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Chesapeake Energy: A Free Market Restart?

It came as welcome news to critics of political capitalism (the socioeconomic system whereby businesses routinely rent-seek for special government favor at the expense of consumers, taxpayers, and/or competitors). Last month, Chesapeake Energy, the self-proclaimed America’s Champion of Natural Gas, began a national “energy independence” advertising campaign that included this declaration:

No government subsidies are requested or needed. The private market, led by Chesapeake and others, will make this happen.

Given the political activism of Chesapeake and its CEO Aubrey McClendon in years past—activism against the coal industry, for example, and in favor of T. Boone Pickens-like subsidy programs for natural gas transportation—this declaration is notable. But beware: Mr. McClendon can speak in his old style and muddle his new message.

What Happened?

Something happened at Chesapeake to cause the role reversal. One might hope that company decision-makers read free-market tracts on the economic means versus the political means to grasp how the former strategy is more sustainable in a consumer-driven economy. Enron writ large is certainly testament to the perils of playing politics for a living. But pragmatism rather than newborn ideology is much more likely at work.

One factor in Chesapeake’s new political philosophy is the now-precarious nature of special political favor. The recent budget battle has alerted business planners that rent-seeking is a high-cost, high-risk strategy and an invitation for public criticism by an energized limited-government citizenry.

The key factor, however, is undoubtedly Chesapeake’s shift from natural gas to oil drilling in response to price incentives. “We make a lot more money finding a barrel of oil than an equivalent amount of natural gas,” McClendon said recently. “Once producers convert to drilling wells that produce $10–$17/mcfe [thousand cubic feet equivalent] units, why would they go back to drilling natural gas wells if prices increase from $4/mcf to $5/mcf to $6/mcf to $7/mcf?” And Chesapeake is going towards oil, the latest news being a new multi-billion-dollar oil and gas liquids find in eastern Ohio (Utica Shale formation).

And so goes the U.S. exploration and production industry. In the last year, hundreds of drilling rigs have switched from gas to liquids, and for the first time in 16 years, oil rigs outnumber natural-gas units. The full story is contained in an August 9th review by economist Frank Clemente: “Rig Shift from Gas to Oil has Profound Implications.”

Self-Help, Not Political Favor

A virtue of the free market is that it requires entrepreneurs to make mid-course corrections to maximize profits and, indeed, to stay in business. With natural gas prices at historic lows compared to liquid prices, a robust market response has taken place.

The drilling switch is part of the self-help opportunity for natural gas producers here in the United States, which includes the further displacing of fuel oil in the Northeast home heating oil market; reversing the flow of LNG infrastructure to export U.S. gas to higher- priced markets; and constructing gas-to-liquids plants to turn natural gas into gasoline and other liquid products.

Natural gas can also offer long-term pricing deals to lock in niche markets, such as fleet vehicles in the transportation market.

Another self-help measure under business freedom is to sell one’s enterprise to a more optimistic or creative entrepreneur, even competitor. No business or existing business form is forever. Sales, purchases, and combinations thereof (and even liquidation) are part of the marketplace’s creative destruction and is principled entrepreneurship™ in action.

NAT GAS Act: Wrong Way Legislation

All this is to “just say no” to New Alternative Transportation to Give Americans Solutions Act of 2011 (HR 1380), the brainchild of unrepentant political capitalist T. Boone Pickens.

The so-called NAT GAS Act is all about carving out new tax preferences in the Internal Revenue Code for alternative fuels involving compressed or liquefied natural gas; for alternative-fuel motor vehicles powered by the same; and for related refueling property. Sounds like an industry that needs to be created from car to pump, doesn’t it?

The biggest dollars are with the trucks (from p. 13 of the 22-page bill):

CREDIT VALUES FOR NATURAL GAS VEHICLES.

—In the case of new qualified alternative fuel motor vehicles with respect to vehicles powered by compressed or liquefied natural gas, the maximum tax credit value shall be—

‘‘(A) $7,500 if such vehicle has a gross vehicle weight rating of not more than 8,500 pounds,

‘‘(B) $16,000 if such vehicle has a gross vehicle weight rating of more than 8,500 pounds but not more than 14,000 pounds,

‘‘(C) $40,000 if such vehicle has a gross vehicle weight rating of more than 14,000 pounds but not more than 26,000 pounds, and

‘‘(D) $64,000 if such vehicle has a gross vehicle weight rating of more than 26,000 pounds.’’

This proposal would also require the U.S. Department of Energy to fund improvements in natural-gas-powered vehicles and heavy-duty on-road vehicles, as well as subsidize the manufacturers of light- and heavy-duty natural gas vehicles. The U.S. Environmental Protection Agency is also instructed to encourage and reward manufacturers who produce natural-gas-powered vehicles.

Conclusion

It is time to depoliticize the federal tax code, not add more complexity to it. The future belongs to the efficient, to the free-market entrepreneurs. Political entrepreneurs, the rent-seekers who have played a part in the decline of the country, are now in rethink.

May the new Chesapeake Energy, the rechristened self-help energy company, show the way forward.

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