Daily Archives: 30 September 2016

Oil in a Free Market Economy

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When oil prices began to plunge two years ago due to a global glut of crude, experts predicted US shale producers would be the losers of the resulting shakeout.

But the American companies that revolutionized the oil and gas business with hydraulic fracturing and horizontal drilling are surviving the carnage largely unbowed.

Though the collapse in prices caused a wave of bankruptcies, total US oil production has only fallen by about 535,000 barrels a day so far this year compared with 2015, when it averaged 9.4 million barrels, according to the latest federal data.

And

As the oil markets ponder where production will resume when prices pick back up, one clear answer has emerged: America. Goldman Sachs forecasts the US will be pumping an additional 600,000 to 700,000 barrels of oil a day by the end of next year—making up for every drop lost in the bust.

RT Dukes, of Wood Mackenzie:

The US isn’t the marginal barrel but the most flexible.  We’ll be the fastest to snap back.

Among other reasons,

Even as banks and other traditional lenders tighten their purse strings, alternative sources of money are cropping up, from private-equity funds to distressed-debt specialists.

“The very existence of that capital means prices are likely to be lower for longer, because it compounds the supply problem,” [Senior Vice President of Corporate Advisory and Banking for Brown Brothers Harriman, Lewis] Hart said.

Alternate sources of capital are willing to provide those funds and take these risks because American producers always find ways to cut costs and enhance efficiencies when things get tough.  The underlying innovativeness that competition encourages, here fracking, produces technologies that also drive toward cheaper, more efficient ways of doing things.

This is the agility that the oil business, that businesses in general, can have in a free market economy.  It’s an agility that government, however well meaning, cannot have, whether in a free market economy or a government planned (or even just government led) economy.

See, for instance, the last eight years of our economy under government regulation.  Oil is succeeding despite that because our economy remains largely free market, although government intrusion is starting to threaten that freedom.

Government Needs to just Butt Out

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A bipartisan group of senators is pushing to include municipal bonds in bank-safety rules, the latest wrinkle in a continuing fight over how safe—and salable—the debt of states and localities would be in another financial crisis.

The proposed regulation would “allow” banks to include municipal bonds on their balance sheets in the category—mandated by existing rules requiring banks to have sufficient (government’s definition) cash to fund operations for 30 days in the next “financial crisis.”  The proposed regulation also specifies the safety rating for those munis: the banking rules’ “high quality liquid assets” category, albeit at the lowest level of “high quality.”

So Chicago’s bonds should be on a par with Dallas’.

No.  These are decisions—every single one of them, the definition of “sufficient,” of “crisis,” whether to include munis as high quality assets, even whether to count munis as assets at all—are best made by banks and by businesses generally in a free market, not made by Government from the center of a government-managed economy.