The Messy Political Economy of Finance and Energy

(This is Part 3 of a review of Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, 2010); Part 1 appears here and Part 2 here.)

If pervasive governmental intervention is inevitable in any developed economy, the question then becomes: what intervention is worthwhile? For Bremmer, the answer appears to be either a) not much or b) intervention that is not designed merely to enhance the power of the governing regime. Unfortunately, one of his central arguments for the value of the free market—the performance of multinational oil and gas companies—founders on the messy politics of energy. The second category of “pro-commerce” intervention appears less and less coherent as we look at the full breadth of programs state capitalist regimes engage in. State capitalists in China may well be promoting the sustainable commerce of the future by forcing certain sectors to act “politically” today.

Crude Distinctions in the Petroleum Industry

Bremmer notes that “the 14 largest state-owned energy companies control twenty times as much oil and gas as the eight largest multinationals” (56). He accuses state-owned energy companies of being corrupt, inefficient, and dangerous, and makes that case in some detail. He also says many of them are amoral, willing to work with the most repressive regimes imaginable. By contrast, he lavishly praises multinationals like Shell, BP, and ExxonMobil:

[E]fficiency gaps between privately owned companies and their state-owned rivals wider in the energy sector than in any other area of an economy. Multinationals offer higher wages, attracting better workers. They’re more likely than state-owned firms to benefit from economies of scale. They’re more innovative. Their managers and engineers are more experienced, and they use better equipment. These advantages will continue to matter in places like the Gulf of Mexico . . . where the technical demands of bringing oil to the surface are extraordinarily high. (62) (emphasis added)

If the BP hemorrhage continues indefinitely, that hole in the world might shake Bremmer’s confidence. Admittedly, the disaster happened after the book was released, but the more we dig into it, the more we find permanently captured regulators at Interior giving these companies whatever they want. Stories of the environmental devastation of Nigeria and Ecuador by Shell and Chevron have been familiar for years.

Peter Maass tells the story of the devastation left behind by many multinational oil companies in Crude World: The Violent Twilight of Oil. In a scintillating description of corruption in Equatorial Guinea (the third largest oil producer in sub-Saharan Africa) and pollution in Ecuador, Maass describes the arguments of those who, like Bremmer, think that multinationals offer more moral business practices than state oil companies. One oilman claims that if American firms don’t do the messy work of securing and extracting the fuel, more repressive regimes will influence oil-producing regions. Maass responds:

The argument made sense in theory—America is a democracy and China is not—but in the real world of deeds and misdeeds, it can be hard to see a great difference. The American government was paying rent for its embassy [in Malabo] to a minister accused of torture. [Equatorial Guinea’s dictator] Obiang’s family was reaping huge profits from sweetheart deals with American companies. There seemed to be more in the way of reward for bad behavior than pressure to change it. (50)

In another section of the book, Maass interviews Salad al-Husseini, a former vice president of the Saudi state oil company, Aramco, whom Maass calls “one of the most respected oil experts in the world.” al-Husseini made the following points about multinationals:

They have brilliant leaders, they have brilliant engineers, but they get exposed to commercial pressures which they have to live with. If they are in financial trouble and have to cut corners, they will cut corners. It means that if your tanker is old and you ought to retire it, you keep it working. It means that if you have an offshore platform that is beyond the national boundaries of a certain country and you can dump chemicals into the sea, you do. It means that if you have to abandon a facility that is a pollutant, you abandon it. . . .All of these are ways in which you say, It’s not my problem, it’s not my cost. (113)

Bremmer is too quick to apply a double standard to state-owned oil companies. He complains of the outsized influence of Russian oligarchs, but doesn’t mention the fact that Lee Raymond earned $686 million for his time at the helm of ExxonMobil. The Chinese may be manipulating their national champions to find more and more oil for a burgeoning home market, but US regulators are often directed by “political appointees” to do whatever it takes to keep royalty revenue flowing and to get campaign contributions from big oil and its numerous allies. The stark distinction between fair and foul approaches to oil wealth only really appears when one compares these examples of excess with Norway’s enlightened approach. But that egalitarianism is less an expression of the free market than a check upon its worst tendencies.

Allocating Capital: An Inescapably Political Task

The finance sector offers another counterpoint to Bremmer. Consider that, “In 2008, the CEO of the world’s largest and most successful bank earned £150,000 [for running] the Industrial and Commerce Bank of China [while] . . . the head of the most unsuccessful investment bank [Lehman Brothers’ Dick Fuld] earned £22 million.” If the Chinese government is actively suppressing exorbitant CEO salaries in the banking sector, what is so bad about that? Perhaps Japan shows that CEO salaries can also be controlled in a “freer” market. But in the US, the financialization of the economy driven by the “free market” has both driven jobs overseas and spawned near-oligarchic tendencies in the financial elite. If there is indeed a “war between states and corporations,” as Bremmer puts it, this is what it looks like when corporations win.

Finally, Bremmer is notably quiet about some of the most laudable aspects of Chinese state capitalism. Perhaps the country is raising prices for oil by aggressively securing supplies, but don’t may experts agree that carbon’s current price does not reflect its negative externalities? Moreover, China’s commitment to developing green energy is enormous:

R. & D. expenditures have grown faster in China than in any other big country—climbing about twenty per cent each year for two decades, to seventy billion dollars last year. Investment in energy research under the 863 Program has grown far faster: between 1991 and 2005, the most recent year on record, the amount increased nearly fifty-fold. In America, things have gone differently . . . . By 2006, according to the American Association for the Advancement of Science, the U.S. government was investing $1.4 billion a year—less than one-sixth the level at its peak, in 1979, with adjustments for inflation.

The US has done so poorly in this area that one ex-president of an oil company laments that democracy cannot give us a coherent long-term energy policy. Meanwhile, another ex-businessman, former Intel CEO Andy Grove, says that Chinese-style job creation programs may be the only way to prevent another Great Depression in the US:

Our fundamental economic belief, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best of all economic systems . . . [W]e stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better. Such evidence stares at us from the performance of several Asian countries in the past few decades.

Consider the “Golden Projects,” a series of digital initiatives driven by the Chinese government in the late 1980s and 1990s. Beijing was convinced of the importance of electronic networks—used for transactions, communications, and coordination—in enabling job creation, particularly in the less developed parts of the country. Consequently, the Golden Projects enjoyed priority funding. In time they contributed to the rapid development of China’s information infrastructure and the country’s economic growth.

A dirigiste state may mandate investment in technology and access to resources. We may not like seeing the Chinese state “lock up” various pools of resources, but consider the needs of its people:

China as a whole is unbelievably short on many of the things that qualify countries as fully developed. Shanghai has about the same climate as Washington, D.C. — and its public schools have no heating. (Go to a classroom when it’s cold, and you’ll see 40 children, all in their winter jackets, their breath forming clouds in the air.)

If China is building infrastructure in Africa in order to gain access to heating oil, who cares if this is being done for “political” rather than “commercial” reasons? Perhaps the biggest story of the decade will be the extraordinary spectacle of the world’s superpower investing in McMansions, war, SUVs, and useless financial instruments, while its putative rival built up its capacity to meet real human needs. America’s wasteful finance, insurance, housing, and auto sectors have shown what can happen when policy unattuned to environmental concerns attempts to promote a “free market” economy.

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