Tag Archives: Ukraine Invasion

Markets Deal With Scarcity, Left Screams “Price Gouging”

11 Monday Apr 2022

Posted by in Antitrust, Environmental Fascism, Oil Prices

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Democrats claim profiteering by oil companies is responsible for the sustained rise in oil prices since Joe Biden’s inauguration (really, his election). That’s among the more laughable attempts at gaslighting in recent memory, right up there with blaming market concentration for the sustained increase in inflation since Biden’s inauguration. At a hearing this week, congressional Democrats, frightened by the prospect of a beat-down just ahead in the mid-term elections, couldn’t resist making “price-gouging” accusations against oil producers. These pols stumble over their own contradictory talking points, insisting on more oil production only when they aren’t hastily sabotaging oil and gas output. Their dishonestly is galling, but so is the foolishness of voters who blindly accept the economic illiteracy issuing from that side of the aisle.

Break It Then Blame It

Those who level “price gouging” charges at oil companies are often the same people seeking to eliminate fossil fuel consumption by making those energy choices unaffordable. The latter is a bad look this close to mid-term elections, so they follow the playbook I described recently in “Break the Market, Blame It, Then Break It Some More“. And this post is instructive: “House Dem: Big Oil is profiteering by, er … doing what we demanded”.

Not only have the Democrats’ policies caused oil prices to soar; for many years they’ve been undermining the stability of the power grid via forced conversion into intermittent renewable energy sources like wind and solar, all while preventing the expansion of safe and carbon-free nuclear power generation. It’s ironic that these would-be industrial planners seem so eager to botch the job, though failure is all too typical of central planning. Just ask the Germans about their own hapless efforts at energy planning.

As economist Lawrence Summers, former Treasury Secretary under Barack Obama, said recently:

“Look, the net effect of the things the administration talks about in terms of micro policies to reduce inflation, this gouging talk is frivolous, nonserious, and utterly ineffectual. A gas price holiday would, ultimately, push up prices by raising demand. … The student loan relief … is injecting resources into the economy at a hundred billion dollar a year annual rate when the economy needs to be cooled off, not heated up. … The administration could be much more constructive than it has been with respect to energy supply.”

The market functions to allocate scarce resources. When conditions of scarcity become more acute, the market mechanism responds by pricing available supplies to both curtail use and incentivize delivery of additional quantities. That involves the processing of vast amounts of information, and it is a balancing at which the market performs extremely well relative to bumbling politicians and central planners, whose actions are too often at the root of acute scarcities.

Antitrust Nonsense

Of course, the Democrats have seized upon the inescapable fact that soaring oil prices cause profits to soar for anyone producing oil or holding stocks of oil. But oil company profits are notoriously volatile. Margins were negative for most of 2020, when demand weakened in the initial stages of the pandemic. And now, some companies are bracing for massive write-downs on abandoned drilling projects in Russia. The oil and gas business is certainly not known for high profit margins. Short-term profits, while they last, must be used to meet the physical or financial needs of the business.

The threats of antitrust action by the Biden Administration are an extension of the price-gouging narrative, even if the threat reflects an injudicious grasp of what it takes to prove collusion. It takes a fertile imagination to think western oil companies could successfully collude on pricing in a market dominated by the following players:

Fat chance. In any case, it’s a global market, and it’s impossible for western oil producers to dictate pricing. Even the OPEC cartel has been unable to dictate prices, not to mention keeping it’s members from violating production quotas. But if a successful conspiracy among oil companies to raise prices was possible, one would guess they’d have done it a lot sooner!

Nor is it possible for the oil majors to dictate prices at the pump, because retail prices are set independently. While the cost of crude oil is only about 54% of the cost of refined gas at retail, fluctuations in prices at the pump correlate strongly with crude oil prices. Here is a ten-year chart of daily price data, where the blue line is the price of West Texas Intermediate crude oil and the orange line is the average price of regular gas in the U.S.:

Here are the same two series for 2022 year-to-date:

Coerced Scarcity

Again, oil prices have been under upward pressure for over a year until a break in early March, following the steep run-up in the immediate wake of the Ukraine invasion. First there was Biden’s stultifying rhetoric, before and after the 2020 election, assisted by radical members of Congress. Then there were executive orders halting drilling on federal lands, killing the Keystone pipeline, efforts to shut down several other existing pipelines, and the imposition of regulatory penalties on drillers. In addition, unrest in certain parts of the Middle East curtailed production, compounded this year by the boycott on Russian oil (which, as a foreign policy matter, was far too late in coming).

However, existing facilities have been capable of squeezing out more oil and gas. Lo and behold, supply curves slope upward, even in the short-run! Despite all of Biden’s efforts to cripple domestic oil production, higher crude prices have brought forth some additional supplies. Biden’s raid on the Strategic Petroleum Reserve has also boosted supply for now, but its magnitude won’t help much, and it must be replaced for use during real U.S. national emergencies, which the war in Ukraine is not, as awful as it is.

That said, investing in new drilling capacity is not wise given the political climate created by Biden and the Democrats: they have been quite clear that they mean to crush the fossil fuel industry. For some time, the oil companies have been busy investing cash flows in “green” initiatives in an effort to bolster their ESG scores, a dubious exercise to say the least. Arguably, in this policy environment, the most responsible thing to do is to return some of the capital over which these firms are stewards to its rightful owners, many of whom are middle-class savers who hold oil stocks in their 401(k) funds. That approach is manifest in the recent stock buybacks and dividend payments oil companies have announced and defended before Congress.

Conclusion

A forced shutdown of fossil fuel energy was much ballyhooed by the Left as a part of Joe Biden’s agenda. Biden himself bought into the “Green New Deal”, imagining it might win him a vaunted place alongside FDR’s legacy in American history. The effort was unwise, but Biden is trying to hang onto the narrative and maintain his punitive measures against American oil companies. All the while, he begs OPEC producers to step up production, bending a knee to despots in countries such as Iran and Venezuela. Why, it’s as if their fossil fuels are somehow cleaner than those extracted in the U.S! The feeble Biden and congressional Democrats are proving just how mendacious they are. They can rightfully blame Vladimir Putin for the recent escalation in oil prices, but they bear much responsibility themselves for the burden of high gas prices, energy bills, and the unnecessary, ongoing scarcity victimizing the American public.

ESG Scoring: Political Tool Disguised as Investment Guide

30 Wednesday Mar 2022

Posted by in Capital Markets, Corporatism, Environmental Fascism, Social Justice

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ESG scores are used to rate companies on “Environmental, Social, and Governance” criteria. The truth, however, is that ESGs are wholly subjective measures of company performance. There are many different ESG scores available, with no uniform standards for methodology, specific inputs, or weighting schemes. If you think quarterly earnings reports are manipulated, ESGs are an even more pliable tool for misleading investors. It is a market fad, and fund managers are using it as an excuse to charge higher fees to investors. But like any trending phenomenon, for a time, the focus on ESGs might feed-back positively to returns on favored companies. That won’t be sustainable, however, without legislative and regulatory cover, plus a little manipulative help from the ESG engineers and “Great Reset” propagandists.

It’s 100% Political, 0% Economic

ESGs are founded on prioritizing objectives that have little to do with shareholder value or any well-understood yardsticks of financial or operating performance. The demands on company resources for scoring highly on ESG are often nakedly political. This includes adoption of environmental goals such as fraudulent “zero carbon” impacts, the nebulous “sustainability” objective promoted by “green” activists, diversity, inclusion and equity initiatives, and support for activist groups such as Black Lives Matter and Antifa.

Concepts like “stakeholder value” are critical to the rationale for ESGs. “Stakeholders” can include employees, suppliers, and customers, as well as potential employees. suppliers, and customers. In other words, they can be just about anyone in the broader community, or more likely activists for “social change” whose interests have but the thinnest connection to the business’s productive activities. In essence, so-called stakeholder capitalism amounts to a ceding of control over corporate resources, and ultimately confiscation of wealth from equity owners.

Corporations have long engaged in various kinds of defensive actions, amounting to a modern-day trade in indulgences. No one will be upset about your gas-powered fleet if you buy enough carbon offsets, which just might neutralize the impact of the fleet on your ESG! On a more sinister level, ESG’s provide opportunities for cover against information that might be damaging to firms, such as the use of slave labor overseas. Flatter the right people, give to their causes, “partner” with them on pet initiatives, and your sins will be ignored and your ESG will climb! And ESGs are used in attempts to pacify leftist investors who see the corporation as a vessel for their own social objectives, quite apart from any mission it might have had as a productive enterprise.

Your ESG will shine if you do business that’s politically-favored, like renewable energy, despite its inefficiencies and significant environmental blemishes. But ESGs are not merely used to reward those anointed as virtuous by the Left. They are more forcefully used to punish firms in industries that are out of favor, or firms refusing to participate in buying off authoritarian crusaders. For example, you might be so berserk as to think fossil fuels and climate change represent imminent threats of catastrophe. Naturally, you’ll want to punish oil and gas producers. In fact, if you are in charge of ESG modeling, you might want to penalize almost any extraction industry, with certain exceptions: the massive extraction and disposal costs of renewables will pass without notice.

All these machinations occur despite the huge uncertainty surrounding flimsy, model-based predictions of warming and global catastrophe. Never mind that fossil fuels are still relied upon to provide for most of our energy needs and will be for some time to come, including base-load power generation when intermittency prevents renewables from meeting demand. The stability of the power grid depends upon the availability of carbon-based energy, which in fact is marvelously efficient. Yet the ESG crowd (not to mention the Biden Administration) seeks to drive up its cost, including the cost of capital, and these added costs fall most heavily on the poor.

ESG-guided efforts by activists to deny capital to certain segments of the energy sector may constitute antitrust violations. Some big players in the financial industry, who together manage trillions of dollars in investment funds, belong to an advocacy organization called Climate Action 100+. They coordinate on a mission to completely transform the energy industry via “green” investments and divestments of presumptively “dirty” concerns. These players and their clients have huge investments in green energy, and it is in their interest to provide cheap capital to those firms while denying capital to fossil fuel industries. As Arizona Attorney General Mark Brnovich writes at the link above, this is restraint of trade “hiding in plain sight”.

Manipulation

ESGs could be the mother of all principal-agent problems. Corporate CEOs, hired by ownership as stewards and managers of productive assets, are promoting these metrics and activities, which may not align with the interests of ownership. ESG’s are not standardized, and most users will have little insight into exactly how these “stakeholder” sausages are stuffed. In fact, much of the information used for ESGs is extremely ad hoc, not universally disclosed, and is often qualitative. The applicability of these scores to the universe of stocks, and their reliability in guiding investment decisions, is extremely questionable no matter what the investor’s objectives. And of course the models can be manipulated to produce scores that suit the preferences of money managers who have a stake in certain firms or industry segments, and who inflate their fees in exchange for ESG investment advice. And firms can certainly engage in deceptions that boost ESGs, as already discussed.

Like many cultural or consumer trends, investment trends can feed off themselves for a time. If there are enough “woke” investors, ESGs might well feed an unvirtuous cycle of stock purchases in which returns become positively correlated with wokeness. Such a divorce from business fundamentals will eventually take its toll on returns, especially when economic or other conditions present challenges, but that’s not the answer you’ll get from many stock pickers and investment pundits.

At the same time, there are ways in which the preoccupation with ESGs dovetails with the rents often sought in the political arena. Subsidies, for example, will be awarded to firms producing renewables. Politically favored firms are also likely to receive better regulatory treatment.

There are other ways in which firms engaging in wasteful activities can survive profitably, at least for a time. Monopoly power is one, and companies often develop a symbiosis with regulators that hampers smaller competitors. This is traditional rent-seeking corporatism in action, along with the “too-big-to-fail” regime. Sometimes sheer growth in demand for new technologies or networking potential helps to conceal waste. Hot opportunities can leave growing companies awash in cash, some of which will be burned in wasteful endeavors. ESG scoring offers them additional cover.

Cracks In the Edifice

John Cochrane notes a fundamental, long-term contradiction for those who invest based on ESGs: an influx of capital will tend to drive down returns in those firms and industries, while the returns on firms having low ESGs will be driven upward. Yet advocates claim you can invest for virtue and superior returns. That can’t outlast real market forces, especially as ESG efforts dilute any mission a firm might have as a productive enterprise.

Vladimir Putin’s brutal invasion of Ukraine has revealed other cracks in the ESG edifice. We now have parties arguing that defense stocks should be awarded ESG points! Also, that oil production by specific nations should be scored highly. There is also an awakening to the viability of nuclear power as an energy source. Then we have the problem of delivering on Biden’s promise to Europe of more liquified natural gas exports. That will be difficult given the way Biden has bludgeoned the industry, as well as the ESG conspiracy to deny it access to capital. Just watch the ESG hacks backpedal. Now, even the evangelists at Blackrock are wavering. To see the thread of supposed ESG consistency unravel would be enough to make you laugh if the entire conspiracy weren’t so grotesque.

Closing

The pretensions underlying “green” initiatives undertaken by large corporations are good mainly for virtue signaling, to collect public subsidies, and to earn better ESG scores. They are usually wasteful in a pure economic sense. The same is true of social justice and diversity initiatives, which can be perversely racist in their effects and undermine the rule of law.

Ultimately, we must recognize that the best contribution any producer can make to society is to create value for shareholders and customers by doing what it does well. The business world, however, has gone far astray in the direction of rank corporatism, and keep this in mind: any company supporting a sprawling HR department, pervasive diversity efforts, “sustainability” initiatives, and preoccupations with “stakeholder” outreach is distracted from its raison d’etre, its purpose as a business enterprise to produce something of value. It is probably captive to outside interests who have essentially commandeered management’s attention and shareholders’ resources.

When it comes to investing, I prefer absolute neutrality with respect to out-of-mission social goals. Sure, do no harm, but the focus should remain squarely on goals inherent in the creation of value for customers and shareholders.

Full Blame for Monstrous Aggression On Putin

14 Monday Mar 2022

Posted by in Foreign Policy, Propaganda

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One would think condemnation of Vladimir Putin’s invasion of Ukraine would be easy for anyone who cares about human rights. This action and the threats he’s made against the West are the work of a psychotic. Yet there are some who place the ultimate blame for his behavior on the West and on NATO in particular. These reactions range from “This is all our fault” to “He’s evil, but we should not have provoked him”. Other reactions are much wilder, such as “We’re hiding something in Ukraine” to “We orchestrated this whole thing.” I am a small-government classical liberal, and no one trusts government power less than I do. However, I certainly place more trust in Western governments than in Russia’s authoritarian regime. If the West deserves any blame here, it’s because we made it easy for Putin.

Authoritarian Longings

For certain Western conservatives who’ve developed a man-crush on the “strong leader” Putin, the first thing you should understand is that he is an inveterate gangster and thug. Brute force fascism has always defined his approach to governance and foreign policy. That’s how this so-called “genius” came to power: three Russian apartment buildings were bombed in 1999, an act believed to have been instigated by the Russian Federal Security Service, of which he was head. Putin blamed Chechen rebels, prompting an attack on Chechnya that led to his ascendency.

Even among more moderate voices we hear statements like this:

“Russia has an existential interest in keeping NATO away from his border.”

Existential? “His” border? NATO may have expanded to include members from Eastern Europe, but that didn’t change its basic defensive posture nor the Putin regime’s expansionist goals. Objectively, it might have been more in Russia’s existential interest to be less belligerent and avoid the kind of rogue-state trap it’s now sprung on itself.

There are a few so-called leading intellectuals in the West who have condemned NATO eastward expansion as the root cause of Russia’s vengeful mind set, such as George Kennan and John Mearsheimer. However, Russian scholar Stephan Kotkin says they have it all backwards:

“The problem with their argument is that it assumes that, had nato not expanded, Russia wouldn’t be the same or very likely close to what it is today. What we have today in Russia is not some kind of surprise. It’s not some kind of deviation from a historical pattern. Way before nato existed—in the nineteenth century—Russia looked like this: it had an autocrat. It had repression. It had militarism. It had suspicion of foreigners and the West. This is a Russia that we know, and it’s not a Russia that arrived yesterday or in the nineteen-nineties. It’s not a response to the actions of the West. There are internal processes in Russia that account for where we are today.

I would even go further. I would say that nato expansion has put us in a better place to deal with this historical pattern in Russia that we’re seeing again today.”

Former NATO Secretary-General Anders Fogh Rasmussen agrees with that assessment, noting several early attempts at outreach to Russia:

“Russia is not a victim. We have reached out to Russia several times during history…. First, we approved the NATO Russia Founding Act in 1997…. Next time, it was in 2002, we reached out once again, established something very special, namely the NATO-Russia Council. And in 2010, we decided at a NATO-Russia summit that we would develop a strategic partnership between Russia and NATO.”

Nazis At the Kremlin

Putin contends that Ukraine must be “de-Nazified”, which is bizarre given the large Jewish population of Ukraine and its representation in leadership. Putin’s claim is also complete projection, as Melanie Willis has written:

“It is in fact Putin himself who has unleashed neo-Nazism on Ukraine using the Wagner Group. This is a private army of mercenaries financed by pro-Kremlin oligarchs. It’s led by Dmitry Utkin, a former Russian military intelligence officer sporting Waffen-SS tattoos who allegedly named his outfit after Hitler’s favourite composer.

Far-right extremists comprise the core of this group, which has committed horrific atrocities across Africa, the Middle East and Ukraine as a front for Russian imperial policy. …

The Russian Imperial Movement, which has fought in Ukraine, was designated a terrorist organisation by the US in 2020 for training and funding neo-Nazi terrorists across the world in its military camps, which operate under the Russian security services’ eye.”

Love Letters To Soviet Monsters

As if to emphasize his bona fides as a vicious authoritarian, Putin lionizes the failed Soviet empire, as if to forgive the horrors perpetrated by the communists: millions of lives lost to the engineered Ukrainian famine of the Holodomer genocide in the 1930s, the widespread raping of Russian, Polish, German women by members of the Red Army at the end of World War II, the millions confined to concentration camps over the entire Soviet era, and the repression, murder, or exile of many others. And this is to say nothing of the long economic nightmare inflicted by communist central planners, including the denial of property rights to ordinary people in the USSR and its satellite states.

Also recall that Putin’s army has made a practice of bombing civilian targets in separate conflicts starting with Chechnya in 1999, Georgia in 2008, and Syria in 2015. Cluster bombs and thermobaric weapons were used against residential areas in all three of these actions, the first two of which were Russian invasions of sovereign nations, and the third was on behalf of the Bashar Assad regime. It’s no surprise that we’re now seeing atrocities committed at Putin’s behest in Ukraine, and it could get far worse.

NATO: Not All About Russia

Another thing to understand: NATO’s original and ongoing purpose goes far beyond simply defending against Soviet and now Russian aggression. Claire Berlinski has a good post on this subject. She quotes “A Short History of NATO”:

“In fact, the Alliance’s creation was part of a broader effort to serve three purposes: deterring Soviet expansionism, forbidding the revival of nationalist militarism in Europe through a strong North American presence on the continent, and encouraging European political integration.”

Much of Europe was reduced to rubble after World War II, with many millions of soldiers and civilians dead. Homelessness and hunger were everywhere. Berlinski points to outbreaks of “militant nationalism” that plagued Europe in the wake of earlier crises.

“The enormity of the destruction transferred the responsibility for preserving Western civilization to the United States. …

Americans who resent Europeans for being reluctant to militarize and for placing so much importance on political integration should remember that this is the world we created. We insisted upon this. Europe had no choice. It’s very strange for Americans suddenly to view the United States’ greatest military and foreign policy achievement as a failure. It was the United States’ plan for Europe to focus on economic growth rather than maintaining large conventional armies …”

Indeed, this point was lost on Donald Trump. There is no question that European states should pay up to their commitments to NATO, and today more balance in those commitments is probably well-advised. However, as Berlinski notes, even when the Berlin Wall fell and the USSR dissolved, NATO’s role in ensuring European stability was still paramount. One might even say it ultimately required NATO expansion to the Eastern European states. And no, Russia was never promised that NATO would not expand to the east. That is a complete myth promoted by Putin and the Russian misinformation apparatus.

The rise of Russian belligerence over the past two decades meant that all three components of NATO’s original mission remained relevant. And through all that, NATO’s posture has remained defensive, not offensive. Yet many in the West have fallen for a continuing barrage of Russian propaganda and misinformation that the U.S. should withdraw from the alliance. On that, Berlinski says,

“It’s an idea very much like unilateral nuclear disarmament.”

The West Did Not Impede Putin

As a staunch Russian nationalist, Putin has always been butt-hurt about the fall of the USSR. And let’s not fool ourselves into thinking he hasn’t been coddled to a significant degree by the West, even as he grew bolder in his provocations and bullying. I already discussed NATO’s attempts to reach out to Putin before 2010. This article recounts, from a series of tweets by Kyle Becker, the subsequent course of affairs. Becker notes the following:

  • As Secretary of State under Barack Obama, Hillary Clinton approved the Uranium One deal giving Russia 20% of U.S. reserves.
  • In early 2010, the new START treaty left Russia with huge tactical nuclear advantages, and the agreement had very weak enforcement mechanisms.
  • Obama’s incredible hot-mic moment in 2012 caught him promising “more flexibility” to the Russians on ballistic missile defense after the November election.
  • The 2014 takeover of the Crimean Parliament and the subsequent rigged referendum to leave Ukraine was met with ineffective sanctions.
  • Missiles fired by pro-Russian forces took down a Malaysian Airlines flight over the Dunbas region in 2014. Earlier, Obama had denied Ukraine access to equipment that would have defended against anti-aircraft fire, and might have prevented the tragedy.

Even more recently, Joe Biden in January practically issued a pass to Russia on action against Ukraine: “It’s one thing if it’s a minor incursion…” Well then! Townhall’s Matt Vespa says:

“Russia is invading because they’ve been getting away with using brute force for years, coupled with an eight-year administration in the United States that did all it could to weaken everyone around them. Obama did nothing when Crimea was seized. He did nothing when Russians established themselves in the Middle East… For a solid decade, the use of force has worked, and Biden being Obama’s former VP, he sees a continuation of that weakness. Putin was right in that regard, gaming out the West’s response to a senile U.S. president. What he did not expect was the tenacity of the Ukrainian resistance.”

The Biolabs Pretext

What about those biolabs in the Ukraine? Putin’s propaganda machine went into high gear to characterize the labs as threats of biological warfare on Russia’s border. Many Western populists and conservatives thought this seemed like a rational pretext for Putin’s actions, but without a shred of proof. We really don’t know what’s happening there, but biolabs are not exactly uncommon, and the vast preponderance of biological and virological research is benign. The mere existence of those facilities is certainly not synonymous with “bio-weapons” research, as many have taken for granted. And, of course, a biolab in the West is likely to be engaged in bio-defense research as well. You can be sure, however, that Putin has contemplated the use of bio-weapons against Ukraine.

Conclusion

Vladimir Putin has made ominous threats against NATO countries, but if he didn’t have a huge stockpile of nuclear weapons he’d be merely a bad actor from a low-tier industrial society, and without the clout to frighten the entire world. His belligerence is long-standing and quite out-of-hand, and it is unlikely to stop with Ukraine should he succeed in crushing it. That seems to be his intent. NATO and the West did not do anything to justify Putin’s conspiratorial fantasies. In fact, the West coddled Putin for far too long, to our detriment and to the horror of the Ukrainian people.

I’m trying to maintain some optimism that Putin’s miscalculations in this invasion will eventually lead to Russian defeat. At the very least, it may be impossible for his occupying forces to maintain control without disastrous consequences to them. That might eventually lead to a withdrawal, much as it did in Afghanistan. Meanwhile, Western leaders still hope to find an “off-ramp” for Putin allowing him to save face and perhaps settle for small gains in the separatist regions. If so, I won’t be surprised to see repeat offenses from Putin in the future, either in Ukraine or elsewhere.