Posts from — August 2011
Vindicating Capitalism: The Real History of the Standard Oil Company (Part III: The Missing Context of Standard’s Rise to Supremacy)
[Editor Note: This five-part series by Mr. Epstein, originally published in The Objective Standard, revisits the Standard Oil Trust controversy on this the 100th anniversary of the breakup of the Trust. Part I reviewed the flawed textbook interpretation of Rockefeller's accomplishment; Part II sketched the rise of Standard Oil and defended the free-market practice of rebating.
The 1870s was a decade of gigantic growth for the Standard Oil Company. In 1870, it was refining fifteen hundred barrels per day—a huge amount for the time. By January 1871, it had achieved a 10 percent market share, making it the largest player in the industry. By 1873, it had one-third of the market share, was refining ten thousand barrels a day and had acquired twenty-one of the twenty-six other firms in Cleveland. By the end of the decade, it had achieved a 90 percent market share.
Such figures are used as ammunition by those who believe in the dangers of acquisitions and high market share. These critics believe that Standard’s growth and its ability to acquire so many companies so quickly “must have” come from some sort of “anticompetitive” misconduct—and they point to Standard Oil’s participation in two cartels during the early 1870s as evidence of Rockefeller’s market malice.
But the growing success of Standard did not flow from these attempted cartels—neither of which Standard initiated, and both of which failed miserably in very short order—but from the company’s enormous productive superiority to its competitors, and from the market conditions whose groundwork had been laid in the 1860s. Without understanding these conditions, one cannot understand Rockefeller’s exceptionally rapid rise.
Recall that in 1870 kerosene cost twenty-six cents a gallon, while three-fourths of the refining industry was losing money. A major cause of this was that refining capacity was at 12 million barrels a year, while there were only 5 million barrels to refine,46 a disparity that had an upward effect on the price of the crude that refiners purchased—and a downward effect on the price of the refined oil they sold.
Rationalizing Surplus Capacity
On November 8, 1871, a writer for the Titusville Herald estimated that “at present rates the loss to the refiner, on the average, is seventy-five cents per barrel.”47 Rockefeller’s firm, which was engineered to drastically lower production costs, could profit with such prices; few other firms could. [Read more →]
August 31, 2011 1 Comment
[Editor Note: This five-part series by Mr. Epstein, originally published in The Objective Standard, revisits the Standard Oil Trust controversy in this the 100th anniversary of the breakup of the Trust. Part I yesterday reviewed the flawed textbook interpretation of Rockefeller's accomplishment.
The Standard story begins during the U.S. Civil War. In 1863, the first railroad line was built connecting the city of Cleveland to the Oil Regions in Pennsylvania, where virtually all American oil came from. Clevelanders quickly took the opportunity to refine oil—as had the residents of the Oil Regions, Pittsburgh, New York, and Baltimore. Cleveland had the disadvantage of being one hundred miles22 from the oil fields but the advantage of having far cheaper prices for materials and land (Oil Regions real estate had become extremely expensive), plus proximity to the Erie Canal for shipping.23
John D. Changes Industry
At this time, Rockefeller was running a successful merchant business with his partner, Maurice Clark, when a local man named Samuel Andrews approached the two. A talented amateur chemist, Andrews sought their investment in a refinery.
After investigating the industry, Rockefeller convinced Clark that they should invest four thousand dollars.24 Rockefeller was attracted to the substantial—and then stable—profits of the refining industry, in contrast to the production industry, which alternated between incredible booms and busts. (When producers struck a “gusher,” whole towns were built up to the height of 1860s luxury; when they dried up, those towns faded into abject poverty.) He was not, however, impressed with the efficiency with which refiners ran their operations. He believed he could do better.
And he did—immediately. Instead of setting up a shanty refinery, Rockefeller invested enough to create the largest refinery in Cleveland: Excelsior Works. From the beginning, he encouraged Andrews to expand and improve the refinery, which soon produced 505 barrels a day,25 as compared to some refineries in the Oil Regions that produced as few as five barrels a day.26
Additionally, in a highly profitable act of foresight, Rockefeller carefully bought the land for his refinery in a place from which it would be easy to ship by railroad and by water, thus putting shippers in competition for his business; his competitors simply placed their refineries near the new Cleveland rail line and took for granted that it would be their means of transportation.27
A Real Businessman
Rockefeller’s business background made him well-suited to run a highly efficient firm. His first interest in business had been accounting—the art of measuring profit and loss (i.e., economic efficiency). Rockefeller’s first job had been as an assistant bookkeeper, and for his entire career he revered the practice of careful financial record-keeping.
“For Rockefeller,” writes Ron Chernow, “ledgers were sacred books that guided decisions and saved one from fallible emotion. They gauged performance, exposed fraud, and ferreted out hidden inefficiencies.”28 [Read more →]
August 30, 2011 3 Comments
Vindicating Capitalism: The Real History of the Standard Oil Company (Part I: The Fallacious Textbook Story)
[Author’s Note: This year marks the 100th anniversary of the Supreme Court ruling that found Standard Oil guilty of violating the Sherman Antitrust Act. As punishment, the world’s largest and most successful oil company was broken into 34 pieces.
Ever since, Standard Oil has served as the textbook example of why we need antitrust law--in the business world in general and in the energy business in particular. The Court’s decision affirmed a popular account of Standard Oil’s success, first made famous by journalists Henry Demarest Lloyd and Ida Tarbell. In the absence of antitrust laws, the story goes, Standard attained a 90% share of the oil-refining market through unfair and destructive practices such as preferential railroad rebates and “predatory pricing”; Standard then leveraged its unfair advantages to eliminate competition, control the market, and dictate prices.
Within the oil and electricity industries in particular, the spectre of a coercive monopoly developing in the absence of government intervention was used to justify coercive, monopolistic behavior by the government in the “common good,” be it by the Texas Railroad Commission or by government electrical utilities. This article, originally published in The Objective Standard, challenges the mythology of the Standard Oil case and, more broadly, the notion that a coercive monopoly can arise in the absence of government intervention. By implication, it illustrates that there is nothing standing in the way of a truly free, competitive energy market--an energy market free of antitrust law.]
Who were we that we should succeed where so many others failed? Of course, there was something wrong, some dark, evil mystery, or we never should have succeeded!1
—John D. Rockefeller
In 1881, The Atlantic magazine published Henry Demarest Lloyd’s essay “The Story of a Great Monopoly”—the first in-depth account of one of the most infamous stories in the history of capitalism: the “monopolization” of the oil refining market by the Standard Oil Company and its leader, John D. Rockefeller. “Very few of the forty millions of people in the United States who burn kerosene,” Lloyd wrote,
know that its production, manufacture, and export, its price at home and abroad, have been controlled for years by a single corporation—the Standard Oil Company. . . .
The Standard produces only one fiftieth or sixtieth of our petroleum, but dictates the price of all, and refines nine tenths. This corporation has driven into bankruptcy, or out of business, or into union with itself, all the petroleum refineries of the country except five in New York, and a few of little consequence in Western Pennsylvania. . . . the means by which they achieved monopoly was by conspiracy with the railroads. . . .
[Rockefeller] effected secret arrangements with the Pennsylvania, the New York Central, the Erie, and the Atlantic and Great Western. . . . After the Standard had used the rebate to crush out the other refiners, who were its competitors in the purchase of petroleum at the wells, it became the only buyer, and dictated the price. It began by paying more than cost for crude oil, and selling refined oil for less than cost. It has ended by making us pay what it pleases for kerosene. . . .2
Many similar accounts followed Lloyd’s—the most definitive being Ida Tarbell’s 1904 History of the Standard Oil Company, ranked by a survey of leading journalists as one of the five greatest works of journalism in the 20th century.3Lloyd’s, Tarbell’s, and other works differ widely in their depth and details, but all tell the same essential story—one that remains with us to this day.
Prior to Rockefeller’s rise to dominance in the early 1870s, the story goes, the oil refining market was highly competitive, with numerous small, enterprising “independent refiners” competing harmoniously with each other so that their customers got kerosene at reasonable prices while they made a nice living. Ida Tarbell presents an inspiring depiction of the early refiners.
Life ran swift and ruddy and joyous in these men. They were still young, most of them under forty, and they looked forward with all the eagerness of the young who have just learned their powers, to years of struggle and development. . . . They would meet their own needs. They would bring the oil refining to the region where it belonged. They would make their towns the most beautiful in the world. There was nothing too good for them, nothing they did not hope and dare.4
“But suddenly,” Tarbell laments, “at the very heyday of this confidence, a big hand [Rockefeller’s] reached out from nobody knew where, to steal their conquest and throttle their future. The suddenness and the blackness of the assault on their business stirred to the bottom their manhood and their sense of fair play. . . .”5
Driven by insatiable greed and pursuing his firm’s self-interest above all else, the story goes, Rockefeller conspired to obtain an unfair advantage over his competitors through secret, preferential rebate contracts (discounts) with the railroads that shipped oil. By dramatically and unfairly lowering his costs, he slashed prices to the point that he could make a profit while his competitors had to take losses to compete. Sometimes he went even further, engaging in “predatory pricing”: lowering prices so much that Standard took a small, temporary loss (which it could survive given its pile of cash) while his competitors took a bankrupting loss.
These “anticompetitive” practices of rebates and “predatory pricing,” the story continues, forced competitors to sell their operations to Rockefeller—their only alternative to going out of business. It was as if he was holding a gun to their heads—and the “crime” only grew as Rockefeller acquired more and more companies, enabling him, in turn, to extract ever steeper rebates from the railroads, which further enabled him to prey on new competitors with unmatchable prices. This continued until Rockefeller acquired an unchallengeable monopoly in the industry, one with the “power” to banish future competition at will and to dictate prices to suppliers (such as crude oil producers) and consumers, who had no alternative refiner to turn to.
The Shared Narrative
Pick a modern history or economics textbook at random and you are likely to see some variant of the Lloyd/Tarbell narrative being taken for granted. [Read more →]
August 29, 2011 10 Comments
Rick Perry’s $7 Billion Problem (Texas wind transmission project 38% over budget–$270+ for every citizen in the state)
“He has been a stalwart in defense of wind energy in this state — no question about it.”
- Paul Sadler, executive director of the Wind Coalition, quoted in Kate Galbraith, “As Governor, Perry Backed Wind, Gas and Coal,” New York Times, August 21, 2011, p. 21A.
Texas curtailed electricity customers this Wednesday in the face of abnormally high temperatures and insufficient capacity. And as is to be expected this time of year, windpower is producing at its yearly lows–on Wednesday, about 9 percent of capacity (880 MW out of nearly 10,000 MW capacity), down from 18 percent earlier in the week.
As Texas revs up mothballed plants, one can only imagine how much state-of-the-art, high-utilization capacity the state could have ‘bought’ instead of wind power, which produces most of its juice when it is not needed.
CREZ Transmission Project
New transmission to rescue wind power that cannot reach the cities? That introduces another problem–wildly uneconomic costs where good money has been thrown after bad.
The Competitive Renewable Energy Zones (CREZ) line, authorized in 2005, began at just under $5 billion and is now estimated to cost $6.8 billion upon completion in 2013. This bill comes to $270 for every Texas citizen—man, woman, and child—and counting.
August 26, 2011 16 Comments
Seven Southeastern states have rejected renewable energy mandates and/or voluntary alternative energy quotas on electric companies: Louisiana, Alabama, Arkansas, Georgia, Kentucky, Mississippi, South Carolina and Tennessee. (North Carolina is another story, requiring a 10% share for renewables and mandated efficiency savings by 2018.)
The good news for the seven states is not only that unnecessary costs have been avoided during the political boom of ‘green’ energy. The benefit is also that artificial bubble jobs are not on a death watch as they are in other states that now face ‘green’-energy retrenchment.
William Yeatman, an energy policy analyst for the Competitive Enterprise Institute, contends that Southeastern states do not have as much renewable energy potential as the rest of the country. “The Southeast has the lowest wind energy potential of all regions, and wind is the energy source that is used to achieve virtually all renewable electricity mandates in the U.S.”
However, Yeatman says that even though the Southeast has limited renewable energy potential, that does not mean renewable energy mandates are a good idea in the Northwest, Northeast or the Southwest. Rather, “It is to say that renewable energy is even more uneconomical in the southeast than in the rest of the country.”
Louisiana’s Politically Clean Energy
August 25, 2011 3 Comments
Part I yesterday described Evergreen Solar Inc.’s recent bankruptcy protection filing, which has left Massachusetts holding the bag for tens of millions of dollars in tax benefits and subsidies for a Devens, MA solar panel factory. Massachusetts wanted to be a true believer, and the promise of 800 jobs in a recession was too good to pass up even if the risks were high.
For politicians looking for good press this was a great opportunity—until reality hit the fan. So what lessons does this failed ‘green’ energy experiment impart for other political jurisdictions eager to create jobs? I offer five.
1. Being green does not mean being sustainable.
Evergreen Solar expanded just as the solar market was reeling from feed-in-tariff (FiT) subsidy cuts in Spain and later Germany, the then hottest markets in the world. Those FiT cuts were caused by rising and unsustainable costs to the Spanish and German governments seeking, just as Massachusetts had done, to prop up local business and create jobs when they were needed most.
2. Solar energy is governed by global markets for commodity prices—and few play that game better than China. So when China saw the luscious FiT subsidy fruit being dangled in Europe, it undercut the prices of local manufacturers for photovoltaic panels and took both market share and FiT subsidy Euros and sent them back to China. The European solar manufacturers were—pardon the pun FiT to be tied—but they were also still screwed because they could not meet or beat the low Chinese prices and saw their business fade away as unsustainable in a market that had become dependent upon unsustainable government subsidies.
These EU PV makers then dumped PV panels on the global commodity market at fire sale prices thus causing a worldwide problem of falling prices that swamped many solar players including Evergreen.
3. Feed-in-Tariffs are Risky Business. The EU story of industrial-policy good intentions gone unfulfilled is also a lesson unfortunately re-learned many times as disappointed results, this time in Massachusetts, remind us that when we seek to build entire new industries on a bed of sand. Our business future (sales, revenue growth, and supply chain channels) can be toppled by tremors in the markets half a world away. [Read more →]
August 24, 2011 10 Comments
Earlier this month, Evergreen Solar Inc. filed for chapter 11 bankruptcy protection, claiming the lower costs of Chinese competitors drove it to restructure. The Massachusetts Economic Assistance Coordinating Council, the Commonwealth board charged with overseeing MassDevelopment tax breaks to business, had previously voted May19 to end the 20-year, $15 million property tax break and terminate the $7.5 million in state tax credits for Evergreen, two months after the company shut its state-aided manufacturing plant in Devens, Massachusetts built and eliminated 800 jobs.
Adding insult to injury, Evergreen borrowed money to build a new solar manufacturing plant in China.
‘Clean-Energy’ Investments Up, but Performance Lags
According to Bloomberg New Energy Finance, new global investment in the clean energy sector (including solar) was up 27% to $41.7 billion in Q2:2011 from the prior quarter–and 22% higher than a year ago. This included several very large utility scale solar thermal projects including the BrightSource $2.2b 392-MW Ivanpah project in California, the 100-MW FPL Termosol project in Spain and Eskom’s 100-MW Upington project in South Africa.
Solar energy investment in the U.S. was also up 195% in Q2 to $10.5 billion according to Bloomberg, largely driven by successful financing of the Alta and Ivanpah wind and solar projects in California.
But after lusting for clean energy investment opportunities, the performance of many of those investments is not very satisfying. The WilderHill New Energy Global Innovation Index (NEX), which tracks 98 clean energy shares worldwide, fell 13% in Q2 2011 after a strong first quarter. Bloomberg New Energy Finance says the story is the same in every corner of the global with continued strong interest in investment in clean energy but poor performance has often been the result.
Evergreen blamed falling prices from Chinese competitors for solar panels, reductions in feed-in-tariff subsidies in Europe and the failure of the US to adopt supportive policies.
Let’s face it, if you can’t make a project go in a market where the state permits the project, mandates that utilities must buy renewable energy even above cost (and where the deals are done typically on long term power purchase agreements that substantially reduce the risk), and where the U.S. government writes you a Treasury Tax Grant check for 30% of the cost, the problem CANNOT BE a lack of policy support. [Read more →]
August 23, 2011 2 Comments
“Suggesting that renewables will let us phase rapidly off fossil fuels in the United States, China, India, or the world as a whole is almost the equivalent of believing in the Easter Bunny and Tooth Fairy.”
Climate and energy alarmists war with reality. And now and again, the incentives line up for a particular alarmist to blow the whistle on some aspect of the governmental ‘cure’ to their problem. The incendiary Joe Romm, for example, trots out free-market-type arguments against carbon sequestration and nuclear (both too expensive).
Hansen on Cap-and-Trade
NASA scientist and uber-climate-alarmist James Hansen informed the climate policy debate in 2009/2010 with his blistering criticism of CO2 cap-and-trade. “The truth is, the climate course set by Waxman-Markey is a disaster course,” he said. “It is an exceedingly inefficient way to get a small reduction of emissions. It is less than worthless….”
Joe Romm complained against Hansen’s “needlessly (and pointlessly) provocative attacks” as being “filled with right-wing and left-wing myths — and very little understanding of the basics of either this bill or cap-and-trade systems.” But California’s rethink of a state-level cap-and-trade program suggests that Hansen’s concerns of a highly political approach to mitigating carbon-dioxide emissions was on the mark.
Regarding international climate-change action, Hansen also called out
The fraudulence of the Copenhagen [Summit] approach – ‘goals’ for emission reductions, ‘offsets’ that render even iron-clad goals almost meaningless, an ineffectual ‘cap-and-trade’ mechanism – must be exposed. We must rebel against such politics-as-usual.
And now Renewables ….
Most recently, Hansen turned his attention to just what wind and solar in particular could do to reduce greenhouse gas emissions to reverse out the human influence on climate.
Steve McIntyre at Climate Audit (Hansen, WG3 and Green Kool-aid) has analyzed Hansen in the context of the IPCC’s amateurish pro-renewables report; I simply reproduce significant parts of the Hansen’s July 29, 2011, critique.
James Hansen on Renewable Energy
There is a consensus that renewable energies need to be part of the solution to the energy security and climate matters. But we must be realistic about their contribution. So now let’s look at the progress of renewable energies after several years of strong government incentives.
Renewable sources [in 2009] provide 10.7% of the electric energy. But … almost two-thirds of this is hydroelectric. Wind has grown to almost 17% of the renewable energy, so it is approaching 1.8% of U.S. electricity. Solar power is only 0.2% of the renewable portion or 0.02% of electricity.
[Globally] … in 2008 … renewable energies provide 19% of electricity, but most of the renewable energy is hydroelectric. Wind provides 1% of global electricity and solar energy less than 0.1%….
Renewables may be small, but they are growing rapidly, exponentially, right? [Data] reveals that growth of electricity in the past two decades in the U.S. has been mainly from fossil fuels…. [Read more →]
August 22, 2011 5 Comments
[Editor note: Austrian-School economics is at the forefront of today's pivotal debate over the limits of government, a debate that certainly includes public policy toward the master resource of energy.
Yesterday's introduction of Rothbard is joined today by a tribute to "Mr. Libertarian" by Roger Garrison, currently professor of economics at Auburn University, upon Rothbard's death. Subtitles have been added to Roger's tribute of 16 years ago, and he has graciously added a postscript for this republication. Enjoy on a hammock this hot summer with a glass of lemonade if you can!]
Murray Rothbard (1926-1995)
In the late 1960s, my interests were far removed from Austrian economics—and from any other brand of economics, for that matter. I hadn’t yet heard of Murray Rothbard and thus couldn’t even have imagined that I would be catapulted by him into the midst of what would later be termed the “Austrian Revival.”
My degree was in electrical engineering, but the hoped-for career was stillborn because of Southeast Asia and the military draft. My years in uniform taught me the importance of having a purpose by depriving me—temporarily—of the possibility of having one. I did have time to read in the military, and like many others in that period, I began reading Ayn Rand’s novels as well as her essays in moral philosophy.
Beginning with Rand
Objectivism is strong medicine, especially for those like myself who had spent their college years avoiding courses in the social sciences because of their apparent lack of structure and reason. But Rand’s Capitalism: the Unknown Ideal was full of structure and reason and provided a moral foundation for a free society.
The Austrian economists, featured in this book’s recommended readings, would show just what is—or ought to be—sitting on Rand’s foundation. Austrian economics is appealing to an engineering mind: basic principles, law-like propositions, unequivocal conclusions—all grounded in logic and applicable to the world as we know it.
Authors that Rand believed to be worthy of attention are listed in alphabetical order. I look back now at my yellowed paperback purchased more than a quarter-century ago and note the neatly drawn check marks that track the progress of my reading: books by Benjamin Anderson, Lawrence Fertig, Henry Hazlitt, and Ludwig von Mises.
Although my imperfect memory tells me that Murray Rothbard’s books were included in this list, I see now that they are not. But Rothbard had been publishing for several years and was for a time a member of Rand’s inner circle. Any enthusiastic reader would soon find his books. [Read more →]
August 20, 2011 2 Comments
Introducing Murray Rothbard to an Energy Audience (Part I: Keynesian economics down, Austrian economics up)
“The economy is not recovering…. It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery.”
- Paul Krugman, “The Wrong Worries,” New York Times, August 5, 2011, p. A21.
Federal energy policy is being driven by the failure of neo-Keynesian economic policy.
Stimulus spending was supposed to end the Great Recession and transform tax expenditure into additional tax revenues. Instead, we are left with both recession and broke government. Obama borrowed from the future and made the present worse. George W. did his share too.
Three Strikes: Is Keynesianism Finally Out?
Keynesian economics failed during the Great Depression (will more textbooks now admit it?). The activist approach of Herbert Hoover (the first New Dealer, according to Murray Rothbard) used the powers of government to slow the liquidation of unsound investments, narrow profit opportunities, injure international trade, and block employment.
FDR doubled down on activist government policy with new spending programs, higher taxes, and regulation and business hostility (Robert Murphy tells the story well in The Politically Incorrect Guide to the Great Depression and the New Deal).
Government spending and deficits crowd out private-sector activity that is consumer driven and thus efficient. The timeless explanation of the artificiality of public jobs by Henry Hazlitt in Economics in One Lesson applies to the U.S. experience in the 1930s and to today’s quagmire. Rothbard’s America’s Great Depression (1963) documents the artificial 1920s boom from expansionary monetary policy (the Federal Reserve Bank was founded in 1913) and the necessary bust that was not ever allowed to run its course to sustainable recovery.
Keynesianism failed again with the 1970s stagflation, which occurred during the energy crisis. The simultaneous existence of high unemployment and high inflation empirically refuted the (Keynesian) Phillips Curve, which graphed how more of one meant less than the other with the two never being high at the same time.
In the face of stagflation, neo-Keynesian leader Paul Samuelson, his guilty textbook Economics exposed, lamented:
It is a terrible blemish on the mixed economy and a sad reflection on my generation of economists that we’re not the Merlins that can solve the problem. Inflation is deep in the nature of the welfare state. Even when there is slack in the system, unemployment doesn’t exert downward pressure on prices the way it did under “cruel” competition.
But lessons were not learned, and Obama finds his third-way interventionism running on empty. The stimulus borrowed from the future and simply propped up mal-investments and created new ones, such as the government-dependent wind power industry. “Green” jobs are bubble jobs that are set to burst sooner or later.
Three strikes–is neo-Keynesianism out?
Austrian-School (Real World) Economics
Enter the ‘Austrian School’ or ‘market-process approach’ to economics. [Read more →]
August 19, 2011 6 Comments