Watching President Obama stumble through his energy crisis, it
seems only a question of whether he will end up channeling Jimmy
Carter or President Cristina Fernandez de Kirchner of
Argentina.
The latter, in case you missed it, just announced that her
government will be seizing a 51 percent interest in YPF, the
Argentine subsidiary of Repsol, the Spanish conglomerate that is
the 15th largest refiner in the world. In most places, that would
be called theft, but in the banana republic of Argentina it’s just
business as usual. In making her
announcement, Fernandez de Kirchner stood directly beneath a
wall-length portrait of Eva Peron haranguing the masses sometime
back in the 1940s. It was an irony that nobody seemed to notice.
Who knows, maybe there’s a Broadway musical in Cristina’s
future.
What prompted the move by the President, who succeeded her
husband in 2007, was that YPF, originally founded by the Argentine
government in the 1920s and privatized in 1993, wasn’t producing
enough oil. Why wasn’t it producing enough oil? Because the
government has imposed price controls. And like price controls
everywhere, they have discouraged production while encouraging
overconsumption. As a result, Argentina has ended up importing
expensive foreign oil despite large discoveries of shale oil in
recent years.
This blast from the past can only remind us that one government
intervention in the economy always leads to a bigger one and that,
despite this sordid history, old leftist ideas never die. There
will always be some demagogue telling us that the government can do
a better job at running things than the people who know their
business. Kirchner probably doesn’t know enough about oil to tell
you the difference between a hydrocarbon and a carbohydrate but as
a lawyer, she is sure that once she and her friends are running
YSF, oil will gush forth like Moses striking the rock.
So that brings us back to our own Man of the People, President
Obama, who is really only in the kindergarten of such retrograde
policies but giving it a try. On Tuesday he stood in the Rose
Garden flanked by his two apostles of freedom and justice, Treasury
Secretary Tim Geithner and Attorney General Eric Holder, and
announced the solution to our energy problems will be hunting down
and prosecuting evil “oil speculators” who are responsible for
driving up the price of gas in the U.S. Who are these individuals?
We don’t have any names but we can already be sure they are
“millionaires and billionaires” and don’t pay any taxes. Why,
aren’t these the same people who are messing up the entire
economy?! Well, what we do know is that Mitt Romney is their
friend.
Before we go any further with this, perhaps we should ask, just
what are “oil speculators” and why is it so important that they be
hunted down? Here is the answer. Oil speculators are investors who
think the price of oil is going to go even higher in the future.
For whatever reason, they expect supplies to get tighter. Therefore
they are willing to buy oil at a premium today in the
anticipation that prices are going to go even higher tomorrow. It’s
a gamble. You don’t automatically make money. Sometimes you lose a
whole lot.
What speculators do, however, if they guess right, is smooth out
the availability of supplies between the present and the future. By
paying a higher price now, they assure that prices will be
lower in the future. In effect, they hold supplies off the
market today so that they will be available next week or next year
when things become even more scarce. Adam Smith described this as
preventing a “dearth” from becoming a “famine”:
When the government, in order to remedy the inconveniences of a
dearth, orders all the dealers to sell their corn at what it
supposes a reasonable price, it either hinders them from bringing
it to market, which may sometimes produce a famine even in the
beginning of the season; or if they bring it thither, it enables
the people, and thereby encourages them to consume it so fast as
must necessarily produce a famine before the end of the season.… No
trade deserves more the full protection of the law, and no trade
requires it so much, because no trade is so much exposed to popular
odium.
Unfortunately, there are always politicians around, like
President Obama, who are willing to encourage that odium
for political purposes.
The biggest oil speculator of all is the federal government. At
present the government has bought 727 million barrels of oil and
stockpiled them in caves in Louisiana so that they may become
available in case we face a dearth of oil tomorrow. This is, of
course, the Strategic Petroleum Reserve, which holds enough oil to
replace all our imports for 80 days. These purchases made over the
years have subtly driven up the price of today’s oil, yet we are
still very glad to have it because it could play a crucial rule in
our future. The SPR has been drawn on four times: in 1991 during
Operation Desert Storm (21 million barrels), in 1996-1997 in order
to pay off part of the federal debt (28 mb), in the aftermath of
Hurricane Katrina when production in the Gulf of Mexico was
disrupted (11 mb), and during 2011 because of tensions in the
Middle East (30 mb).
The current run-up in price could qualify as another such
emergency. The reason private investors are driving up futures
prices is that they are anticipating a shooting war in the Persian
Gulf. As Secretary of Defense Leon Panetta testified this week, we
have been “within an inch of war almost every day.” Quite frankly,
the Obama administration could well justify making some small
releases from the SPR, since these tensions are having an impact on
prices. But at this point it would probably be wiser to hang on to
those supplies in case something more serious happens. If the
President would explain all this to the public, people might be a
little more tolerant about bearing the hardship. Unfortunately, his
own anti-energy policies and past quotes about raising gasoline
prices have overshadowed all this. So instead, he has to make a big
show of tracking down “speculators.”
Right now I would say it’s time to start an office pool on how
long it will be before the President or some congressional Democrat
starts talking about price controls. Then we follow right in Jimmy
Carter’s footsteps and have a repeat of the “oil shortages” of the
1970s. That’s the problem with government intervention in the
marketplace. One you intervene, things only get worse, which
creates a new clamor for even more intervention. Just ask Cristina
Fernandez de Kirchner about that one.
•••••••
Three weeks ago, I
wrote a column saying you could count me out on defending
George Zimmerman in the Trevor Martin case. At that point the
country seemed on the brink of racial warfare. Al Sharpton was on
television every night, African-American youths were rioting in
southern cities, the New Black Panthers had put a price on
Zimmerman’s head. Then a week later there were racial killings in
Tulsa and it appeared the country might be pushed over the
edge.
Now suddenly everything is quiet. You hardly see a story on the
news. What happened? Well, there was an arrest. The Florida
prosecutor finally got around to deciding that the circumstances
demanded a second-degree murder charge. In Tulsa, the alleged
killers were arrested very quickly and will probably be facing the
death penalty. Mind you, none of this says that any of these people
are guilty. It just means that somebody in authority is
acting and that everyone will have their day in court.
It’s a good lesson in the purpose of the justice system. It is
there to keep the peace. If police and prosecutors and
judges don’t deal with a situation like the Zimmerman-Trayvon
Martin shooting, then someone else will. Instead of being
tried in a court of law, it will be tried on television every night
or in the streets. Judges and prosecutors and law school professors
have somehow gotten lost in the conviction that their only
responsibility is to make sure that no one is ever wrongly accused
or convicted of anything. They talk endlessly about how the justice
system pits “the lone individual against the awesome powers of the
state.” But if the state has awesome powers, it also has awesome
responsibilities. It has to keep the peace in a nation of
300 million individuals, many of whom dislike each other and are
not hesitant to act things out. The calm that has descended upon
both the Trayvon Martin and Tulsa, Oklahoma cases are a good
example of just how important those responsibilities can be.
