Oil

Double, oil and trouble

The price of oil is beyond $130 a barrel. Where will it stop?

THE price of oil may soon hit $200 a barrel—or so, at any rate, believes Shokri Ghanem, Libya’s oil minister. A few years ago such a prediction would have seemed absurd. But the price has doubled in the past year and has risen by 40% this year alone. It touched yet another record, of over $135 a barrel (before dipping slightly) on Thursday 22nd May. So more spectacular increases seem all too plausible.

The immediate trigger for the latest jump seems to have been an unexpected fall in American oil inventories. But stocks, although falling, are not particularly low: in America, they are only slightly below the average of the past five years. Supplies of petrol and other refined fuels are actually a little above average. And since demand for oil and petrol are falling in America, lower stocks are not as much of a worry as they might normally be.

Mr Ghanem’s explanation for this curious state of affairs is to blame speculators, who are investing ever more enthusiastically in oil futures. Many others share his view. Joe Lieberman, an American senator, points out that the value of investment funds that aim to track the price of oil and other raw materials has risen from $13 billion to $260 billion over the past five years. He blames these “index speculators”, for a big part of the commodity-price increases. He and his colleagues in the Senate are so worried that they are contemplating measures to curb the traders’ exuberance.

Yet few bankers agree that speculation has much to do with price rises. For one thing, indexed funds do not actually buy any physical oil, since it is bulky and expensive to store. Instead they buy contracts for future delivery, a few months hence. When the delivery date approaches, they sell their contract to someone who actually needs the oil right away, and then invest the proceeds in more futures. So far from holding oil back from the market, they tend to be big sellers of oil for immediate delivery.

That is important because it means that there is no hoarding, typically a prerequisite for a speculative bubble. Indeed, as discussed, America’s stocks and those of most other countries are at normal levels. If the indexed funds were indeed pushing the price of oil beyond the level justified by supply and demand, then they would be having trouble selling their futures contracts at such high prices before they matured. But there is no sign of that. In fact, until recently, oil for immediate delivery was more expensive than futures contracts.

Economic theory suggests that the future price is simply traders’ best guess of the shape of things to come. And traders seem to be very worried about the future. They recently pushed up the price of oil to be delivered at the end of 2016 to over $145 a barrel.

They seem to be motivated by the sobering realities of supply and demand, rather than reckless speculation. The output of several big oil exporters, such as Russia, Mexico and Venezuela, is declining. Yet none of those countries allows foreign investors unfettered access to develop new fields or increase production from existing ones. Many of the most promising areas for exploration, including Saudi Arabia, Iraq and Iran, are in effect off-limits to Western oil firms. Worse, the cost of developing new fields is rising almost as fast as the oil price. Cambridge Energy Research Associates, a consulting firm, believes it has more than doubled since 2000.

All this means that global oil production is growing only slowly. Global demand, meanwhile, continues to rise, thanks to an ever-increasing thirst for oil in fast-growing developing countries such as China and India. Their increased consumption is more than compensating for falling demand for oil in rich countries. In other words, the investors that Messrs Lieberman and Ghanem accuse of unfounded speculation may instead have concluded that the world will be short of oil for some time to come. Instead of hectoring speculators, perhaps Mr Lieberman should be hounding Mr Ghanem and the leaders of other oil-rich countries to allow foreign oil firms more access.

Fort Trumbull Circa 2008: Waist Deep in the Big Muddy

Crank the Wayback Machine to Summer, 2006. When the U.S. Supreme Court allowed New London, Connecticut, to use eminent domain to take the property of people living and doing business in the waterfront neighborhood of Fort Trumbull. The Supreme’s decision on Kelo v. New London was the cherry on an ugly sundae. New London and the state supported quasi-public New London Development Corporation (NLDC) had been trying to take Fort Trumbull for years. The “public use” justification? Fort Trumbull, with its hodge podge of single and multifamily homes, and its mix of moderate and low income residents, could be replaced by a deluxe and delightful development project that would generate more revenues, easing the burden on New London property owners and providing more cash for local government and public education. (That nearby Pfizer Pharmaceutical also wanted Fort Trumbull to become a more upscale accessory wasn’t included on the official bennie list.)

A small group of Fort Trumbull owners (including Susette Kelo, under whose name the Supreme Court case was filed) resisted being sacrificed for the greater good. Even when paid some folks have a thing about being forced by government to git for the rich. Claire Gaudiani, then president of Connecticut College (a private college in New London that advertises itself as “highly selective”) and a former NLDC exec, decried the resistors’ selfishness — essentially claiming they were costing local minority children a better education. As for the elderly people and families in Fort Trumbull who didn’t want to leave long time homes, Gaudiani famously declared that “anything working in our great nation” had required “skin on the sidewalk.” New London’s manifest destiny was to become “a hip little city.”

Androids may dream of electric sheep, but urban planners fantasize over faux hip.

This is all water round the Fort Trumbull peninsula. After the last few resistors departed in 2006, Corcoran Jennison, the preferred developer for the Fort Trumbull project, got cracking on a tony utopia. A thousand condos bloomed. Crowds of affluent young professionals now sip lattes and tap laptops in cafes overlooking the Long Island Sound. Revenues are rolling in. Property taxes have been slashed and children are learning to read and write as well as kids did a half century ago.

The real squeal –

Fort Trumbull is a residential wasteland. Ain’t nothing going on but the mud. According to Corcoran Jennison, the makeover is mired in the slack lending market. Speaking of slack, Corcoran Jennison has been dragging its feet on the Fort Trumbull residential redo for years, citing a string of reasons. The NLDC has had to get tough with Corcoran time and time again. Stern warnings have been issued. Fines have been levied. Deadlines have been drawn and redrawn in the sand. And Corcoran Jennison’s residential plan, as presented to the citizenry of New London in 2000, has undergone some important changes. By 2006, the development model had morphed from condos into apartments. New London’s Zoning and Planning Commission had no authority over the switch from home ownership to multifamily rentals. The NLDC and its parent, the State of Connecticut Department of Economic and Community Development (DECD), called the shots. As it was in the beginning, so it continues.

The quasi-public NLDC controls the deeds to the land taken from Fort Trumbull’s property owners. The DECD is the financial power behind the NLDC and the taking and remaking of Fort Trumbull. Though a state agency supported by state taxpayers, the DECD channels mega money from the U.S. Department of Housing and Urban Development. Aka HUD. Overseer of the Federal Housing Authority (FHA).

In early March 2008, Corcoran Jennison made another change in its Fort Trumbull residential plan by seeking an alternative to conventional financing; asking the FHA to pick up the slack of the slack lending market and back a $11.5 million loan. The loan, provided by an approved lender, would be insured under the Section 220 program, which applies to multifamily housing projects in urban areas in need of revitalization. Despite the fact that such areas have lots of poor people and Corcoran Jennison is a big player on the regional government-assisted affordable housing scene, New Londoners need not fear that a low income enclave will replace moderate and low income Fort Trumbull. Luxury digs are still the name of the game. Income limits on tenants will NOT be restricted. So says Kristine Foye,* spokeswoman for the New England Regional Office of HUD. The president of Corcoran Jennison, Marty Jones, worked for HUD during the Ford administration. First in Washington and then as a multifamily housing rep in Boston. Please — no jokes about how many HUD bureaucrats does it take to screw in a revitalization…

Should Corcoran Jennison default on the FHA insured loan, HUD would pay back the lender and take possession of whatever was built, or partly built, on the land controlled by the quasi-public NLDC, which is controlled by the HUD-bucked DECD. Doubtless this doomsday scenario will never take place, since all the involved acronyms know real estate like Corcoran Jennison knows slack.

How Corcoran Jennison fared with their FHA loan request hasn’t been announced. Dire words about the developer’s lack of financing are coming from the NLDC. Corcoran Jennison faces yet another deadline at the end of May. According to NLDC president Michael Joplin** if Corcoran doesn’t come through with financing the NLDC could be “very close” to giving them the heave ho. Don’t count on it tho. The tangled DECD, NLDC, City of New London, and Corcoran Jennison relationship smacks of the US engagement in Iraq; getting in was a big mistake but getting out means loosing face. And while the mission may have changed into something completely different over the years, taxpayer dollars keep boots on the wasted ground.

Carola Von Hoffmannstahl-Solomonoff

The Jeffersonians Were Right After All

To the casual eye, Kevin Gutzman has written a scholarly book about Virginian political thought and practice from revolutionary times through 1840. But its scholarly merits do not exhaust the merits of Virginia’s American Revolution: From Dominion to Republic, 1776-1840. Readers are also treated to the incidental pleasure of watching the Straussian rendering of American history dismantled piece by piece.

As that version would have it, the United States was formed by a single American people in the aggregate and is not and never was a compact among sovereign states. The states are necessarily subordinate in their relationship with the federal government, never having enjoyed independent existences of their own. They possess no corporate mechanism by which to resist federal usurpation, and they are bound to accept the federal government’s monopoly on constitutional interpretation.

Gutzman begins his story in the 1760s, as the controversy with the mother country is growing more and more intense. Richard Bland, who served in the House of Burgesses, began his 1766 pamphlet An Inquiry into the Rights of the British Colonies by revisiting his colony’s early history. In coming to these shores, he said, Virginia’s settlers had availed themselves of the natural right to emigrate. They had come to a new land at their own expense, and were no longer subject to English law, having fallen under the "Law of Nature" instead.

That meant Virginians had been in a position to enter, of their own free will, into a mutually binding relationship with the Crown, which they subsequently did. They expected future kings to abide by James I’s promise that Virginia’s form of government would never be altered. Virginia could be taxed only by its representatives, and possessed "such Freedoms and Privileges as belong to the Free People of England." The Crown had repeated this guarantee numerous times, said Bland, in its commissions to Virginia’s royal governors.

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Thomas Jefferson lent his own support to this narrative in his Summary View of the Rights of British America, but as Gutzman observes, there is "virtually nothing in Jefferson’s Summary View that Mason, Bland, Carter, or the Burgesses had not said before."

The preamble to Virginia’s republican constitution of 1776 spelled out Virginia’s understanding of its legal status before the world, as it had been explicated by Bland and Jefferson. Virginia had the exclusive authority to govern for Virginia. The king, meanwhile, had unjustly refused to accept a position as head of a great commonwealth of dominions tied together by a common loyalty to his dynasty.

The grievances listed in the preamble revolve almost entirely around the issue of self-government – economics barely appears; religion, not at all. That self-government was later reaffirmed in the Articles of Confederation, Article II of which described the states as having maintained their "sovereignty, freedom, and independence." Virginians were persuaded to adopt the federal Constitution in 1788 on the grounds that that sovereignty would hardly be affected by the proposed confederation.

With all the emphasis that is normally placed on the Constitution’s Framers, we are apt to neglect the importance of the ratifiers, for it is they whose interpretation of the Constitution – and in particular, the precise nature of what they believed they were getting into – is of ultimate importance. And here is the heart of Gutzman’s argument.

At Virginia’s ratifying convention, the concern was raised that phrases like "general welfare" could be cited by ambitious politicians who wanted to exercise powers beyond those outlined in Article I, Section 8 of the Constitution. Federalist Edmund Randolph, who had been Virginia’s attorney general for the past decade, assured everyone that his fears were unfounded, for all rights were declared in the Constitution to be "completely vested in the people, unless expressly given away. Can there be a more pointed or positive reservation?"

In other words, this was a strictly limited and federal government.

George Nicholas, who would become Kentucky’s first attorney general, explained:

If thirteen individuals are about to make a contract, and one agrees to it, but at the same time declares that he understands its meaning, signification and intent, to be, what the words of the contract plainly and obviously denote; that it is not to be construed so as to impose any supplementary condition upon him, and that he is to be exonerated from it, whensoever any such imposition shall be attempted – I ask whether in this case, these conditions on which he assented to it, would not be binding on the other twelve? In like manner these conditions will be binding on Congress. They can exercise no power that is not expressly granted them.

Randolph and Nicholas belonged to the five-man committee that was to draw up Virginia’s ratification instrument. They were in a unique position to articulate the understanding that would govern Virginia’s ratification.

Virginians kept this limited view of the Constitution and the federal Union very much in mind into the 1790s. Disturbed by Alexander Hamilton’s financial program, particularly the federal assumption of state debts, Patrick Henry drafted a resolution for the Virginia legislature in which he borrowed from the language of the assurances of Randolph and Nicholas that the federal government would have only those powers expressly delegated to it. The House passed it that day, the Senate six weeks later.

Shortly after Henry drafted his resolution, a General Assembly committee issued a report about the Washington Administration’s policies, which it found alarming. It declared (borrowing from Randolph and Nicholas) that the states were "contracting parties" whose rights were "sacred." It insisted, echoing Randolph, that "every power not granted [to the federal government] was retained" by Virginia.

What this means, Gutzman explains, is that

Nicholas and Randolph’s explanation of the Constitution, and thus of the significance of Virginia’s ratification, had come to be seen as completely authoritative by the overwhelming majority of Virginia’s political leadership. As in the Imperial Crisis and the Confederation period, Virginians conceived of their interstate union as precisely a federal union, a union among parties that were somehow on an equal footing (as Nicholas had put it, thirteen contracting parties). Virginia, not America, remained the primary political unit, the United States Government a convenience.

Virginians continued to draw out the implications of these views over the course of the 1790s. According to John Taylor of Caroline, the great Virginian political pamphleteer, "The confederation is not a compact of individuals; it is a compact of states." It was therefore the responsibility of the state legislatures to monitor the federal government and, if necessary, to prevent the enforcement of laws that violated the Constitution.

Constitutions are violated, Taylor said, and it would be absurd to expect the federal government to enforce the Constitution against itself. If the very federal judges the Constitution was partly intended to restrain were the ones exclusively charged with enforcing it, then "America possesses only the effigy of a Constitution." The states, the very constituents of the Union, had to do the enforcing.

So by the time of the Virginia and Kentucky Resolutions of 1798, whose doctrines of interposition and nullification held that the states could refuse to enforce any federal law they considered unconstitutional, there was nothing new or unusual about such a view. It was merely the logical implication of assurances by Federalists at the ratifying convention, assurances that had dominated Virginia’s constitutional thought in the ensuing decade.

Those resolutions, in other words, "floated like leaves on the stream of the Virginia constitutional tradition of Jefferson’s A Summary View of the Rights of British America, Richard Bland’s An Inquiry into the Rights of the British Colonies, John Taylor’s pamphlets of the 1790s, and the Richmond Convention’s instrument of ratification (as explicated by George Nicholas and Edmund Randolph)." In form and content they belonged to the tradition of Patrick Henry’s Stamp Act Resolves and his General Assembly Resolution of 1790.

Historians had sometimes claimed that Jefferson, the anonymous author of the Kentucky Resolutions, hastily devised nullification as an ad hoc response to the Alien and Sedition Acts’ assaults on civil liberties. But as Gutzman shows, nullification, Jefferson’s proposed remedy, was in fact the culmination of a decade’s worth of Virginian political thought traceable to the ratifying convention. There was nothing ad hoc about it.

The principle of local self-government and against interference from distant central authorities was central to Virginian political thought both before and after the War for Independence. This is a key point of continuity between late colonial Virginia and the Virginia and Kentucky Resolutions of 1798. "As during the Imperial Crisis, so after the enactment of the federal Constitution, Virginians put their state first and the distant authority they had erected for their state’s convenience – formerly in Great Britain, now in the federal capital – somewhere down the list."

Now if someone were to try to use this history as an argument in support of states’ rights today, or more generally on behalf of the compact theory of the Union, one can imagine a predictable response: Virginia was only one state, and its ratification debates do not authoritatively bind others in their own interpretations of the Constitution and the nature of the Union.

Gutzman has anticipated this reply, and has elsewhere answered it – persuasively, to my mind. Since Article II of the Articles of Confederation declared the states (including Virginia) to be sovereign, and since the delegates to Virginia’s ratifying convention explained to the people of Virginia that their state was one of thirteen parties to a compact from which they would be exonerated if it exceeded its delegated powers, then how could other states lack such a status themselves? If we accept the co-equality of the states as a constitutional principle – that is, some states cannot have more or different rights than others – then no other conclusion seems to follow, even if other states may have understood the nature of the Union differently at the time they entered.

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In light of all this, one can imagine Gutzman’s opinion of the centralizing John Marshall, but Marshall figures little in this book, which focuses primarily on Virginia’s experience rather than on the Union as a whole. For Gutzman on Marshall, see his excellent book The Politically Incorrect Guide to the Constitution.

In short, Virginia’s American Revolution is not only an invaluable contribution to the scholarly literature, but it is also a treasure trove for those who would recapture the original American republic.

May 9, 2008

Thomas E. Woods, Jr. [view his website; send him mail] is senior fellow in American history at the Ludwig von Mises Institute and the author, most recently, of Sacred Then and Sacred Now: The Return of the Old Latin Mass and 33 Questions About American History You’re Not Supposed to Ask. His other books include How the Catholic Church Built Western Civilization (get a free chapter here), The Church and the Market: A Catholic Defense of the Free Economy (first-place winner in the 2006 Templeton Enterprise Awards), and the New York Times bestseller The Politically Incorrect Guide to American History.

InBev weighs options for beer merger

By Julie MacIntosh in New York and Neil Hume in London

The large Belgian brewer InBev could attempt to force Anheuser-Busch to the bargaining table or strike a deal with SABMiller as it tries to consolidate share of the global beer market, according to people familiar with the company’s plans.

InBev has long studied the possibility of a merger with Anheuser, the US brewer of Budweiser beer, but has consistently run into opposition from Anheuser’s board of directors.

As it weighs whether to take a more aggressive stance, InBev is working on a $46bn takeover bid for Anheuser and arranging potential financing for a deal, according to people close to the process. Those people cautioned that InBev’s plans were still not crystallised, however, and could change.

Shares of Anheuser finished the session more than 7 per cent higher at $56.61 in New York on Friday, their biggest gain in three years. InBev fell €1.56, or 3.1 per cent, to €48.76 in Brussels.

Warren Buffett’s Berkshire Hathaway is the second-largest shareholder in Anheuser.

If the Belgian brewer does proceed with an approach, it could take its offer straight to August Busch IV, the Anheuser chief executive who resisted an informal bid from InBev last October, the people said.

If its foray does not convince Anheuser to sit down for friendly talks, InBev may consider a direct appeal to Anheuser’s shareholders.

To cast its net sufficiently wide, however, InBev is also evaluating a plan B: a tie-up with SABMiller. InBev and SABMiller have been informally discussing a combination, according to a person familiar with the situation.

The progression of those talks, however, has been limited by the US Department of Justice’s review of SABMiller’s deal to merge its US operations with those of Molson Coors.

None of the companies could immediately be reached for comment.

Molson Coors said this week it expected the venture, which will be named Miller-Coors, to win regulatory approval in the next few weeks. After that point, SABMiller’s talks with InBev could progress further.

To move its potential offer for Anheuser forward, InBev has worked to arrange a financing package through JPMorgan and Santander, the Financial Times’ Alphaville website reported.

InBev, which owns the Stella Artois and Beck’s beer brands, would gain control of roughly a quarter of the world’s beer market if a deal with Anheuser were successful.