Energy Policy Myopia: George P. Shultz Remembered (Republicans have been bad too)

[Ed. note: George P. Shultz has long been an errant voice on energy and climate issues. A leading Republican climate alarmist, Shultz’s energy views from decades ago, still held, are the subject of the post below.]

“Shultz writes: ‘The president requested service stations to voluntarily suspend the sale of gasoline on Saturdays and Sundays. The 90 percent compliance with his request resulted in long lines at gas stations on weekdays.’

Hogwash! The ‘long gas lines’ were the result U.S. government central planning with respect to oil. Notice how often those long gas lines have returned since controls ended in the 1980s.”

When it comes to energy policy, President Obama seems to have learned nothing from the past. His ideas closely resemble the grandiose, failed policies of the 1970s.

But such historical ignorance knows no party.  Republicans are just as likely to exhibit the same.

Case in point? An essay published in the Hoover Institution’s Defining Ideas by Nixon administration cabinet member (labor and then treasury) George P. Shultz.  His article shows that even with the benefit of time, he has learned nothing about policies he helped make 40-plus years ago.

When he came to Washington in 1969, Shultz was put in charge of a task force to reconsider the Eisenhower-era oil import quota policy.  The Mandatory Oil Import Program (MOIP) was a mess. Ostensibly created for national security reasons, (reasons that no one could credibly articulate), it was soon encumbered with favors to numerous interest groups.

Shultz boasts that the task force urged “a sharply improved management system.” But the recommendations of the task force were beside the point. The only solution for MOIP was its termination not its transformation.

Then Shultz jumps forward to the 1973–74 Arab oil embargo after the onset of war between Israel and its Arab neighbors, Syria and Egypt.  Virtually all economists understand that the gas lines of the “energy crisis” that winter were the result of U.S. price and allocation controls. A price ceiling—enacted by the Nixon administration as an ill-considered means to fight inflation—is what elementary economics texts use to show how a shortage is created.

But that’s not how Shultz explains it. He writes: “The president requested service stations to voluntarily suspend the sale of gasoline on Saturdays and Sundays. The 90 percent compliance with his request resulted in long lines at gas stations on weekdays.”

Hogwash! The “long gas lines” were the result U.S. government central planning with respect to oil. Notice how often those long gas lines have returned since controls ended in the 1980s.

Shultz points out that the UK and France were spared shortages since they refused to support Israel though neither was spared price increases since the Arab OPEC members cut production to support their embargo. But Shultz fails to address the question of why the Netherlands, which was also embargoed by the Arab oil exporters, didn’t face shortages.  They were spared because they didn’t have the kind of laws that had so distorted the U.S. market.

Shultz concludes by noting that Eisenhower had cautioned against “dependence” on oil imports, especially if they exceeded 20 percent of U.S. demand.  “’Ike had a point,’” he claims he told himself.

The dependence argument has been the cornerstone of U.S. policy for 40 years.  We are vulnerable because we are dependent.

But this argument, omnipresent though it is, is also wrong-headed. Oil was, and is, a fungible commodity bought and sold in a world market. If the U.S was importing, say, 50 percent of its supply and there was a disruption that reduced world output, prices would surely rise, but there is no reason why anyone would face “gas lines” or any other problem of that sort.

If U.S. refiners had been able to pay the market price in 1973–74 and immediately pass along the added cost, the market would have reallocated supplies to meet U.S. demand. The extent of import “dependence” wouldn’t have mattered in the slightest.

But the control system disordered the market process. This was proven once controls were lifted. From 1980 to 2008, oil market disruptions led only to temporary price spikes. The U.S., meanwhile, enjoyed robust economic growth even as imported oil topped 60 percent of supply.

There is only one important lesson in Shultz’s essay: That is, we will never have useful energy policies in the U.S. as long as leaders of both parties misconstrue the policies of the past.