Over at Think Progress, video editor Lee Fang is working full-time at smearing one of the world’s most admired companies, Koch Industries. Today he lashes out at Charles Koch’s excellent op-ed in the Wall Street Journal. Fang’s theme is that the Koch brothers preach free enterprise, but practice crony capitalism:
Koch’s Tea Party libertarianism is actually a thin veneer for the company’s long running history of winning special deals from the government and manipulating the market to pad Koch profits.
Fang then proceeds to itemize this “long running history,” apparently without noticing that not one of the examples he offers constitutes either a “special deal” or “manipulating the market.” Let’s take them one by one.
— Fred Koch, the founder of Koch Enterprises, built refineries in the Soviet Union in the 1930s. This is completely irrelevant to Fang’s theory, but for what it is worth, there is an interesting story behind it, which is easily accessible on Koch’s web site. Fred Koch invented a catalytic cracking process, but the major oil producers shut him out of the United States market. Accordingly, he and his company looked overseas. The result, as described on the Koch Industries web site:
[Fred Koch’s] anti-communist sentiment stemmed from the trips he made to the Soviet Union from 1929 through 1932 when his engineering company designed and built oil cracking units to be erected in refineries in the U.S.S.R. Mr. Koch found the Soviet Union to be “a land of hunger, misery and terror.” Virtually all of the Soviet engineers with whom he worked were purged by Stalin, who exterminated tens of millions of people. This experience, combined with what his Communist associates told him of their methods and plans for world revolution, caused Fred Koch to become a staunch anti-communist.
Fang and his colleagues at Think Progress should take note.
— Koch “exploits a number of government programs for profit.” Here we get to the heart of the matter. Fang accuses Koch of making “special deals,” but his evidence doesn’t support the charge. Laughably, he criticizes Georgia-Pacific, a Koch subsidiary, for using government-maintained roads in the course of its logging operations, just like every other logger. What are they supposed to do, walk? This isn’t a “special deal,” it is the way in which logging is universally done, as it was by Georgia-Pacific before Koch bought that company.
Equally silly is Fang’s complaint that Koch’s cattle ranching subsidiary takes advantage of a New Deal program that allows ranchers to graze cattle on public lands–again, not a “special deal,” but a New Deal program or policy that is equally available to everyone.
In his Wall Street Journal op-ed, Charles Koch specifically addressed the fact that Koch Industries must necessarily participate in some programs which, as a matter of public policy, it would oppose:
Because every other company in a given industry is accepting market-distorting programs, Koch companies have had little option but to do so as well, simply to remain competitive and help sustain our 50,000 U.S.-based jobs. However, even when such policies benefit us, we only support the policies that enhance true economic freedom.
For example, because of government mandates, our refining business is essentially obligated to be in the ethanol business. We believe that ethanol–and every other product in the marketplace–should be required to compete on its own merits, without mandates, subsidies or protective tariffs. Such policies only increase the prices of those products, taxes and the cost of many other goods and services.
Every one of us obeys laws with which he does not agree, and takes advantage of incentives which, if he were the decision-maker, would not exist. If you don’t believe me, ask George Soros whether his income tax return includes deductions.
— Koch “won massive government contracts using their close relationship with the Bush administration.” This one is a mystery. The excitable Mr. Fang claims that the Bush administration “handed Koch Industries a lucrative contract to supply the nation’s Strategic Petroleum Reserve with 8 million barrels of crude oil.” But if you follow Fang’s link, it takes you to a Department of Energy press release that says, “Koch’s offer was selected on the basis that its exchange ratio provided the best value to the government.” So Fang’s complaint is what, exactly?
— Koch campaigned against Obamacare, but nevertheless applied for the benefits that Obamacare makes available to companies to partially offset the costs it imposes. This is true; Koch was one of thousands of companies that did so. Koch has addressed health care on its web site, too:
However, once [health care] laws or programs are enacted, we will not place ourselves or our employees at a disadvantage by turning our back on incentives offered to our competitors.
Koch and the thousands of other companies that applied for the benefits made available by Obamacare will have to bear the costs of that statute, and it is entirely appropriate that they avail themselves of offsetting benefits regardless of whether they think the legislation, in total, was a good idea. Once again, there is not even the hint of a “special deal” or of “market manipulation,” which was supposed to be the point of Think Progress’s argument. Obamacare applies to Koch Enterprises as it does to everyone else.
— Relying on an Alaskan blogger, Fang claims that “a Koch subsidiary in Fairbanks asked Gov. Sarah Palin’s administration to use taxpayer money to bail out one of their failing refinery [sic].” This one is particularly revealing. One of the problems with a web site like Think Progress is that the kids who write for it are ignorant with respect to both business and law. They lack the experience (and likely also the intelligence) to understand the matters they try to write about. This is a case in point. The Alaskan blogger had no idea what he was talking about; Fang, apparently, even less.
What actually happened was that a Koch subsidiary, Flint Hills, entered into a contract with the State of Alaska whereby it bought crude oil from the state and refined it. The price of the crude oil depended in part on the pipeline tariff charged to ship it. If the tariff went up, the price of the crude went down, and vice versa. A tariff proceeding was commenced that, if successful, would have had the effect of significantly increasing the price that the Koch company would pay to the state per barrel of crude:
The pipeline tariff proceeding, brought by the state of Alaska and pipeline shipper Anadarko Petroleum Corp., was initiated after an agreement was reached on a royalty oil contract between the state and Flint Hills, Cook said. At the time the contract [was] accepted, neither the company nor the state considered a possible change in the tariff, Cook said. “It is a circumstance Flint Hills Resources could not have contemplated at the time the contract was signed,” Flint Hills executive vice president Anthony Sementelli said in a Feb. 24 letter to the state Department of Natural Resources. …
The tariff change could result in Flint Hills paying the state as much as $100 million in additional royalty oil costs, a state official said on background.
This was highly problematic for Flint Hills, in part because the company potentially could go for years without knowing the ultimate price of the crude oil it was buying. So Flint Hills approached the state with a proposal to lock in a fixed price, independent of the tariff proceeding.
There is more on what happened here:
The pipeline tariff used in the calculation is the current interstate tariff filed by TAPS owner companies with FERC.
That tariff is being challenged, however, and if the FERC orders the tariff lowered to a level the Regulatory Commission of Alaska has set for intrastate shipments on TAPS, Flint Hills would have to pay more for its royalty oil, Cook said.
The adjustment could potentially raise crude oil costs for the refinery by $50 million a year, but the real problem is the retroactivity of the potential charge to the start of 2005. FERC has scheduled hearings on the appeal in early 2007, and a decision is possible soon after, but there is no certainty to that, he said.
If the decision is made to order a lower tariff, the additional payments to the state would be retroactive to the beginning of 2005. The TAPS tariff is scheduled to be renegotiated in 2009, so the potential liability could cover four to five years, or $200 million to $250 million, Cook said. …
Flint Hills has been seeking a revision of its royalty oil contract with the state to remove the potential retroactivity of the charge, but has been unsuccessful so far.
Ultimately, the State of Alaska–this was the Murkowski administration, so Think Progress’s reference to Sarah Palin is gratuitous–declined to agree on a fixed price for its crude oil, and the eventual result was that Flint Hills lost a great deal of money. At no time was there any talk of a “bailout” or a “special deal.” Lee Fang and his fellow goofballs at Think Progress don’t understand any of this. They have no idea what TAPS and FERC are, or how they work. They know nothing about contracts, or the price of crude oil, or how refineries and pipelines operate. To be frank, what they write on such topics is childish, and is driven entirely by prejudice.
— Fang says a pipeline has been proposed that will run from Canada to Texas, and the land for it, if it is built, will be acquired by “eminant domain” [sic]. I have no idea whether the project is a good idea or a bad idea–I assume good, if it will allow more domestic energy production–but does Think Progress seriously believe that it is possible to build 1,000 miles of pipeline without a power of eminent domain?
— Koch Industries “has been the recipient of about $85 million in federal government contracts mostly from the Department of Defense.” That number sounds awfully low–it represents less than 1/10 of one percent of Koch’s annual revenue–but let’s assume it is correct. What is the point? Is there something wrong with selling goods or services to the federal government? Presumably the folks at Think Progress don’t think so. And what is the “special deal” that was supposed to be the entire point of Fang’s essay?
— Finally: “Koch also benefits directly from billions in taxpayer subsidies for oil companies and ethanol production.” In the world of Think Progress, a subsidy is when the government doesn’t take all of your money in taxes. Koch pays its taxes like every other company in the industries in which it competes. What is the “special deal?” The billionaires who fund Think Progress, like George Soros, agitate in favor of higher tax rates, yet I have never heard of one who paid more in taxes than he was legally obligated to.
As for ethanol, note Charles Koch’s comments above. Koch Industries, like other oil refiners, produces ethanol in part because it is required to do so by law. Brad Razook, President of Flint Hills, also addressed Koch’s production of ethanol:
Because of government mandates, we believe ethanol will be part of the transportation fuels market for years to come. We also want to remain competitive. We are always going to oppose government policies we believe are inconsistent with liberty and economic freedom.
But we are also going to abide by the law, and ethanol is required by law. And once a law is enacted, we are not going to place our company and our employees at a competitive disadvantage by not participating in programs that are available to our competitors.
So, to sum up: Think Progress has come up with not a single instance of a “special deal” or of “market manipulation,” let alone a “long history.” Think Progress is left-wing fantasy written by uneducated, inexperienced kids who, despite their lack of qualifications, are funded by billionaires with an axe to grind. It is hard to understand why anyone takes them seriously.
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