Memo to Obama: Here’s How the Market Works

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President Obama is running a political campaign as predictable as it is despicable. It is based on attacking capitalism. “Markets never work, government always does” appears to be his meshuggeneh mantra. As it happens, two recent Wall Street Journal stories illustrate the free market (disparagingly called “capitalism” by its opponents) in action. Obama might want to reflect on them, though it is doubtful that he often reflects on anything — he seems to be the epitome of a reflexive instead of a reflective person.

The articles, appearing on the same day and the same page, report on the impact of the fracking revolution in natural gas production, a revolution that has dramatically decreased the price of natural gas — by nearly half in the last year alone.

The first article reports some good news about the rock-bottom prices for natural gas. The price is inducing companies with trucking fleets to switch from diesel to natural gas (NG) — either compressed (CNG) or liquefied (LNG).

For example, Waste Management is now buying NG trucks. It plans to make 80% of the new trucks it buys over the next 5 years NG trucks. The NG trucks cost about $30,000 more than ordinary diesel trucks, but save more than $27,000 a year in fuel expenses. Ryder Systems, a truck leasing company, is making the same move, with one of its vice presidents saying, “The economics favoring NG are overwhelming.”

Other corporations shifting their truck fleets to NG include such huge players as UPS and AT&T.

The article notes the standard problems facing fleets looking to convert to NG, such as the need for bigger tanks, and especially the lack of CNG or LNG fueling stations nationwide. But as the fracking gas revolution continues apace, it is likely that the price of natural gas will remain extremely low compared to diesel, so will tempt more and more gas stations to offer NG fueling pumps. And the article doesn’t note how much cleaner NG is than diesel, which means that as air pollution laws continue to tighten, the cost of diesel trucks will go up. Nor does the article note that as more fleets convert to NG, the price of NG trucks will start to fall as production of them cranks up.

On the bad news side, the companion piece reports that natural gas “giant” Chesapeake Energy has been beaten up by the low price of its product and is now investing heavily in unconventional drilling for shale oil. Specifically, Chesapeake is focusing on the huge Utica shale formation lying under the state of Ohio, betting billions to buy leases for drilling rights to about 5% of the state’s land.

This is either ballsy or balmy, depending on your tolerance for risk. The Utica field is estimated to contain between 1.3 and 5.5 billion barrels of oil, but the company has drilled only 59 wells, and of the nine about which it has released data, the information shows that oil is but a third of what is provided — the rest being mainly that damned cheap natural gas!

All this simply illustrates the view of pricing that Hayek and Kirzner enunciated: that pricing is an information transmission mechanism — more simply, a language. The price of a product tells both producers and consumers how to alter their behavior and plans for the future. When the price of natural gas went up not so long ago, it told producers to produce more, and they did — in spades! Now that it has plummeted while the price of oil has remained relatively high, it tells consumers to switch to it, and it tells producers of natural gas and oil to shift capital from producing the former to producing the latter.

All this would be illuminating to Obama, were he a man capable of illumination. But he isn’t, so it won’t.




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Comments

norman

You say: "President Obama is running a political campaign as predictable as it is despicable."

If that is so, maybe he won't get re-elected. If he does get re-elected, then maybe that's what American's believe, so says his ad agency.

Besides, if precedent prevails and each new president is worse than his predecessor then beware of Romney.

Visitor

I think Obama will not be re-elected.

But in any case, I don't think it is generally true that each new president is worse than the preceding. Certainly Reagan was NOT worse than Carter, but markedly better. Indeed, Jefferson was not worse than John Adams. Buchanan was not worse than Pierce. Coolidge was not worse than Harding. Eisenhower was not worse than Truman. Ford was not worse than Nixon.

I don't think that Romney, if he wins, will be the greatest president ever. But--unless he does some totally unforeseeable things--he cannot POSSIBLY be worse than the current buffoon.

Visitor

Of course Obama will be re-elected. We live in a ountry that re-elected GW Bush during a terrible, avoidable war. The incumbent always, always wins. It's all about brand name, not any policy. Very few in the US will vote for a RC cola when they have Coke and Pepsi to choose from. Whose ever heard of RC cola? Must not be as good......

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