How Ronald Reagan Saved the Dow


On this day in economic and financial history...

Opening the oil-slicked floodgates
A decade of an artificially depressed U.S. oil industry finally came to an end on Jan. 28, 1981, when President Ronald Reagan lifted the last remaining oil price controls on gasoline, propane, and American-sourced crude. The oil industry was again allowed to control pricing and distribution, which was estimated to potentially increase gasoline prices by $0.06 to $0.12 per gallon over the already high $1.25 per gallon paid at the end of 1980 -- equal to about $3.50 today.

Oil price controls had been instituted by the Federal Energy Administration beginning in 1971 and augmented in the wake of the devastating OPEC embargo of 1973. As early as 1975, government economists were warning that the controls would prove ineffective and give foreign producers greater leverage over oil pricing. American motorists felt the pain acutely at the pump, as the price of a gallon of gas had quadrupled from 1971 to 1980. The markets had difficulty handling these higher prices as well, as evidenced by the progress of the Dow Jones Industrial Average(INDEX: ^DJI) over the course of the 1970s. The first controls were instituted in August of 1971, when the Dow hovered near 900 points. On Jan. 28, 1981, the Dow closed at 943 points.

Deregulating oil proved to be one of Reagan's best economic decisions. By the end of his final year in office, the price of a gallon of gas had dropped to $0.91, which in real terms meant that its price had been cut in half since the end of 1980. After breaking past the 1,000-point level for good at the end of 1982, the Dow would go on to enjoy one of the longest and largest bull runs in its history. Although oil prices dropped as a result of deregulation, it became much more viable to develop American sources, and the Dow's largest oil representative thrived. For the rest of Reagan's presidency, ExxonMobil(NYSE: XOM) shareholders enjoyed a total return of 332%.

Here's to Louis!
If you're reading this while having a glass of milk or orange juice -- or, better yet, a refreshing beer -- then you might want to thank Louis Pasteur, who first gained a U.S. patent for the anti-spoilage process that bears his name on Jan. 28, 1873. Titled "Improvement in Brewing Beer and Ale," Pasteur's patent advanced the germ theory that he is largely credited with, particularly in the description of how air may be introduced to the fermentation vessel only through a heated tube or a cotton filter "for the purpose of either killing or extracting any germs which it may contain."

Today, pasteurization is widely used for a variety of foods and beverages, including beer and wine, but also juices, dairy products, syrups, and canned food. Anheuser-Busch InBev was the first American brewer to use pasteurization in the 19th century when it was just getting started under Adolphus Busch, and it is now the largest brewer in the world. An estimated $505 billion worth of beer was sold around the world in 2012. The global milk industry, which produced 721 million tons of the protein-packed liquid in 2010, also has Pasteur to thank for its profits.

How do you say "this is a bad deal" in Swedish?
In a move billed as its biggest step into the luxury automobile market yet, Ford agreed to buy the auto operations of Sweden's Volvo for $6.45 billion on Jan. 28, 1999. It was a time of intense mergers and acquisitions around the world, and auto industry analysts gave Ford high marks for trying to broaden its appeal in Europe while simultaneously bolstering its tarnished safety reputation with Volvo's gold-standard reputation. Ford CEO Jacques Nasser said at the time: "What we are really buying here is generations of hard work and dedication. ... We are buying the strength of the brand ... and we are buying a team that is incredibly best in breed in terms of its worldwide capacity and research and development."

These high hopes never translated into big profits. Just 11 years later, Ford sold Volvo off to the parent company of China's Geely Automobile for just $1.5 billion, a 77% loss on the original purchase price. The Economist derided the deal as "worse than those figures suggest" by noting that Ford also "had to support the Swedish carmaker through years of losses and even now it faces further expenses ... that will eat up much of the meagre sum it is getting for Volvo." A year after the sale, Ford's net income shot up to to more than double its earlier levels. Perhaps this was just a bad relationship that had been long overdue for a breakup.

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