“If you put the federal government in charge of the Sahara Dessert, in five years there’d be a shortage of sand” Milton Friedman
The above quote has many iterations from 1951 to 1980, attributed to various pundits such as the William F. Buckley, Alfred Kahn and Milton Friedman, whose version is the most remembered and repeated. It targeted various ludicrous situations such as the Soviet shortages of just about everything, the Swedish lumber shortage, the Emirates oil shortage and our own housing shortage.
It is the anatomy of such blunders that speak to the phenomenon of governments creating a crisis that they then made even worse with solutions that exacerbated the very problem they created. The US is not exempt from this malaise, and currently is suffering from an energy crisis that clearly illustrates this.
The rising costs for energy, especially when you go to the gas pump, has a genesis that goes back quite a few years, but let’s start with the Bush administration and it’s illegal and tragic war mongering in Iraq, destroying a major source of oil production, which has yet to recover. Move then to the Obama administration and its grossly premature move to reduce the oil industry in the pursuit of green energy. Even with these issues, during the Trump administration we were still at the point where we were importing less than 17% of our energy needs, mostly from Canada and Mexico.
At this point a brief story to illustrate an important development I learned from my financial adviser. A few years ago he recommended that I buy stock in oil refiners. I was skeptical as back then oil had just dropped below $30/bbl, but he quickly corrected my ignorance and said to notice he wasn’t referring to oil producers but refiners, those that take crude and make it into useful products like gasoline, diesel and home heating oil. Apparently ever since the Obama Administration, refining capacity in the US had declined by more than 30% due to the regulatory hurdles in building new refining capacity as the old plants became obsolete; apparently the effective tool in the push to go green was DC’s glacial bureaucracy. I found that astonishing considering that the US was once the world’s leading refiner, but facts are facts and so I became an investor in refining. Recently those refiners’ stock prices hit the projected peak so we sold, more than doubling the investment.
Now there’s a clue here as to why, despite the fact that the last time that oil hit $120/bbl gasoline only rose to just about $4/gal. Refining capacity back then was relatively adequate, presenting no huge increase in cost in distribution, and demand was not as high as it is now. Yes, one result is huge profits much of which went to stock buy-backs. Further, those 900 oil leases that the Administration says weren’t being used were either spent, found economically untenable or inaccessible; that, coupled with the absence of capital over the last few years as the source for investment was mostly from pension funds and university endowments, nearly all of which dried up with the advent of the ESG investing mania.
Oil production is capital and labor intensive. This is not a problem for authoritarian and socialist regimes like OPEC countries and Russia where capital is in the hands of governments who weaponize energy, environment is a nonissue and labor is cheap; in the US we have unionization, capital markets and burdensome regulations. Add to this the current administration’s cancellation of major useful leases and pipelines resulting in declining domestic supply, coupled with reduced refining, and the US becomes, as it was in the 70’s, vulnerable to imports from countries not exactly friendly or dependable.
So we have the anatomy of twenty years of blunders giving us the crisis we are now in, but we hear nothing in the way of solutions from the Biden administration, except of course if you count accusations of greed, blaming Putin’s war in Ukraine, begging the Saudis to increase oil supplies, or proposing a Federal gas tax holiday. All of these things are irrelevant and easily debunked and none gets to the cause or constitutes a solution.
Take the accusation of greed leveled at the oil industry. True, American oil companies have record profits, but nowhere to invest them, so they buy-back their stocks, increase dividends, all to make their stock more valuable; while that’s their ethical obligation to their shareholders, it’s short money; long money requires planning for future development, but the Biden Administration has made clear the oil industry, along with natural gas, is to be replaced by the Green New Deal. Now there’s an old cowboy adage that’s appropriate here that goes something like “Don’t shoot your horse from under you unless you have another one to ride.” Maybe someday we will have sufficient green energy to replace carbon based energy, but it’s not today; you would think government would have the simple common sense of cowboys and not kill an industry vital to energy before we had a replacement. If the government didn’t shoot the horse out from under us, we would be a net exporter of energy.
Then we have the Putin narrative. We import less than 6% Russian oil, little of which is refined to gasoline and diesel. The real problem with the Ukrainian War in regards to energy is the US policy of meddling in the foreign affairs of other countries; in this case we are providing billions in military aid to Ukraine, one of the most corrupt countries in Europe and one with which we have no treaty or security interests. We then strong arm our NATO Allies into sanctions against Russia, incurring severe energy shortages for them even greater than our own, and bidding up the price for oil and natural gas. We then have the hubris to tell them not to worry, we will send them LNG, which some of them are beginning to realize is proverbial nonsense as we are actually killing that industry in our own country, and even if that were not the case, it would arrive too little, too late.
We have the embarrassing spectacle of an American President begging the Saudi’s to increase production, first with phone calls that go unanswered, then with physical trips with little results. They are not our allies, even with the unconscionable assistance we give them in their genocide of the Yemen people. This is not just a bad idea; it’s a horror show, especially considering that we have the resources ourselves if we would only stop shooting the horses out from under us.
As far as the three month holiday from federal gas taxes, it will make a slight difference, more so if you just abolish it altogether, but regardless Congress has made it clear that’s not going to happen. I think Biden was just looking for something to show that he’s trying to address this crisis, but in the face of the budget and debt issues, again created by the government, Congress has little appetite for tax cuts.
Where will this lead? Few economists are willing to take a guess, and the same with inflation, another government creation and also a strong contributing factor to the energy crisis. Despite what the government and the media tell the American people how all this is “unprecedented”, more and more are coming to realize that we’ve seen this movie before, like sand in the Sahara.
Libera Voce 