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Capitalism, Socialism And Energy Politics

By News Creatives Authors , in Business , at July 26, 2021

Lately, the terms capitalism and socialism have been flying through the social ether, typically inappropriately or as misinterpretations, but mostly as perjoratives. To opponents, capitalism is considered greed-driven and heartless, socialism is seen as autocratic and ineffective. As many have pointed out, it is typical to use the term socialism mistakenly to attack social welfare projects (such as the New Deal), while capitalism wrongly stands in as a metaphor for human behavior (as if socialists aren’t greedy).

Many of the people attacked as socialists are nothing like them: Barack Obama and Joe Biden have shown no particular tendency towards socialism, and many of the proposals coming from Progressive Democrats are merely about social welfare programs, such as pre-K schooling and child income credits. Unlike the 1970s, no one (nobody serious, I think) is suggesting nationalizing the oil industry or utilities, or that the government build electric cars. Which isn’t to say that much of the Biden plan and the Progressives’ Green New Deal is arguably inefficient if not horribly wasteful (money to the wealthy to buy electric sports cars?), but that doesn’t make it socialism.

Similarly, the taint of capitalism seems to stick to its products in the minds of many Americans. Yesterday’s New York Times Magazine

had an excellent article on the opposition to genetically modified organisms, which noted that the early products met opposition partly because they came from a large corporation, as if the molecules involved had a homeopathic signature of ‘corporate’ versus ‘non-profit’. And while it is true that corporations and businesses seek money and profits, those in the public sector have their own incentives that can lead them astray, as when some Veterans’ Administration doctors fiddled with records to improve their performance metrics.

Name-calling is popular in today’s angry tribal politics but not useful. If you think pre-K schooling is ineffective or too expensive, say so, don’t call it socialism. If you think that people use too much energy, don’t blame the private sector, blame the consumers.

The oil industry provides many examples of the difference between socialist and capitalist policies. There have been a wide number of national oil companies over the years, and their performance tends to be highly varied, partly reflecting a policy in some places of what the late John Treat called ‘commercialization’. That is, even if a company is owned by the government, it can still behave more like a private company than a bureaucracy.

The arguments for relying on state mineral enterprises, specifically national oil companies, are that they are more attuned to society’s conditions and needs, they allow the government to monitor resource exploitation, and they can have lower borrowing costs, being government entities. The arguments against include excessive autonomy (Petroleos de Venezuela—PDVSA—was often called a state within a state), inefficiency, and corruption. The middle approach, regulated capitalism, has generally worked the best.

A free market ideology can go too far. A colleague once told me the World Bank asked for a study of the petroleum market in Chad, which they thought should be privatized to improve competition. Given that the domestic oil market at that time was 10 tb/d, he could not foresee privatization leading to anything but monopoly. (As BP’s Peter Davies once said, “Monopolies are terrible, unless they’re yours.”)

On the other hand, socialist countries are littered with failing enterprises that government bureaucrats pushed as transformative for their economies. The poster child could be (again) Petroleos de Venezuela) which took over the expiring concessions of several foreign companies’ operations in the 1970s. Twenty years later, an executive commented to me that his subsidiary produced one-half of the amount of oil before nationalization, but had twice the employees. (He didn’t think that was a good thing.)

Sadly, many have forgotten that it was Venezuelan President Rafael Caldera who, after initially implementing currency and price controls, liberalized the economy and especially the oil sector. A number of private operators bid on and revitalized aging oil fields, raising production over 1 mb/d, which was partly responsible for the 1998 oil price collapse. Subsequently, Hugo Chavez sought to restore the power of the state over not just private operators but PDVSA, resulting in a strike and the firing of half the company’s work force (including most executives and skilled workers). Production has since steadily declined until it is now minimal, as the state can’t pay workers, many of the managers are inexperienced (and hired for loyalty rather than expertise), and untold amounts of money are unaccounted for, justifying the argument that it’s not socialism, but kleptocracy, at fault. (Both, obviously.)

Sadly, the Chavez regime emulated a predecessor, Carlos Andres Perez, president during the 1970s oil boom, in both attitude and policies, despite their earlier abysmal failures. And Mexico’s President, Andres Manuel Lopez Obrador, is doubling down on the mistakes of Perez and Chavez, taking a strict ideological stance favoring state enterprise over private, and blaming all the failures of Petroleos de Mexicanos (Pemex) on his predecessors’ reforms, even though they had only been recently implemented. Even sadder, when a consortium of private companies found a large oil field, he has moved to assert state control over its operation, which will chill the investment climate for years to come.

The biggest crime is that this all harks back to Plato, who queried, “Who will watch the watchers?” That we haven’t solved that problem is visible in the need for police reform in many U.S. cities, but also the failure to recognize that neither the public nor the private sector can be completely trusted to act as we wish. No regulation is not a viable condition, but over-regulation can be costly as well, and both private and public sectors suffer from it. (Think of the postal worker disciplined for leaving their route—to save someone from a fire.) Both capitalists and socialists (or those presuming to be such) should recognize that ideology is a good teacher, but a bad master, and try harder to deal with real world problems in a cost-effective way.


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