines today, for instance, has not only seriously damaged the prospects for peace but has exacerbated tensions between Shi-ites and Sunnis even more because of the devastating impact the loss of income has had on Iraq's post-war and post-Saddam recovery.

For those aware of the difference between how oil is transported in this world and a spaceship in Star Wars, it should have come as no surprise that, with refineries, ports, and shipping terminals shut down after hurricanes walloped Louisiana and Texas, the price of refined oil products went up dramatically. Without fuel deliveries, there were only two ways to distribute a limited supply: rationing by price; and rationing by government edict. Rationing by price created a temporary, irritating inconvenience for the whole country; however, it was over by December. Rationing by government edict would have taken months to establish, required a huge bureaucracy to administer, and, if the history of oil price supports is any guide (they lasted fifty years), we might have had to deal with government rationing of gasoline for a long time. But certain politicians would not be satisfied with what was a very successful strategy.

Instead, arguing from the passion of the moment rather than from even a short term, rational view, leading Democrats and not a few Republicans wanted to punish the oil companies for doing a job that government would not have been able to perform, i.e., successfully manage a shortage with price increases until the crisis ended two months later. "Excess profits" they called the crime. What were the excess profits used for, one might ask?

The cost of rapidly building shipping terminals, refineries and offshore oil platforms was huge. Though the specific journal entries may not exactly match, the money to rebuild US facilities had to come from somewhere. And, the actual net gain over the previous quarter was barely noticeable, from 7% profitability, low by American corporate standards, to 12%, which is about normal. But, if politics were to sway enough people, encouraging Congressional representatives to punish those evildoers at Exxon Mobil and BP, perhaps we could push oil companies so far that they might have to take a loss. What would be the Congressional response when, a year later, it became clear that nothing had been done about investing in new methods of extracting more oil? Or fixing the shipping canal that collapsed to flood the 9th Ward of New Orleans?

It is an odd, disturbing fact that the gravest excesses of European imperialism, from 1879 to the collapse of the British Empire after World War II, were led by well-meaning, socially conscious, often leftist politicians concerned about the well-being and security of their citizens. Deeply sensitive to their people, they chose to ignore the contingencies of reality, and simply looked the other way when the costs of living at home became increasingly borne by people overseas, or by classes of people at home that their own "reforms" and "revolutions" had defined as no longer human. We know what that ended with: catastrophic, ruinous war. It was left to dirty, cranky, thieving business people to pick up the pieces, rebuild, and find a way into the future. Yes, that period was a cataclysm, but it could easily be repeated by political reasoning being replacemed by political hysteria. In fact, the process never seems to be very far away.

Today, some of our leading politicians, Russia's President Putin, and a string of others across the world are repeating the old, foolish mantra, that the suppression of free markets is a smart way to conduct domestic and foreign policy. As citizens, we have an obligation to discourage them from doing this, because it won't be to our good at all. A free lunch can kill you.


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