[A-List] Enron, Part I

Mark Jones mark.jones at tiscali.co.uk
Wed Dec 5 06:57:10 MST 2001


At 05/12/2001 10:20, Michael wrote:

>Is there anyone here who can make sense of what the Bush administration
>is hoping to achieve by all of this?


Enron's collapse is obviously symptomatic and characteristic feature
of  Wall St's bursting bubble; in the end, Enron was just another Ponzi
scheme, albeit one that grew like a cancer until Enron was brokering up to
35% of energy supplies not only in the US but in Britain and other
countries too.

But there is much more to Enron than just another derivatives scam, or just
another skeleton in the Bush cupboard for that matter. Enron's collapse is
indicative of a deep crisis within the energy industry, which many both in
the industry and in the markets are obviously very reluctant to admit to.
It is part and parcel of the unravelling which did the California utilities
in and exposed the unworkability of total deregulation. Underlying the
collapse of Enron is the collapse of deregulation itself, and that is much
more significant in its implications for the future even than this $100bn
bankruptcy.

The roots of the controversy about deregulation are as old as the oil
industry. From its Pennsylvania beginning in the 1860s, oil was an anarchic
free-for-all of  uncontrolled markets: until the 'big hand' of John D.
Rockefeller  swept all the little guys away and brought in the
monopolisation and cartelisation which became not just one's method but a
whole management style which came to characterise an era. Ever since, oil
has been an ideological and political battleground between the
free-marketeers and those who saw logic in monopoly and vertical
integration. These battles were surface reflection of a deeper process: the
rise from humble beginnings to social hegemony, and then the eventual
decline of  the petroleum business and with it, the rise and decline of the
whole petroleum economy on which it was based. The re-emergence of
deregulation as a policy theme in the 1980s, was symptomatic of the growing
signs decay and that Big Oil had passed its peak.

In "The Prize: the epic quest for oil, money and power"(Simon & Schuster
1993), Daniel Yergin describes how NYMEX (the NY Mercantile Exchange),
transformed itself from a  sleepy market in egg and potato futures into the
frenzied centre of the oil futures market in 1983, just at the time when
OPEC was launching major price hikes. The contest was between traders
selling futures and OPEC's political will: 'the crude oil futures contract
would resolutely undermine OPEC's price-setting powers... the rights to a
single barrel of oil could now be bought and sold many times over, with the
profits, sometimes immense, going to the traders and speculators....
elbowing themselves into the seething crowd on the floor of the Nymex...
traders were also pushing and elbowing their way into the oil industry,
which hardly took kindly to them.  The initial reaction to the futures
market on the part of established oil companies was one of scepticism and
outright hostility. What did these shouting, wildly gesticulating young
people, for whom the long term was perhaps two hours, have to do with an
industry in which investment decisions were made today that would not begin
to pay off until a decade hence? But ...[w]ithin a few years , most of the
major oil companies and some of the exporting countries, as well as many
other players, including large financial houses, were participating in
crude futures on the Nymex ... none of them could afford to stay out ...
the volume of transaction built up astronomically [and] Maine potatoes
became a distant, quaint and embarrassing memory.' [The Prize  p725 ]

The history of the oil industry, despite its twists and turns, has followed
an internal logic from its early buccaneering times to Rockefeller's
Standard Oil trustisation, to the phase of settled midlife maturity, with
integrated operations from expro [exploration and production] to marketing,
with states taking a strategic interest and nationalising oil companies: to
eventual privatisation, commoditisation and now even the ending of
'reserves' in favour of 'just-in-time' production. Why? What is underlying?
We have had laisser-fair capitalism, monopoly capitalism (finance
capitalism/imperialism mirrored by Soviet state monopolies) and now we are
in a final stage of deregulation, unbundling, chaos etc. Something
fundamental is at work. George Keller, chairman of Chevron said: "The
concept I was taught was that you moved your own crude through your own
refining and downstream system. It was so obvious that it was a
truism".  [Yerginp723]. Yergin added: 'The move to the commodity style of
trading would be resisted in many companies by traditionalists who saw this
direction as an uncouth, immoral, and inappropriate way to conduct the oil
business - almost against the laws of nature... but in due course they were
persuaded.'

The rapid ascent of Opec was following the 1967 6-Day Arab-Israeli war
broke established relations between producers and oil majors. Yergin also
says that the swiftness of the move from coal to oil in the late 60s early
70s had this result, i.e. tightened the market creating bottlenecks,
shortages and then price shocks. The symptoms of eventual decline were
present even as oil reached its peak.

Anthony  Sampson in The Seven Sisters (p54-56) discusses the ideas of oil
economist Morris Adelman, a 'fierce critic of the oil companies' who
believes in competition and that 'over the long term, the oil industry
behaves like any other; the greater the output of an oilfield, the higher
the cost of additional output so that the "crude oil industry, contrary to
common belief, is inherently self-adjusting". .. the notion of a "natural
monopoly", Adelman suggests, was "a scholarly gloss on revealed truth. When
half a dozen companies made up the international industry, they knew they
should be allowed, statesmanlike, to divide markets and set prices." ' But
Adelman was wrong: monopolies happened because there was no other way to
capitalise this extraordinarily capital-intensive industry. But when the
industry became mature, and when the first signs of shortage, resulting
from the fact that oil is actually scarce in nature, began to appear, the
monopolies came under pressure. Rent-seeking states who controlled the
reserves tried to maximise their advantages by breaking the stranglehold of
the oil corps, and then the great capitalist states which were the
end-consumers tried to fragment the whole industry in order to remove
bottlenecks to supply.

The deregulators attacked oil-monopolies and rent-seekers with ideological
gusto, but Sampson shows how shallow their thinking really was. He
contrasted the deregulation argument with the arguments put forward by the
defenders of the conspiratorial, cartelising approach of John D. Rockefeller.

Rockefeller, the first of the great oil robber-magnates whose 'big hand'
had mysteriously come from nowhere to sweep away the anarchy of producers
and wildcatters in the first Pennsylvania oil boom in the 1860s.
Rockefeller thought he was 'serving as God's instrument and imposing order
upon chaos. The new race of master-industrialists, of whom Rockefeller was
the first, remained confident that they were in the process of building
modern America, forging the links and levers across the continent long
before the state and federal governments had comprehended its scope. They
regarded the critics and trust-busters as nostalgic and economically
ignorant -- rather as sixty years later modern multinational tycoons would
complain about the objections of nation-states. "The struggle against
Rockefeller's movement for industrial consolidation", writes [Rockefeller
biographer Allan] Nevins, "was not a struggle against criminality; it was
largely a struggle against destiny." And Rockefeller's grandson Nelson
echoes Nevins' view, that "the size of his fortune was an historical
accident".' (Sampson p55

Petroleum, more than any other industry, brings out the struggle between
monopoly and free markets which tears capitalism apart precisely because it
is both unique, indispensable, and also finite as a resource because it is
geologically certain to peak and decline. The effects of such limiting
factors were discussed as early as 1842 by Justus von Liebig, an obscure
professor of agronomy in the German provincial town of Giessen, who
published a book in English which would revolutionise agriculture. Karl
Marx wrote that  Baron von Liebig (1803-73) was 'more important than all
the economists put together'. Only one other natural scientist had as great
an influence on Marx, and that was the biologist Charles Darwin. Liebig's
discoveries put soil science on its modern footing. He analysed plant
photosynthesis and found how plants fix nitrogen and carbon dioxide from
the air. The laboratory he set up pioneered work on artificial fertilisers.
By putting it on a scientific basis, he helped make possible the capitalist
agriculture which complemented capitalist industry.

But Liebig himself was no fan of capitalism. He believed it led to a
damaging divorce between man and nature, and it was from Liebig's work that
Marx drew the conclusion that in the long run capitalist agriculture will
lead to falling yields, desertification and loss of biodiversity.

Even more than his work as a soil scientist, Liebig's lasting achievement
was to postulate that any complex system is always limited by a single
boundary condition. Liebig's Law is fundamental to most modern ideas about
carrying capacity and the limits to growth. It states that the productivity
and ultimately the survival of any complex system dependent on numerous
essential inputs or sinks is limited by that single variable in least
supply. Thus, the lack of any essential soil nutrient limits overall soil
fertility. The shortage of iron constrained development of the English
economy in the 18th century.

Removing such bottlenecks attracts resources on a scale ultimately
dependent only on the limits of the whole economy and the available
capital. But accumulation can never eliminate bottlenecks entirely.
Instead, expanding economies which constantly transform their technical
basis, will always press against new limits to growth, struggle to overcome
them and sometimes succeed, sometimes not.

Liebig's Law has proven fundamental to understanding the cyclical dynamics
of capitalist accumulation, but what the Law points to is not the existence
of external limits to growth, as most environmentalists assume, but to the
limits which occur immanently, as a system's dynamics evolve.

This is true of any natural ecosystem, from soil itself to the large scale
interactions between species coexisting and competing within biomes.
Liebig's Law points to the existence of interdependences within holistic
systems. It is not a simply question of one nutrient or mineral in short
supply determining the growth in numbers of all populations within a
system, but rather of the way the relative availability of components
conditions the complex interaction of the organisms making up an ecosystem
and without any one of which the integrity of the ecosystem as a whole may
be compromised. One mineral or nutrient is in short supply relative to the
reproduction and evolution of the whole system.

No-one has ever found a substitute for oil. As oil production begins to
decline sharply, the world's population will peak. By 2020 there will be
three billion teenagers.  Social crises are unavoidable. This is so despite
present glutted oil markets. Deregulation will not help, and the collapse
of Enron illustrates why. Deregulation cannot find oil which is not there,
and brokers anyway do not add value, they are a value-subtracting,
unnecessary layer in markets which are slumping because of depressed demand.

Enron were simply brokers at the margin and in a falling market they were
certain to be the first to be squeezed out.  Rockefeller was right: in
order to properly capitalise the energy industry, there must be stable
markets and predictable internal rates of return which allow capital to
amortise over at least a 20-year period. Spot-markets obviously do not do
this. To reinvigorate the world's energy industry requires a massive shift
of resources away from consumption and into investment in energy supply. As
Houston energy bankers Matthew Simmons point out, trillions of dollars are
needed in the next decade, and that's on the most optimistic assumptions
that the reserves exist anyway. If they do not, then no amount of upstream
investment will get energy to markets in a timely or cost-effective manner.

Without this investment, economic growth cannot resume in any case, so
capitalism faces a Hobbesian choice. Deregulation in fact produced a
self-reinforcing positive feedback cycle: low prices produced lack of
profits for energy companies, resulting in lack of upstream investment and
accelerated depletion, further resulting in oil and gas price spikes
followed by a sharp recessionary downturn which again has ndercut prices
and thus further reduces investment, increases future bottlenecks, thus
again forestalling an upturn.

In 1986, when Enron was just starting out, the energy market was still
gripped by structural rigidities. The huge wave of deregulation and
privatisation had barely begun. This was to take away most national
controls, brought many new countries into the oil market, and changed the
balance of market power in favour of the oil majors and away from national
states. In Non-Opec states, principally the North Sea and North America,
deregulation of the oil and particularly natural gas markets and reduced
tax burdens liberalised the market and produced a wave on investment and
innovation.
The optimum oil price for the US economy is generally thought to be about
$20 a barrel (this was the target price President Bush and Iraqi leader
Saddam Husein agreed in the abortive negotiations before the 1991 Gulf War).
According to Peter Schweizer  ["VICTORY" 1196]: the Saudis cooperate with
the US in exchange for intel on dissidents, satellite images, AWACS,
Stinger missiles, advanced fighters, direct military protection, and were
even 'leaked' information when Treasury Department planned to devalue the
dollar so they could shift investments into nondollar assets.
During the Cold War, the Saudis engaged in covert operations with the CIA
to lower global oil prices and thereby deprive the USSR of the much-needed
hard currency it needed to operate. Each $1 drop in oil price cost the USSR
about one billion dollars in revenue.

A $5 drop in the price of a barrel of oil would increase the U.S. GDP by
about 1.4 percent. Poindexter: 'It was in our interest to drive the price
of oil as low as we could'.
Defense Secretary Weinberger: 'One of the reasons we were selling all those
arms to the Saudis was for lower oil prices.' The Saudis were also
providing financial aid to the mujahedin and the Nicaraguan contras. In the
first few weeks of the Saudi push, daily production jumped from less than 2
million barrels to almost 6 million. By late fall of 1985, crude production
would climb to almost 9 million barrels a day. Shortly after Saudi oil
production rose, the international price of oil sank like a stone in a
pond. In November 1985, crude oil sold at $30 a barrel; barely five months
later it stood at $12.8

Schweizer continues: 'In the spring of 1986, the downward plunge in
international oil prices was causing serious worries around the world but
also among some quarters in the Reagan administration. Vice President
George Bush was preparing for a highly visible ten-day tour of the Persian
Gulf area. A product of the Texas oil country, Bush saw danger, not hope,
in the dramatic and recent decline in oil prices.'9
On the face of it, Bush was acting on his own against the Reagan
administration's avowed policy: while Reagan, Casey and Weinberger were
talking oil prices lower, Bush -- himself an oilman -- was meeting with
Yamani and Fahd to talk prices up.10 But the apparent policy differences
were probably driven not by Bush's private conflict of interest but by a
deeper reality, one that has always been present. Bush may have been an
oilman but he was also a former CIA Director and a future president.

The same incoherence about US energy policy was demonstrated earlier, in
the mid-70s when President Carter's administration floundered between
diametrically opposed policy options, veering from outright attacks on OPEC
to attempts to incorporate OPEC within Western interests and policies. The
same policy incoherence could be seen in the 1950s, when Texas prorationing
was an issue. The Texas railroad commission  had set production levels for
decades in the al-important Texas oil province; the effect was to determine
world price levels; the justification was the same as Rockefeller used in
the 1870s oilrush, namely the need to create 'orderly markets' and to apply
conservation measures, i.e., to prevent the profligate waste of the oil
resource by reckless extraction methods. These contradictions are inherent
in a business which from the earliest days veered between the anarchy of
wildcatting and uncontrolled free markets, and the secretive oligopolies
invented by Rockefeller's Standard Oil and entrenched in the global
cartelisation of oil by the so-called Seven Sisters.

Unrestrained markets always produce alternate gluts and famines and given
the importance of oil, destabilise capitalist industry as a whole. The wave
of privatisation and deregulation of the past decade has reproduced some of
these instabilities, and just as the late 1990s have seen a glut,
shortages, wild price hikes and oil-shocks are also inevitable in the future.

The material logic of oil: the uncertainty of future supplies, the
opportunistic nature of the expro process, the need for stable markets to
justify large-scale investment in process industries, refineries, tanker
fleets, pipelines etc, dictated the shape of the oil industry. The
provenance of oil, the remoteness of its locations, the unstable regimes
who often control it, the strategic nature of the product and the
articulation of oil with imperialism, add still another layer of
conflicting and contradictory logics which are bound to result in policy
incoherence, especially in turbulent times.

Low oil prices are not in the interests of the oil corps, obviously, and
they destabilise client regimes in oil-producing countries. On the other
hand, during the Cold War, low prices also destabilised the USSR just at
the time when Reagan's huge defence spending increases placed insupportable
burdens on the Soviet economy, eventually bankrupting it. And how were
these increases to the US defence budget financed? Through recycled
oil-dollars. Low oil prices might be good for capitalist economy generally,
and US manufacturers are bound to struggle for free energy markets. But
from the point of view of US imperialism as a whole, its competitive
advantage vis a vis its imperial rivals, as well as its Cold War enemies,
was greatly enhanced by higher oil prices, since oil was paid for in
dollars and the effect of high oil prices was to drain value from US
competitors, forced to pay more hard-earned dollars for their energy. The
dollars ended up back in the US, not before being recycled through vast
loans principally to Latin America. Reagan's voodoo economics financed Star
Wars while cutting taxes; the sums were not supposed to add up, but they
did, because high interest rates and an overvalued dollar squeezed vast new
sums in interest (i.e., imperial tribute) from the neocolonies, who
borrowed at a time when oil prices, interest rates and the dollar value
were all much lower.

By means of the cynical trickery of seignorage, the US financed its arms
build-up by impoverishing Latin America (by 1980, average Latin American
living standards where back at levels last seen in the 1960s, and have
still not fully recovered). Defeat in Vietnam, the oil-shocks of the 1970s
and the collapse of Bretton Woods, dollar devaluations and record
inflation, had seemed to spell the end of US hegemony. The underlying
reasons for the economic and social difficulties of the 1970s, were, as we
have seen, the result of a fundamental crisis within the late imperial mode
of production. But instead of US hegemony collapsing, as many expected, the
restructuring of the global economy and US imperial relations enabled the
US to offload the costs of crisis onto competitors and neocolonies. By the
early 1990s the US had re-emerged triumphant. The unexpected revival of US
fortunes was deeply depressing to the Soviet leadership, who had expected a
different outcome from the upheavals of the 1970s and the apparently
irresistible descent of the capitalist world system into ever-deeper
crisis. This apparently unlimited capacity for phoenix-like renewal finally
convinced the Kremlin that there were no circumstances when they might hope
to win the Cold War and faced with disastrous economic crises internally,
Gorbachev and his clique took the decision to abandon the struggle and to
seek terms from the enemy. I had many talks with Soviet ideologists such as
Aleksandr Yakovlev and Alexei Gromyko in the late 1980s and the
bewilderment they felt at capitalism's resilience was often palpable.

After the Cold War was over, oil prices collapsed, destabilising OPEC,
whose members were cheating on quotas. Saddam's discussions with the US
agreed, as we have seen, on the optimum world price, but overproduction
meant there was no obvious way to cure the apparent glut of oil. When
Saddam attacked Kuwait his primary purpose was to take Kuwaiti production
off the market, and to give Iraq a pivotal role in OPEC. Saddam's defeat
had the effect of taking Iraqi oil off the market instead, and the price
rose. But it was then in US interests to preserve Saddam in power, thus
keeping Iraq in the background as potential swing-producer. Not Saddam, but
the lives and health of a generation of Iraqi's has been sacrificed to the
goal of stabilising oil prices (and also offering the Arab nation an object
lesson in the price of resistance).

[incidentally, even though it's no surprise, the cynicism of US foreign
policy is breathtaking. Clinton's Secretary of State Madeline Albright's
gaffe about Iraqi children is well-know. She appeared on television to
explain US policy over Iraqi sanctions and the effect these were having on
the civilian population, and the following exchange took place:
Interviewer: "We have heard that a half million children have died. I mean,
that's more children than died in Hiroshima. And -- and you know, is the
price worth it?"
Albright: "I think this is a very hard choice, but the price -- we think
the price is worth it." (From "60 Minutes", May 12, 1996).

Albright, a Czech refugee by origin, sometimes excuses her gaffes by
explaining that 'English is not my native tongue', an ominous declaration
given her position as Secretary of State. Visiting Guatemala in 1997, she
told a group of impoverished children: "Why would [I] and the United States
care about what is happening here? The reason is we are all one family and
when one part of our family is not happy or suffers, we all suffer."
[Washington Post, 5-5-97, p.20].

This is worthy of Joseph Goebbels, considering that for more than 40 years
the US has inflicted poverty, torture, death squads, massacres and
disappeared people on Guatemala. A week later the Washington Post reported
a conversation between Albright and a student, "who asked whether the
United States was not spending too much of its resources on being the
world's policeman and too little on more pressing domestic concerns[.]
Albright asked him in return to estimate what share of the federal budget
goes to foreign policy. When he guessed 15 or 20 percent, Albright pounced.
'It's one percent, one percent of the entire budget,' she said, meaning the
State Department budget but omitting expenditures incurred by the Defense
Department, the CIA, the National Security Agency, and other agencies which
consume more than 50 percent of US government spending.

[ end Part I ]


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