From the perspective of Chicago during the Gilded Age of the robber barons, economist Thorstein Veblen wrote in The Theory of Business Enterprise that business cycles were the result of manipulation and not natural market processes. This peculiar but very influential conjecture was predicated on the belief in the “machine” as paradigmatic for the modern industrial economy. The operation of machines is highly systematic. They are run by engineers and technicians whose interests lie in the integrity of the system and its plan-like functioning. In Veblen’s view this kind of predictability in an economic system is anathema to the interests of the so-called “leisure class” (i.e. business people). Unlike the engineers, these are “money-makers” who need market turbulence for the opportunities it creates. A smoothly-functioning economy is, he thought, an unprofitable one.
Today we know better. The conspiratorial machinations of businesspeople are not required to create business cycles; economic systems have a sufficient complexity to create these themselves. Moreover, technology can hardly be seen as a stabilizing force as new developments are usually highly disruptive. Still, Veblen was right that business cycles create bargains. The current recession is definitely doing this as the control of oil and gas equities around the world could see a shift from the hands of the OECD consumers to certain financially solvent developing countries. The recent precipitous 70% drop in oil prices has created these bargains but the credit crisis has restricted access to this game to only a few players. Several international oil companies are naturally still in a position to play so I’d keep my eyes on cash-rich supermajors like ExxonMobil and Total. But national oil companies backed up by gargantuan sovereign wealth funds will be shaking things up considerably. Already Abu Dhabi- and Dubai-based investment companies are on a buying spree, even in Canada. And with its still-burgeoning economy and fragile political system, China and its Big Three state-run petroleum companies (Sinopec, PetroChina, CNOOC) are now revving up their acquisition motors. This is aptly pointed out in today’s Financial Post article (February 23, 2009) “China moves to snap up bargain-basement oil“:
This week, Beijing sealed a multibillion-dollar deal to secure 20 years of Russian oil. Meanwhile, the Chinese government is also considering diverting some of its US$1.95-trillion in foreign exchange reserves to set up a fund for overseas oil investment and exploration. Beijing also plans to offer cheap loans to domestic firms that make overseas oil investments.
Veblen may have been wrong about a cabal of businesspeople creating crises the working classes in a style reminiscent of Huxley’s Brave New World. Nonetheless, he was right in recognizing how the path for the creation of great wealth is laid in times of market downturns. China’s state-run resource behemoths weren’t welcome by many countries when things were going well. How things have changed!
