Global Market Perspective | A Fisher Investments Blog

Riding the Free-Market Train

It’s often said the private sector can run a business far more efficiently than governments can, and an Italian company is setting out to prove it: In about a week, Italy’s first privately owned high-speed trains will debut, putting  some competitive heat on the state-owned rail company, Trenitalia.

The trains, operated by NTV, are primarily getting attention for their luxury stylings (details available here)—and having ridden the rather sparse French TGV high-speed trains several years ago, I imagine the leather seats, wide carriages and so-called cinema carriage will attract plenty of travelers. NTV is also making a play for foreign travelers, boasting that all employees speak English.

They’re competing on costs, too, though NTV has indicated their prices may not undercut Trenitalia’s—instead, NTV’s seeking an edge through price flexibility, similar to many airlines’ pricing model, which offers cheaper fares to those who book in advance or travel at off-peak times. Compare that to Trenitalia’s price scheme, which starts with a base fare and then applies surcharges for flexible tickets and discounts for group travel or other considerations.

On balance, it seems NTV is betting that offering an overall more pleasant experience—more comfortable travel and perhaps less booking headaches—will help them cut into Trenitalia’s market share. And make no mistake, a little healthy competition is a good thing. Until now, Trenitalia didn’t have much incentive to improve its services or pricing—it was the only option for anyone wanting to travel by train in Italy. If NTV gains significant market share, Trenitalia likely has to start competing—maybe they get newer trains, offer more legroom, cut prices, expand their service, or what have you. And as the two companies try to outdo each other (and if more service providers join the fray!), customers get more choice and perhaps better prices.

And now, the funny part: One of NTV’s principal investors, with a 20% share is none other than SNCF—France’s state-owned rail company! If that’s not capitalism and free trade at its finest, I don’t know what is. Heck, maybe if NTV’s successful, the French, too, learn the benefits of private ownership and market competition. A free-market rail revolution could be just the ticket for European travelers!

North Sea Production Stalls

For many years, American economist Art Laffer has argued that increasing tax rates in some cases causes overall tax revenues to fall. Last week’s report from the Department for Energy and Climate Change includes some evidence to support that theory. As explained in Friday’s Telegraph:

Oil platforms only pumped 947,000 barrels of oil per day in July, down from 984,000 barrels per day in June and more than 1m barrels per day in May.

The Health and Safety Executive has warned that only one in 30 of the UK's North Sea oil rigs is in a good condition. A number of large platforms have closed for major maintenance this year.

However, the business climate may also have something to do with the drop in oil output. Producers have been unhappy that the Treasury raised taxes by 12 percentage points to between 70pc and 82pc depending on the size of the fields at the Budget this spring. This has added millions of pounds to the tax bills of big producers. Whatever the cause, the fall is likely to have a substantial impact on the Chancellor's tax revenue from the oil industry, which amounted to £9bn last year.

The good news is the recent decline in North Sea oil production doesn’t necessarily need to be a long-term trend. The Chancellor increased the taxes on oil production as part of his larger austerity plan, which many believed necessary to put Britain on more sound fiscal footing. However, if these taxes are lowered once the UK’s fiscal issues have stabilized, oil companies would theoretically have incentive to resume higher production levels. Add that to ongoing oil rig maintenance and future improvements in oil extraction technology, and the North Sea can likely remain a vibrant oil producer in the long run.