Four-dollar gasoline and natural gas. This per gallon price is high for the oil industry and per MMBtu price low for the natural gas industry given historic prices.
In the face of low prices, the natural gas industry can practice free-market self-help or seek special government favor. The former is the economic means, the way of voluntary exchange in a consumer-driven market; the latter is the political means whereby a special government regulation, subsidy, or tax provision is sought and/or received. The choice is between business leaders practicing free-market capitalism or furthering political capitalism (aka crony capitalism).
Political capitalism’s rent-seeking is hardly new in American business. J. Howard Marshall II, who began his half-century in petroleum as a New Deal regulator, once noticed how the industry wanted help from the Department of Interior to increase prices. In Marshall’s words:
Many big shots in the [oil] business, who later denied it, literally prayed for us amateurs in government “to save us else we perish.” A few years later, when most of them, for one reason or another, found salvation, few sinners remembered their prayers. Such is human nature.[1]
Talk freedom and free enterprise, practice rent-seeking. Today’s big shot, T. Boone Pickens, once talked endorsed individual enterprise and small government. “We must reduce the influence of big business in Washington,” he said in his first autobiography in 1987. “The way to do that is to kill the protectionist game.”[2] But contrary to his previous beliefs, the former oil and gas producer and energy trader and investor has spent tens of millions of dollars in recent years lobbying for a government-enabled energy transformation.
As originally formulated several years ago, the Pickens Plan proposed to employ the powers of government to have 1) wind turbines displace natural gas in the electrical generation market and 2) natural gas back out petroleum in the transportation market. Wind would gain the electricity generation market, natural gas would be repositioned to fuel motor vehicles, and oil would be displaced altogether. Wind would unambiguously win, natural gas would hold its own, and oil would lose.
T. Boone did not get enough federal subsidy and abandoned his aggressive plan to build the world’s largest wind farm. Viola, he dropped the electricity component of his plan. T. Boone since has focused on transportation, specifically to convert the heavy truck market (via generous taxpayer help) from diesel to natural gas.
Such would presumably be an incremental market to aid natural gas prices. But is government favor really the only way to go for the gas industry as Pickens believes?
Self-Help, Free-Market Style
In the face of low prices for its product, an industry can do two things in a free market. One is to reduce supply. For gas producers, that means producing less in the face of a supply-increasing technology boom. To this end, drilling rigs are being redirected to oil prospects from gas plays. Between April 2010 and April 2011, according to Baker-Hughes, the natural gas rig count fell from 973 882. “More rigs are being directed toward oil instead of gas largely because of the large price disparity between the two fuels on an energy-equivalent basis,” the U.S. Energy Information Administration recently noted. “On April 21, 2011, the number of active oil-directed rigs exceeded the number of gas-directed rigs for the first time since April 28, 1995.”
The other choice is to increase demand. Several self-help measures are being incited by relative energy prices for natural gas interests to:
1. Further penetrate the Northeast home heating oil market, continuing the trend of natural gas-for-oil of the last several decades.
2. Build new or rejigger existing import LNG infrastructure to export U.S. gas to high-price markets
3. Construct gas-to-liquids plants to turn natural gas into gasoline and other liquid products, a global opportunity (such as Shell’s Arabian Gulf project, the world’s largest).
4. Related to #3, increase exports of liquids stripped from natural gas, such as propane and butane.
5. Offer long-term pricing deals to lock-in niche transportation markets (fleet vehicles).
Some of the above (#1, #4, #5) are incremental, and some (#2, #3) require lots of capital and lead time. All require dedicated effort in a market where the energy competition is keen. But who said the free market was easy, especially for an industry that is breaking its own records for new production?
Conclusion
In Saving Capitalism from the Capitalists, Raghuram Rajan and Luigi Zingales remarked: “Capitalism’s biggest political enemies are not the firebrand trade unionists spewing vitriol against the system but the executives in pin-striped suits extolling the virtues of competitive markets with every breath while attempting to extinguish them with every action.”[3] Such is the case of T. Boone Pickens with natural gas—as it has been with other energy industry leaders such as James E. Rogers of Duke Energy with his cap-and-trade carbon-dioxide regulation scheme and Jeffrey Immelt with GE’s renewable energy plays.
Denying natural gas special favor, and removing the heavy subsidies now enjoyed by the renewable energy industry (some 50 times that received by the fossil fuels per unit of energy produced), is a step towards establishing a more free, competitive, government-neutral market in energy. Perhaps the T. Boone Pickens of old—the man who once bragged about his propensity to stay out of Washington, D.C. and just be left alone by the feds–would even applaud the scaleback of the government’s picking-winners-and-losers tax policy.
[1] Marshall, J. Howard II. Quoted in Robert Bradley, Oil, Gas, and Government: The U.S. Experience. Lanham, MD: Rowman & Littlefield, 1996, p. 1831.
[2] T. Boone Pickens, Jr. Boone. Boston: Houghton Mifflin Company, 1987, p. 287.
[3] Raghuram Rajan and Luigi Zingales, Saving Capitalism from the Capitalists. New York: Crown Business, 2003, p. 276.
