Is the hydrocarbon economy too big to fail?
If the woefully inadequate outcome of the Paris climate conference is any indication, the answer is still a resounding “Yes!” That’s because the overly optimistic agreement conspicuously ignored the core issue driving up the earth’s temperature and warping the world’s already misshaped markets.
The problem is Big Oil.
Simply put, Big Oil is a bad investment fueled by irrational exuberance, chronic cronyism and an increasingly indefensible misallocation of capital. And decades of throwing good money after bad has produced a distorted economic system that socializes risk, privatizes profits, externalizes costs and misallocates capital. This continues because policy makers sustain it with taxpayer-funded subsidies, costly tax breaks and low-overhead access to publicly held resources.
By failing to institute much-needed cost internalization mechanisms and by completely avoiding the key problem of government subsidization, the cork-popping cadre of COP21 tacitly admitted what most cynics already knew – policy makers still believe “Big Oil” is far too big to fail. But, like other distorted markets in history, the correction is coming. The growing impact of climate change is exposing the key fallacy at the heart of the hydrocarbon economy: Big Oil cannot simply exempt itself from the natural economy governing all things in this closed system called planet Earth.
It’s Only Natural
Since Adam Smith published The Wealth of Nations in 1776, few ideas have captured the capitalist imagination like the notion that “an invisible hand” directs enterprising, self-interested individuals to produce a widely distributed wealth of social goods in spite of their self-serving intentions.
When the “self-serving” butcher, brewer or baker sells quality products at a fair price, they each profit from the returning patronage of their customers. Their customers enjoy good meat, fine ale and fresh bread. An invisible hand rewards these enlightened purveyors with enough money to eat well and drink well, too. And in the process, the whole village eats and drinks and thrives. But unenlightened sellers – those who peddle unnatural combinations of poor products at high prices – are driven out of business by the unsustainable inefficiencies produced by bad decisions and ill intentions.
This market correction happens, in no small part, because they’ve thrown the whole town – which is itself a mini financial ecosystem – completely out of balance with their bad meat and the lost wages from food-borne illnesses. Even worse is the disruption to the ethical butcher who gets undercut by malicious pricing from unscrupulous sellers. But, according to the theory, an invisible hand restores order to the town’s financial ecosystem when consumers react and economic balance is restored.
It’s taken a while for all those bad debts and poor investments to fill up the ecological balance sheet with red ink.
Over time, free-market devotees transformed Smith’s original theory of “an invisible hand” into “the invisible hand.” They believe “the hand” is a universal, natural force governing markets, meting out economic justice and controlling the fate of humankind. And they may be right. But they may also be surprised to find that “the hand” is connected to the right arm of Mother Nature and she’s using it to punish one of history’s most inefficient and least “enlightened” business models. By turning up the thermostat, filling the seas, altering climactic patterns and disrupting food chains, nature’s increasingly visible hand is “correcting” the shortsighted, heavily subsidized use of hydrocarbons to power an unsustainable, ecosystem-denuding industrial system.
Back in 1776, Adam Smith bemoaned the problem of unenlightened short-term thinking in investment and the distortions caused by corporate influence in politics. Like the seller of bad meat at an artificially low price, Big Oil has profited mightily from a short-term emphasis on high returns while its disproportionate political influence ensured the global village subsidized everything it’s been selling.
But Mother Nature is not a day trader…