- The managerial state and rule by the perfectly unjust man Nick Nielsen, The View from Oregon
- What do left-liberal abusers really think? Bryan Caplan, EconLog
- Cthulhic tendrils lubricated by oil Xenogoth
- How Robert E. Lee’s home became Arlington National Cemetery Rick Brownell, Historiat
Today, the day after President Obama announced in the Rose Garden a “framework agreement” intended to limit the Islamic Republic of Iran’s pursuit of nuclear weapons, I read the Wall Street Journal account carefully but it did not help. I don’t understand it. It may just be too early for a good analysis. In the meantime several questions loom large in my mind.
- If I don’t understand the details, do I believe in an agreement with a hostile country described by a man who promised that “you could keep your doctor”?
- Do I believe that this agreement is to the advantage of the United States? The question arises because it was negotiated principally by two men with a track record. The first, Pres. Obama, succeeded in exchanging five terrorist generals for a single American soldiers who is a deserter according to those who were on the battlefield with him. The second, the current Secretary of State, demonstrated that you could leave the Palestinian/Israeli relationship in an even worse state than you found it.
- The President and the Secretary of State did not manage, as a part of this supposedly momentous agreement, to get three Americans held by Iran released. One of them is a former Marine. It should have been a tiny footnote to the main text. Ah, well, there is no text, just an oral argument! Frankly, in the bigger picture the freeing of three people is a small, symbolic thing. Symbols matter a lot though when you don’t have access to the hard facts. I don’t, you don’t.
- Is the mullahs’ government – that always cheated in the past – going to abstain from lying, this time? If it does not, is this agreement going to be the cause of the death of thousands of innocent Iranians (as collateral damage)? I ask because, the next administration may not have the current administration’s difficult-to-believe indulgence. It may just decide to take care once for all of a sore festering for twenty years. If an American administration does no such thing, what is the likelihood that a future (future) government of Israel will take the chance to see millions of Jews murdered? This is not gratuitous fear mongering. Two days before the announcement, an Iranian general was on TV affirming that Israel has no right to exists.
- Do I believe that our European partners will stand firm and renew their sanctions if Iran is caught cheating? The question arises because they were salivating on all their national TV at the prospect of selling, selling anything in Iran once the sanction were lifted.
On the bright side, the lifting of some sanctions will unleash a torrent of Iranian oil on the world market. This will further depress of global oil prices. One more thorn in the foot of the gangster Putin.
In case you haven’t noticed, the price of oil has dropped dramatically and has not rebounded as yet. As I write, the price of the most common form of crude oil is under $54 per barrel, about half of what it was in mid-2014. What’s going on?
Several factors contributed to the fall. One was increased U.S. production, much of it shale oil. Also, U.S. consumption has not been rising apace with GDP in part because of higher fuel efficiency. Demand in Europe and Japan is muted due to low growth or recession.
Those things did not happen suddenly, however, so the drop would appear to be overdone. Large producers, who have a lot of pricing power, would normally cut production in this circumstance. (Pricing power means a change in their production has a noticeable effect on the world price.) The Saudis have considerable pricing power and their production decisions are controlled by their government. Why have they not cut production? I believe they are engaging in predatory pricing.
Predatory pricing is illegal in the U.S. and elsewhere, under anti-trust law. Predatory pricing occurs when a supplier cuts his prices for the purpose of bankrupting a competitor, or at least driving the competitor out of the market. The predator is willing to suffer losses or reduced profits temporarily, while holding the prices low. Once the competitor is gone, the predator’s pricing power will have increased enough that he can raise prices a lot and make up for losses suffered during the period of predation. Predatory pricing is definitely possible in free markets but is very risky for several reasons: (1) the predator can’t be sure how long it will take to ruin his competitor, (2) he can’t be sure how long he can maintain low prices without sustaining ruinous losses or perhaps face a shareholder rebellion, (3) it’s possible the competitor, or someone who has bought his assets in bankruptcy, will come back to life and start competing as before. For these reasons (and others, such as the difficulty facing regulators who are supposed to distinguish predatory motives from “innocent” business strategy), I believe there is no reason to outlaw predatory pricing.
The situation is a little different in the international oil market because the Saudis and many other major players are government controlled. They are not constrained (much) by the market forces outlined above. They are not accountable to shareholders and are only vaguely responsible to the population of Saudi Arabia. They have substantial latitude to pursue political motives even if their profits suffer. And anti-trust law does not operate across national borders.
What might the Saudis want to accomplish politically? They hate Russia and Iran, both of which rely heavily on oil exports. They don’t hate the U.S., at least not openly, but they surely wouldn’t mind sticking it to U.S. and Canadian shale oil producers. Those producers are largely market-driven and thus have limited ability to withstand predatory pricing. The Saudis could indeed drive smaller firms out of the market, and also less profitable operations of larger firms.
That might not be such a bad thing. There has been a huge land rush into shale oil and fracking. In any such boom, whether in energy, mining, or computers, many small firms fall by the wayside. If the Saudis ruin some marginal firms or projects, that’s not such a bad thing.
We little guys are sitting pretty. We’re paying a lot less for gasoline. If we hold shares of the major oil firms we’re probably OK, as their share prices have held up and their dividends look solid. The same is true of the pipeline operators. Only if we hold shares of marginal energy firms or oilfield service companies are we in any trouble.
So – go for it, Saudis! Stick it to the evil governments of Russia and Iran and help us clean out some of our marginal energy operations.
OPEC’s decision earlier this week is being interpreted as something that will lead to an “oversupply” of oil. Prices of the commodity seem to be going down already. There are several political implications, and perhaps the most interesting countries to watch are the OPEC members themselves.
Many oil-rich countries end up affected by the so-called “resource curse”. Due to cronyism and other types of interventionism, they distort the economy and focus too much on that one special resource they have.
As a result, whenever the artificial bubble of that sector is hit, the effects are disastrous. Many of these countries need to develop – and that’s across the board, not just the resource sector. This is bad enough, but there’s more. If you consider the corruption of cronyism, it’s not necessarily the case that the country will be well when things go well in that sector.
OPEC reminds us that the state is not a unitary actor in world politics. Their collective decision to supranationally plan the supply and price of most of the world’s oil has deep consequences, some of which are negative for their own people.
In order to understand this, you have to look inside that “black box” of the state and look at the winners and losers of this foreign policy decision. The ruling elites and the cronies want to remain in charge and extract as much as they possibly can from each decision.
However, this may undermine their own position in the long run. This is because those on the losing side, the have-nots, often get very annoyed and do something about this, especially when the state apparatus is weak and lacks legitimacy. In fact, many of the conflicts related to the “resource curse” today include something of this component as part of their root causes.
If OPEC has been used as a tool of crony capitalism, the effectiveness of this move for those running the show is partial, and even questionable in the long term – it might turn out to be a shot in the foot. And it certainly doesn’t help the poor, the local population, the ones who would benefit from a very different approach.
Pages 48 – 53
Chapter Summary – A group of industrialists sit around a shadowy table plotting the downfall of our favorite rugged individualist.
I love how cliché this chapter is. Four figures sitting around a table, their faces shrouded in darkness as they scheme over the fate of the world, the sycophant politician sniveling his consent to their plans. This is one of those times where I am not quite sure if the fiction created the trope or the fiction is following the trope but it is okay either way, it is delightful to read.
We have at our table:
James Taggert: Who is far less whiny when not in the presence of his sister.
Orren Boyle: Our socialist-industrialist representative in the story.
Wesley Mouch: Our aforementioned politician, in the pay of Hank Rearden but in the pocket of Orren Boyle.
And finally –
Paul Larkin: The man at Rearden’s dinner party last chapter.
Essentially they spend the chapter plotting against Hank Rearden and promoting a philosophy of non-competition among businesses. From a historical standpoint this is essentially what happened with Hoover and the industrialists leading up to the great depression. A series of price and wage controls were set up that distorted normal market activity leading to the boom-and-bust cycle as described by Ludwig von Mises. As a side-note it is an interesting historical misconception that Hoover “did nothing” during the great depression. Hoover was arguably the most meddling president up to that point in regards to the economy except perhaps for Abraham Lincoln, but total economic warfare is hard to beat.
But to get back on track here, for what it lacks in literary creativity this chapter makes up for with pure economic and political insight that is delightful to read. The most illuminating part is a speech, or perhaps rant, by Orren Boyle that goes as follows, some of Taggert’s responses are edited out for brevity:
“Listen Jim…” He began heavily.
“Jim, you will agree, I’m sure, that there’s nothing more destructive than a monopoly.”
“Yes.” Said Taggart, “on the one hand. On the other, theres the blight of unbridled competition.”
“That’s true. That’s very true. The proper course is always, in my opinion, in the middle. So it is, I think, the duty of society to snip the extremes, now isn’t it.”
“Yes,” said Taggart, “it isn’t fair.”
“Most of us don’t own iron mines: How can we compete with a man who’s got a corner on God’s natural resources? Is it any wonder that he can always deliver steel, while we have to struggle and wait and lose our customers and go out of business? Is it in the public interest to let one man destroy an entire industry?”
“No,” said Taggart, “it isn’t.”
“It seems to me that the national policy ought to be aimed at the objective of giving everybody a chance at his fair share of iron ore, with a view towards the preservation of the industry as a whole. Don’t you think so?”
“I think so.”
This exchange is a fantastic summary of the process involved when the government gives special privileges to favored industries under the guise of regulation. Essentially Rearden is out-competing his fellow steel producers and since they cannot compete under market conditions they intend to compete politically by ham-stringing his business through the legal process.
This process has happened time and time again throughout history and the ironic part is that these actions have almost universally been heralded as “anti-business” when in fact it is the businesses itself that propose this regulation. The first anti-monopoly laws in America were lobbied for by the competitors of the successful oil, rail, and steel businesses which resulted in the *rise* in prices of those goods. It seemed the “natural” monopolies were pro-consumer while the regulation was pro-business.
There are also historical comparisons to be made to the great depression. The whole concept of “protecting an industry” at the expense of a single, productive, individual was the cornerstone of “Hoover-nomics” especially in the farm industry. The industrial revolution brought about a massive increase in farming productivity which naturally led to a decline in prices and a surplus of labor in that industry that came to a head during the “dirty thirties”.
The natural course of the market would be for inefficient firms in that industry to liquidate; with the entrepreneurs and workforce moving to other industries. This would cause a short period of transitional unemployment as workers moved into similar or growing industries while the more efficient firms and prospective entrepreneurs would buy the liquidated capital goods of the inefficient businesses at a discount.
Consumer goods prices would fall to equilibrium where only firms able to produce goods below that price would be able to maintain production. This would have the net effect of expanding the labor pool and be a net gain for society as new areas of production would be made available by the increases in productivity. Instead, Hoover organized industrial cartels that maintained price and wage controls over the entire economy propping up inefficient businesses that continued to waste and malinvest resources resulting in what we know today as the great depression.
To summarize, this chapter is a fantastic must read five page tour de force of economic insight.
Next chapter: More Dagny, more snark, and more family drama.
I have been working on this piece since November 30th. I wrote the bulk of it on the first day, and most editing since has been cosmetic. It is related to a project I am helping a friend with, although that is not the reason I wrote it. I don’t often blog about things that recently happened, and when I do bring up current events it is usually in a very general way. The same is true about this post as well. Still, gas prices have been falling, where I’m located at least, ever since before Thanksgiving. A gallon of regular has been stuck at $2.94 for a week or more now and I begin to wonder if they’re not ready to go back up again. Mentioning that is the best I can do to tie to any recent goings-on to the material below, which I hope you, the reader, enjoy, as it is my very first official Notes on Liberty contribution. Thanks again, Brandon, et al.
What’s so bad about Energy Dependence?
Contrary to what one might be led to think, energy independence need not be the opposite of energy (inter)dependence. Likewise, contrary to what many advocates of free markets and free trade will say, energy dependence (perhaps not their choice of words), is not a good thing. Energy interdependence certainly can be a good thing, but in today’s world I can’t agree that every instance of it always is.
The argument in support of energy interdependence runs, energy is cost-effective so long as it is abundant, therefore, the more suppliers of energy we have, the better. But the statement can also lead to another conclusion: therefore, the larger the size of the supply, the better. What this should mean is a very large domestic supply is as good or better than simply a large foreign supply. This does not mean they aren’t both good. And of course, the more suppliers there are the greater the potential for competition to lower prices, but I suspect that it is much easier to get competition amongst a few suppliers in a free (well, sort of) country than it is to get competition amongst several suppliers in an unfree world. Continue reading
Recently there was a bad fire at the Chevron refinery in Richmond, CA, as you probably know. The refinery will be offline for an unknown period, probably months. Upon reading this, and knowing that the CA government prohibits “imports” of gasoline from other states, I knew the retail price would jump. I made a mental note to fill up my Thunderbird next morning. Too late – regular had jumped from $3.85 to $4.01. This morning it was $4.06, and $4.13 by afternoon.
My reaction? I’m delighted that the market is doing its job of balancing supply, which has suddenly dropped, with demand. But predictably, ignorant fools have jumped on this situation, as in this letter in this morning’s San Francisco Chronicle:
Please ask Chevron to explain why the cost of gasoline will go up because of an accident at their plant.
Don’t they have insurance to cover the loss of their equipment? Is Chevron going to recoup the lost income (deducted from the billions of dollars in profit that they make every year) from us?
If the accident was determined to be due to Chevron’s negligence, are they going to compensate all of their neighbors “inconvenienced” by this?
But most of all, please ask all the other oil companies why their costs are going up because of a fire at a Chevron refinery.
If the other companies are not suffering a financial loss from this devastating environmental disaster in the Bay Area, why are prices expected to rise at Exxon-Mobil, Royal Shell Dutch, BP (Arco, lest anyone forget) and any other company I might be too angry to remember at this moment?
I might have to hold my breath until you find out the answers to these questions or until the air clears, whichever comes first. I’ll let you guess which one that will be.
Chevron probably doesn’t carry insurance because they are big enough to be self-insured, and the risks may be too large and uncertain for an insurance company to estimate. But insurance is irrelevant to retail pricing. The basic problem is the all too common myth on which this letter is based: that cost determines price. The myth is that suppliers add up their costs and then tack on as much profit as they think they can get away with. As anyone who has studied economics should know, supply and demand jointly determine price in a competitive market such as gasoline. Set your price too high and you lose customers and your profit declines. Set it too low and your margin declines, and you may sell out your supplies. The sweet spot varies constantly with shifting supply and, to a lesser extent, shifting demand.
Of course, profits benefit Chevron’s shareholders. But they are vastly more valuable to Chevron’s customers because they are the driving force (putting aside government interference) that tells Chevron what kind of products we want, where they are offered, how they are delivered, etc.
Of course, government interference is substantial and shouldn’t be set aside. Politicians worried about rising gas prices could help out by lifting the prohibition on imports.
Hurray for profits!