This week we received more disturbing news on the current state of energy prices, as the price of a barrel of crude reached an all-time high of $118.00 on futures trading. At the same time our so-called friends, the Saudis, announced that they have placed on hold any plans to increase oil production, which would help bring down the price. Gasoline also reached an average national high of more than $3.50 a gallon, and many are expecting it to reach more than $4.00 a gallon, with $5.00 a possibility this summer in certain parts of the nation. Politicians in Washington are searching for answers but as usual are clueless.
Yet the solutions to our problems are not in some fantasy utopian world, where we can all run our cars on some mysterious clean-burning fuel, but in the past when we did whatever was required to strengthen our economy and benefit America. And in those days we never listened to extremists tell us it was beneficial to dismantle our economy on flimsy science.
American economic power skyrocketed in the decades after the War for Southern Independence. Before the war, the United States was a second-rate power but by the end of the century America dominated the global economy, producing nearly a third of the world’s manufactured goods, as well as taking a leading position in mining and agriculture.
How did the United States transform itself in such rapid fashion? Well there are several factors, including the imposition of a protective tariff and the lack of oppressive taxes and regulations. But an often overlooked reason was the availability of cheap energy. Industrialization and robust economic growth require vast amounts of energy. And the man responsible for supplying most of it in the 19th century was John D. Rockefeller and his Standard Oil Company.
Rockefeller has been labeled by most historians, along with other entrepreneurs of his day, as a “robber baron,” a shrewd, cruel capitalist concerned only with enriching himself at the expense of the poor, working classes. Although this was true for some, it was not the case with Rockefeller. He was a superb businessman and incredibly efficient, seeking to make high quality petroleum products cheap and readily available for every American. He did it the right way, with brains and brawn, the way America was meant to be.
There are, according to Burton Folsom in his book The Myth of the Robber Barons, two types of entrepreneurs – political entrepreneurs and market entrepreneurs. A market entrepreneur is someone who uses the free market to build his business. Good old American hard work! This would be what we call a self-made man. But a political entrepreneur is a businessman who cannot make it on his own and seeks government aid, such as subsidies, and legal protection, in the form of anti-trust laws, to gain an advantage. These were the real robber barons.
Rockefeller was definitely in the former, a great market entrepreneur. He was nearly obsessed with making energy cheap and available for everyone, using good business practices and the free market. But his sole concern was not just cheapness but quality as well. To one of his partners he wrote, “Let the good work go on. We must ever remember we are refining oil for the poor man and he must have it cheap and good.”
Before the age of electricity, homes were illuminated with kerosene lamps. Five years after the war, in 1870, kerosene cost 58 cents a gallon, an expensive commodity, but with Standard Oil controlling 90 percent of the market, and Rockefeller’s incredible efficiency, he lowered the price to just 8 cents per gallon by 1880. “Hope we can continue to hold out with the best illuminator in the world at the lowest price,” he wrote another partner. This greatly benefited the poor in America, and enabled them to illuminate their homes.
Rockefeller was able to do this through the use of “vertical integration,” for which he is often criticized. This practice is not monopolistic but effective at cutting costs, which lowers prices. For example, oil in those days was shipped in wooden barrels, manufactured by coopers. Standard Oil paid nearly $3 a piece for them. Believing he could do it cheaper, Rockefeller bought vast tracts of timber land, built his own barrel-making operation, and cranked them out at just .96 cents. This is true efficiency and helped bring prices down. He did not engage in these practices to further enrich himself and try to control more of the market, as is sometimes alleged.
By controlling the product, in this case oil, from the time it left the ground until it was sold in stores, Rockefeller was able to cheapen it for the common man but also for American industry, which boomed during this period. This is not a coincidental parallel. The availability of cheap energy, and with a protective tariff guarding the gates against foreign predators, America’s economy employed millions of American workers and soon became the envy of the world, producing the material that won both world wars.
But what are we doing today? The exact opposite of course. Yes the oil companies have made record profits during this period of high prices. In fact, of the top Fortune 500 companies in 2007, three oil companies – ExxonMobil, Chevron, ConocoPhillips – ranked in the top five, pulling in some $70 billion in profits.
But consider what they are up against. They are prohibited from drilling in ANWR (Arctic National Wildlife Refuge) in Alaska, where there is a oil reserve of some 10.5 billion barrels, enough to end our imports from Saudi Arabia for two decades. They are also restricted from opening up drilling in much of the Gulf of Mexico, where there is thought to be a vast reserve as well. New reserves have also been found in the Dakotas and Montana, with no plans to drill.
At the same time, no new refineries have been built since the early 1970’s. This is very important because it is in the refining process where the supply of gasoline and diesel is controlled. Refineries are now at full capacity. There is only so much they can do. Current technology also exists to produce gasoline and diesel from coal, where we have a 500 year supply. But as you might guess, there are no plans to invest in this new technology either.
And let’s not forget, these same oil companies who are making record profits are also paying record taxes, to the tune of tens of billions a year!
With all these restrictions, oil companies have little available at their disposal to increase supplies and bring down prices. We are now paying the piper for the environmentalist tune we have been singing for more than thirty years.
Today our economy runs on petroleum. Always has and always should, for the foreseeable future. As long as energy has remained cheap, our economy has excelled, but let energy prices inflate and our economy slows and sometimes slows dramatically. The surest way to grind our economy to a halt is with inflation in the energy sector.
And yet even this very week we see environmentalist wackos trot out their other scare tactic, the fact that we are almost out of oil. This is known as the peak oil theory. But this is far from the case. Estimates on global oil reserves vary but they are thought to be around 12 to 16 trillion barrels, whereas the planet has consumed just one trillion barrels to date, according to Nansen G. Saleri of Quantum Reservoir Impact in Houston, Texas. There is plenty of fuel for our economy, we just need to find the will to go get it.
We also must stop listening to these environmental extremists, who cling to unproven theories, and do what needs to be done. We need new drilling and new refineries, along with new nuclear power plants to free up coal for other purposes. While we are busy bankrupting ourselves and listening to screwball environmentalists in Washington and New York City, China and Russia, our chief global rivals, are scrounging the globe for every available energy reserve. They are gaining the high ground while we talk about creating new “green collar” jobs and putting sod on roofs to “green” our buildings. How laughable! China is even making inroads in the Gulf of Mexico and the Caribbean, gaining closer ties with Cuba to tap reserves right under our noses.
But while our rivals look to build their economic futures, doing whatever is in their nation’s best interest, our country, led by the Bush Administration, is intensely focused on the idea of ethanol production as an oil substitute. Corn-based ethanol is subsidized by the government at $2 billion per year and this folly is already having a negative impact on our economy. As more and more farmers are switching their fields from wheat production to corn, food prices are increasing, by 11 to 25 percent last year depending on the commodity.
And because of this asinine policy, for the first time in American history we actually had to import grain last year. Corn prices are also increasing because we are burning it up for fuel. This is also causing shortages for other uses as well. The Breadbasket of the World is now in decline, all because of a ridiculous, unproven theory put forward by nutcases like Al Gore and Leonardo DiCaprio. Our current policy is even having a global impact, as world food prices rose nearly 85 percent, causing food shortages and even riots in some countries like Mexico. It will only get worse.
The upcoming election in November will determine the fiscal policy of this country for the next four years. Of the three “major” presidential candidates, no one is talking about the real issues at stake. We face major economic problems and neither the Republican or Democratic candidates seem to want to confront these issues with any degree of seriousness. We need a president who will embrace America First policies, like our forefathers in the days of Rockefeller, and put this nation on a sound financial footing. If not, our future looks very bleak.