Thursday, April 19, 2012

The free market is never free and socialists look an awful lot like oligarchs.

Two ends of an energy story, both of them handled badly.

Here in the U.S., Chesapeake Energy, one of the largest domestic gas producers, saw its shares fall 7% on Wednesday on the news of some questionable deals by its charismatic CEO and co-founder Aubrey McClendon.  McClendon has been one of the natural gas industry’s biggest proponents and one of the first to realize the value and possibility of the Marcellus Shale’s gas reserves.  It seems McClendon has taken out over $1million in loans secured against Chesapeake Energy wells.  Both McClendon and Chesapeake Energy claim nothing was illegal as an arrangement has been in place since 1993 that allows the CEO to buy into some of the company’s wells, an arrangement that has been disclosed in SEC filings since 2007.  The question is whether this represents a conflict of interest; a serious question indeed.  Imagine the CEO of McDonalds has the ability to buy into specific franchise locations.  As CEO he would be able to influence the financial performance of these restaurants through assigning the top managers to these locations, burdening other locations with certain costs to reduce the overhead at his locations, or increasing corporate promotion for these specific locations.  Was it legal?  The courts may decide, yikes, legality; but from an ethical behavior perspective, Mr. McClendon has failed miserably.

Meanwhile in South America, the Argentine government of Cristina Fernandez renationalized its largest oil group, YPF.  What makes this act so egregious is the motivation behind the move.  It had nothing to do with a comprehensive national economic plan, instead it was simply good old crony oligarchy politics.  Pay off some previous political debts, demagogue the large multinational private firms, and play populist.  What’s worse, the Argentine record for managing state owned enterprises is as abysmal as the human rights record in Syria.  Naturally, the owners of YPF, the Spanish energy group Respol and the Spanish government are none to please.  Expect this issue to head to the WTO and World Court.  The lack of acknowledging and respecting property rights is endemic in too many mineral, raw material, and energy rich companies.  Whether it is Russia, Bolivia, Argentina, or Nigeria the government claims may vary, but the truth is always tied to greed and political favor.

So we have free market shenanigans and governmental cronyism.  As former Fed Chairman Alan Greenspan famously said “It is not that humans have become any more greedy than in generations past. It is that the avenues to express greed had grown so enormously.”

The free market is never free and socialists look an awful lot like oligarchs.

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