Gentlemen:
Some of my interlocutors initiated discussion of some underlying issues related to my various commentaries and policy recommendations. These discussions generally relate to two foundational subjects: First, how much government should be involved with commercial transactions of private enterprise companies and, specifically in our case, in the international business of our oil companies. Second, whether I favor free trade or isolationism and how United States foreign policy and trade policy should interrelate.
My comments have been with regard to the oil industry but because the oil industry is such a large and critical part of international commerce and geopolitics these two areas of discussion expand our considerations to a wider scope. These two subjects are fundamental to considerations of government general policies regarding business within which the oil business is a critical but not the only participant. In this commentary I offer my thoughts on these two subjects so it is a bit longer than normal. I hope you find them of interest for your holiday reading. As usual, all responses and comments from you are welcome.
Government Involvement with Private Enterprise Commerce
I have discussed characteristics of international oil supply, market, and pricing systems and enumerated causes and nature of misperceptions which in turn cause (1) oil price volatility in open markets and (2) confrontational and counterproductive geopolitical policies for unstable parts of the world. Also I have noted the US is now in a constant state of conflict with various adversaries in different parts of the world, some of our own making, and can expect to remain so for the foreseeable future. This condition is contrary to the rather naïve presumption at the end of the Cold War that the world would enter an era of benign relations among all nations which would accept US lecturing, hectoring, and brow-beating as to how they should run their economies, finances, gender relations, government agencies, trade, elections, human rights, and various social practices. Not surprisingly, the other nations of the world did not welcome the US telling them what to do and the results range from resentment to animosity. A big area of negative consequences from our meddling is the Middle East. Our interfering presence there has been justified as necessary because it is a major source of oil.
I suggested the US establish an alternative long-term reliable and sustainable oil supply and market system in the Western Hemisphere with negotiated long-term stable predictable prices. I made the point that implementation of such a system would necessitate dealing with other countries’ governments and companies and would therefore require a coordinated effort between the US Government and US private-enterprise oil companies.
So questions have arisen as to how much I advocate US Government involvement in the oil industry, energy policies, and the general economy. The US Government has many noteworthy actions and activities; some affect all activities such as standardizing weights, measures, and time and others affect primarily commerce such as the Patent Office. All these provide an environment in which commerce can function efficiently; some of these were required by advancements in transportation and other modernizing developments.
Some government actions have been critical to development of unconventional oil and gas resources. I have been asked what I think are the most important of these. The first, of course, was Thomas Jefferson buying the Williston Basin, Powder River Basin, DJ Basin, and a few others and, of course, Louisiana from Napoleon. The second was Madison sending Andrew Jackson to New Orleans to make sure the British did not take over all that, and third, Polk admitting Texas to the Union and then fighting a war with Mexico and acquiring parts of Wyoming, Colorado, New Mexico, Utah, Nevada, Arizona, and California. These were all important preliminary steps by government; Aaron Burr tried to do it with private enterprise and that did not work out.
Government policy was that these areas needed settlement and economic activity, so it undertook a unique philosophy regarding getting its resources developed – it gave them away to people who would develop them. It gave away land to railroads if the railroads were built; it gave away mineral resources to people who mined them; it gave away farmland to people who farmed it; and the country got developed – in a hurry – and it still is. The government established growth and ongoing revenues for itself by giving away resources and taxing the resulting economic activity. Do not pay any attention to third-world countries who claim they are developing; they have no clue how to do it. I have worked in several; they develop to the extent someone else does it for them.
The distinguishing feature of all that land that was acquired and then given away was that it included the mineral rights – and that made all the difference.
Private ownership of mineral resources is rare in the world.
The idea that drilling rigs, 2 or 3 miles of pipe, 40,000 horsepower, 10,000 tons of sand, and 2 million gallons of treated water can be repeatedly moved around and put on development locations in the middle of populations who do not own mineral rights has been demonstrated as unrealistic. Many countries have a high degree of sensitivity to production of oil by foreign companies even though they cannot do it themselves. Also, in many, including some parts of the US, local populations have also developed an anti-“Fracking” emotional response to development proposals; evidently stimulated by Russian propaganda campaigns. Countries without private ownership of minerals and which have large bureaucracies requiring extensive permitting for all human behavior will not do much unconventional oil development. Argentina may be an exception with the new Macri administration.
The US Department of Energy operates 17 national laboratories. These labs do basic research on many subjects much of which is devoted to energy sources and development. With the exception of those doing secret work related to national security or weapons, results are published openly. According to the Technology Transfer Act, information is given away and is therefore useful to commercial private enterprise worldwide. Some of that work was helpful for developing the techniques of horizontal drilling and hydraulic fracturing for development of unconventional oil and gas resources.
With respect to domestic strictly commercial transactions I think in general the Government should provide and protect property and contract rights, provide a fair and unbiased means of dispute resolution, and then pretty much get out of the way.
I think the same for strictly commercial transactions between two private enterprise entities internationally as well. This is not the case in many international transactions involving oil, however. Oil, as a natural resource, is owned or controlled by the host government in most countries and they use government-controlled companies as their representative in the oil business. Transactions with these governments and companies are influenced by the fact that government positions are backed by political, military, and police power. Private enterprise companies are no longer allowed such powers. Adversarial negotiating strengths are therefore quite asymmetric unless a US company has US Government support which they have not had for several decades.
When such transactions reach an impasse US companies have no recourse. The most famous example was in the early 1970s when the Saudis were negotiating with the American owners of Aramco regarding oil prices and ownership which was essentially a Saudi desire to quit honoring the original agreements. The US Government made a point of informing the Saudis they would not support the companies. As Kissinger (National Security Adviser at the time) noted: “Free market theology had kept . . . the United States out of negotiations as the companies were rendered defenseless”. Oil prices were subsequently raised repeatedly and significantly “unilaterally, without even the semblance of negotiation with the international oil companies”. Kissinger noted the result: “Never before in history has a group of such relatively weak nations been able to impose with so little protest such a dramatic change in the way of life of the overwhelming majority of mankind.” He could have added “by breaking a contract”.
The Mercantilist days are over. The British and Dutch East India Companies cannot be replicated. Nor can private enterprise companies hire private military contractors for support in such situations (note the outcry when a private contractor proposed taking over part of the US military effort in Afghanistan). But in the example above, the result of contentious negotiations between a private enterprise company and a government agency, ministry, or government-controlled oil company is pre-determined unless the company is supported by its own government.
I think the US needs to backup its own companies in such situations. Such backup can be coordinated use of various aspects of foreign, financial, trade, and other policies and can be as subtle or overt and forceful as needed. In a confrontational world, a successful strategy must use all its tools. Without such backup our companies are not respected except for their technical and operational capabilities and that is not always enough; once the technology and operational methods have been demonstrated, the companies are vulnerable.
Establishing a new separate alternate oil supply and price system leads to several secondary considerations such as whether US companies are withdrawing from existing world open oil trading, how does that affect existing oil markets and overall trade policies, and whether we would be confronting or conceding to Russia or China in various places. Those and other geopolitical affects will require coordination and joint planning by government policy makers and oil company managements.
Russia is establishing an extensive network of ownership in oil and gas fields and transportation systems worldwide using quasi-private entities. Certainly we cannot undo what has been done but we can work to dilute its effectiveness and try to constrain further acquisitions. Russia is quietly and methodically establishing the Energy Dominance position which President Trump announced as a US policy objective last summer – but has not implemented.
Establishing an independent oil supply and market system in the Western Hemisphere could reduce, but not eliminate, US involvement in the Middle East. We spent hundreds of billions of dollars in our misguided effort to re-build, re-organize, and bring enlightenment to a part of the world that does not want to change (on the contrary, they want to change us). This whole effort was based on the belief that we needed to maintain oil supplies and stop terrorism. But the oil flowed before we started, flowed during all the battles, and will flow after we leave; we got an oil surplus and price crash and we got ISIS. We can never recover those costs with oil supplies from there and have little to show for them.
We have worn out our military with over-deployment and overuse of men and machines. Russia and China are both developing modern militaries and we need to concern ourselves with how much life is left in old overused airframes, how many planes and ships are fully operational, and how many officers and men in all services are trained and equipped for top performance. Obviously the Navy is having problems with ships running aground and running into other ships and pictures show those ships are rusty. Rusty!? To re-build, re-equip, and re-train we should break off for awhile. Some would interpret this as US retreat and point out that Russia might step in and take a more active role there. Some would say the Middle East and Putin deserve each other. Let Putin and Middle East oil become a European and Chinese problem. Our necessary involvement can be evaluated and managed more objectively with oil out of the equation.
International Trade: Free or Isolationism?
Because I have advocated establishing an alternate oil supply system separate from the current worldwide fungible market, another question is whether I am advocating isolationism. No. But I do not advocate free trade willy-nilly with everybody either. Trade is a strategic tool and source of economic strength, not just a subject for economic theories. We seem to have the idea that if we trade with another country that is not our friend they will become so. Experience does not support that view, however, so I think we should choose our trading partners carefully. We also need to decide how much we value implementing economic theories of efficiency and how much we value retaining strategic capabilities and independence. Obviously we can trade with close friends, neighbors, and allies but we should not take it upon ourselves to make our enemies rich.
The most obvious example is China. I have recounted in an earlier commentary how I was asked, in 1996, a few months before the transfer of Hong Kong from Britain to China, for a review of my opinion of what would happen to Hong Kong after the Chinese took it over. At the time, China was a poor Communist country with a lot of people and Hong Kong was a rich center of free-market capitalism. My answer was that we needed to worry about what happened to us after Hong Kong, with its 24/7 capitalistic, entrepreneurial business practices, managerial experience, and a lot of capital connected with the largest, cheapest labor force in the world. Little did I anticipate that the US would empower the process with a free trade policy with China and by sponsoring China to join the World Trade Organization which it did in 2001. To join the WTO, China was required to open its economy under many international standards. This accelerated the growth of the US trade imbalance with China.
US manufacturing dropped by about a third within 15 years. Along with billions of dollars, we have transferred much of our manufacturing capability, technology, and skills to the Chinese and they steal what we do not transfer willingly. It has been well demonstrated that in prolonged conflicts the winner has a strong manufacturing base. China hacks our corporations, infrastructure, and government systems, steals technology, builds its military with much of our technology, ignores our concerns over North Korea, and competes with us for resource access and now is the world’s largest oil importer. But for some reason we still freely trade with it. I am well aware of economic theories of economic efficiency increased by free trade but economic efficiency is of little benefit when you are strengthening an enemy and weakening yourself.
China is a Communist country. Communism is an extreme version of socialism. Socialism by its nature is oppressive and coercive. Socialism cannot exist without 100% participation by the populace, therefore dissent cannot be tolerated. In small societies, dissidents and non-compliers can be ostracized but in large societies coercion becomes necessary with varying degrees of repression, force, and brutality. Socialist societies must be highly regulated to impose uniformity and regulations must be enforced. Although China opened its economy to join the WTO, which allowed it to grow economically, it is still ruled politically with a firm hand by the Communist Party. A distinguishing feature of Communism from many other forms of socialism is that it is expansionary and attempts to force itself on other societies. With its new capabilities, China is now becoming confrontational and expansionary.
Like Victor, we have enabled a Creature we cannot control. We can try to minimize the harm it causes us but we cannot expect it to go floating off on an ice raft. Free trading with China has to be one of the most shortsighted policies the United States has ever implemented.
Best wishes to everyone for the holidays. The New Year promises to be very interesting.