Oil, Security, and Energy Independence

Fred Smith, FedEx founder and chairman, is a dedicated advocate of free markets—except when it comes to energy, which he believes requires government intervention

by Peter Coy

The man who built FedEx (FDX) into one of America's most successful companies calls himself a "market liberal," which is more or less the opposite of a political liberal. FedEx Chairman, President, Chief Executive, and founder Frederick Smith wants government to keep its hands off business as much as possible. He even sits on the board of directors of the Cato Institute, which advocates "limited government, individual liberty, free markets, and peace." In a speech last year to Cato benefactors, he said: "It is impossible, from a managerial standpoint, for the federal government to do the things it is trying to do today."

But on one important issue—energy independence—Smith opposes the Cato line and actually advocates greater government involvement. Smith believes so strongly that more must be done to secure U.S. energy independence that he became co-chairman of the Washington-based Energy Security Leadership Council, along with General P.X. Kelley (Ret.), former Marine Corps commandant and member of the Joint Chiefs of Staff. This month, the council put out a 64-page report detailing what it thinks should be done. Among the proposals: higher, though more flexible, standards for vehicle fuel efficiency; incentives to manufacture hybrid gasoline-electric vehicles in the U.S.; funding for research on alternative fuels; and government permission for energy companies to drill for oil in Alaska and the Outer Continental Shelf.

To Smith, the danger of energy independence was illustrated on Dec. 14, when OPEC voted for a 2% production cut—its second cut in two months—even though oil is above $60 a barrel (see BusinessWeek.com, 12/14/06, "OPEC Shuts Off the Spigot").

In the Wrong Hands

Smith's divergence from the small-government credo of the Cato Institute has put him at odds with Cato's staff experts on energy. To dig into why Smith favors government intervention in the energy sector, though not elsewhere, BusinessWeek on Dec. 14 interviewed Smith and separately contacted Cato analyst Jerry Taylor, a senior fellow specializing in energy issues.

Smith told BusinessWeek he doesn't see his position with the Energy Security Leadership Council as a departure from his free-market principles because "the oil market is anything but a free market." Says Smith: "Quite the contrary, it's a cartel, which were it operated in the U.S., would result in a violation of many U.S. laws. About 90% of the world's proven oil reserves today are not owned by private companies. They're owned by national companies, many of which are arms of states that have a great antipathy toward the U.S."

In Smith's view, taking a free-market approach to dealing with the OPEC cartel is "like going out to play basketball and the other team is ready to play football. It's an enormous economic and national security risk for the U.S."

Factoring Military into the Equation

His main solution is to make the U.S. less dependent on oil, which is primarily used as a transportation fuel. "We need reduced energy intensity," Smith says. "The reason the U.S. has not had a much more severe reaction to the runup of oil prices over the last several years is the relative improvement in energy efficiency. If the country doesn't take steps to do that again in the future, and we continue on the path that we're on, then we will have at some point almost certainly a major national security challenge or a severe economic disruption much, much greater than we've gone through."