In January I penned an article including some economic and market prognostications for 2024. I had believed that it was on the lighter side and fairly easy for a layman to comprehend. The response from readers was generally positive. However, one of my friends quipped: “I read the entire article and I did not understand a thing!”
This time around I am hoping to be able to connect with all my valued readers by trying to unpack the somewhat nettlesome intersection between big business and politics. If I have lost you already, hang in there so that I can explain.
To say that the temperature of political discourse in this country is at an all-time high is perhaps an understatement. One of the preferred ways for politicians to rile up the masses is to “throw red meat” to an angry mob, pointing fingers at the alleged “enemies of the people.” And, despite the fact that the narratives are usually contrived and full of falsehoods, it seems to work quite effectively. Much of the time the outrage is directed at businesses and industries that are fundamental to our economic prosperity. So, I will play the role of public defender of these beleaguered businesses and industries and explain why the anger and outrage is, in my view, largely misguided.
Big Oil
There is no industry that makes the masses more angry than the oil and gas exploration industry. They are often blamed for everything from environmental harm to price gouging. Yet energy producers are indispensable to the global economy. Whether we like it or not, we desperately need basic transportation, home heating and air conditioning, and certainly food (many natural gas derivatives are used in fertilizers). What I am positing is that without the oil and natural gas producers, our standard of living would be markedly diminished.
Now let me be clear—I am as concerned as anyone regarding the environment and the future of our planet. But even those who vilify the oil and gas industry cannot deny the fact that the energy transition from fossil fuels to renewable sources will not happen overnight. It will require decades of time and trillions in capital investment. In the meantime, many of the most vilified companies like ExxonMobil and Chevron have actually been investing billions in reducing the environmental impact of their activities and searching for greener solutions.
The accusation of price gouging could be one of the greatest myths of the 21st century. Many believe that oil and gas companies collude to keep prices high. In fact, the most successful companies in the industry are those who use innovative technology to reduce the cost of production, which in turn provides ample supplies of low-cost energy.
While there are industries that are characterized by natural monopolies or oligopolies, the oil and gas industry is not even close to either. While ExxonMobil is a large company, it produces less than 3% of the global supply of oil. Monopoly power? I do not think so. If the price of oil spikes during adverse geopolitical events (such as the invasion of Ukraine by Russia), the oil price rises because supply and demand fundamentals are disrupted. It does not happen because a group of oil company executives decide to profiteer, as many disingenuous politicians are wont to claim.
Big Pharma
Another popular target of politicians on both sides of the aisle is the pharmaceutical industry. It is true that many drugs are expensive. But the U.S. pharmaceutical industry has had a prolific track record of bringing remarkably effective and lifesaving drugs to the markets for many decades. The average lifespan has been increasing over the last century, mainly due to the ability of modern medicine to treat, and in some cases, cure a wide variety of diseases.
But one could ask why the pharmaceutical industry should charge high prices for their products. That is a fair question. But the answer may lie in the economics of bringing new drugs to market. The costs of bringing a novel therapy to market is in the billions and the timeframe of conducting clinical trials is many years. And there are many clinical trials that fail to receive FDA approval. Without robust profits from a pharmaceutical company’s existing portfolio of approved products, the appetite for investment in future innovative treatments would be severely impaired. Thus, many medicines to treat unmet patient needs would take much longer to come to market.
A Double Standard
I am sure you have heard a number of politicians railing against the energy and pharmaceutical industries, shaming them for their “excessive” profits. But there are other industries that earn even larger profits that are feted by those same politicians as purveyors of great innovation and job creation. To be sure, many technology companies are producing new products, but at the same time generating outsized profit margins. Are the innovations and products of technology companies more indispensable than the innovation and end products of other industries? Are their profit margins more justified? Free markets have been a major contributor to American exceptionalism since the country’s founding. The principles of free markets would suggest that the government refrain from dictating which industries are virtuous and which ones need to be punished or controlled.
Now, This Is an Outrage!
I am not the type of person who loses his cool when the price of gasoline rises by 10 or 20 cents a gallon. In fact, I have noticed recently that the price of gasoline is back to historically reasonable levels. Yet, the price of a 2-liter bottle of Coca Cola is about the same as a gallon of gasoline. The price of Coca Cola (as well as many other food staples) has risen sharply since the beginning of the pandemic. And yet the politicians do not spew their rhetoric and shame the soft drink industry for price gouging! When was the last time a politician threatened the soft drink industry with increased regulations and price controls? Frankly, I can live without Coca Cola but I do need cheap sources of energy. And I may need a lifesaving drug one day. So please, esteemed politicians, stop playing politics and fomenting anger against the very industries that bring essential goods and services that help improve our quality of life!
Investment Advisory Services are offered through Mariner Independent Advisor Network (MIAN), an SEC Registered Investment Adviser. Caplan Capital and MIAN are not affiliated entities. Some information provided herein has been obtained from third party sources deemed to be reliable as of the date of original publication, and rules, laws and legislation are subject to change without notice. This article should not be considered personalized advice, and it is important that your unique circumstances be taken into consideration prior to making any financial decisions.
Jonathan D. Caplan, a former Wall Street executive, is president and founder of wealth management firm Caplan Capital Management, Inc., with offices in Highland Park and Hackensack. He holds a B.A. from Yeshiva University and an MBA in finance from New York University Stern School of Business.