“The Energy Crisis of the 1970s: Looking Back, Looking Ahead” (Econ 101 needed at RFF seminar)

By Robert Bradley Jr. -- October 4, 2016

“Economists may not know much. But we know one thing very well: how to produce surpluses and shortages. Do you want a surplus? Have the government legislate a minimum price that is above the price that would otherwise prevail…. Do you want a shortage? Have the government legislate a maximum price that is below the price that would otherwise prevail.”

– Milton and Rose Friedman, Free to Choose (1979), p. 219.

Tomorrow (October 5, 2016), a book seminar will be held at Resources for the Future [register here] to revisit the lessons from the 1970s energy crisis. Panic at the Pump: The Energy Crisis and the Transformation of American Politics in the 1970s by Meg Jacobs will receive comments from three RFF scholars.

The Princeton historian and author usefully provides a good deal of archival documentation surrounding the ill-fated attempt by federal authorities to regulate the price and allocation of crude oil and oil products in the 1971–1981 era. Lacking a proper worldview, however, her effort either skims or misses some key insights of the  monumental government failure that began with the presidency of Richard Nixon and ended with that of Ronald Reagan.

Professor Jacobs’s thesis is roughly as follows:

1. External events, particularly OPEC policy, created oil shortages and “panic at the pump”
2. Activist federal regulation to quell this “energy crisis” failed
3. This failure left a legacy that plagues an activist response to today’s oil (fossil fuel) problem concerning climate change.

A different worldview (what Jacobs would characterize as the “conservative” or Ayn Rand or Milton Friedman anti-government view) is as follows:

1. Richard Nixon’s price control program created shortages in light of changed world oil events (as she describes in the first chapter, but pins on external factors)
2. The federal government’s price and allocation regulation created huge distortions and pure waste that left consumers worse off, even not saving money at the pump.
3. The termination of price and allocation controls in early 1981 ended the energy crisis then and ever since, although a variety of government interventions continue to distort energy markets. BUT the legacy of energy conservationism (reduced usage from government policy) left energy politicized.

The classical liberal view is just the tip of understand the historical record. Jacobs does not have the right theoretical lens; her research and documentation scarcely considers the vast economic literature on the energy crisis, from Joseph Kalt’s The Economics and Politics of Oil Price Regulation (MIT: 1981) to my Oil, Gas, and Government: The U.S. Experience (Cato: 1996) to Peter Grossman’s U.S. Energy Policy and the Pursuit of Failure (2013). Professor Jacobs seems afraid or wholly untrusting of economics (or political economy in general).

Another missing book in her telling concerns another volume of impressive archival research: Energy Policy in Perspective (Brookings: 1981).

Counter-factual history in the case of the energy crisis is not hard to fathom. Had Nixon’s price control program not been in place in 1973/74,

1. Oil prices would have increased from international developments, even sharply.
2. Higher prices would have prevented panic, tank topping, and gasoline lines, or at least kept the physical disruptions localized
3. Market prices would have reduced demand and increased supply over time to bring prices down sooner and farther than ended up being the case.

The energy crisis as we know it today would be unknown to history had a free market existed with petroleum in the 1970s. [1]

Natural gas shortages in the winters of 1971/72 and 1976/77 would have been averted, too, had federal price controls been absent. President Eisenhower joins President Nixon as the two fathers of the energy crisis in this regard (the former vetoed a wellhead natural gas decontrol bill in 1956).

The story that Professor Jacobs cannot see is quite interesting. Here are some highlights:

1. As energy economists noticed, Americans were paying world prices for oil despite well-to-pump regulation intended to hold prices below world (‘market’) levels
2. Rampant inefficiencies and gaming were responsible for #1. Oil resellers (more than one hundred companies that emerged in response to price controls) captured a lot of the economic rent that federal oil and price regulation intended to get from (regulated) producers to consumers. The resellers, as superfluous as they were, kept Americans out of the gasoline lines between early 1974 and the summer of 1979, and after during the control period, for the most part.
3. The 1970s energy crisis was so dramatic that economists, interest groups, and political parties have not lobbied for government price ceilings on oil and gas, outside of price gouging in the aftermath of a natural disaster.
4. The experience of the 1970s fooled a generation of economists and many others into believing in resource depletion, aka Peak Oil. The Club of Rome is mentioned (pp. 39–40), and M.A. Adelman’s view of resourceship is mentioned (p. 310, with a footnote to me!). But the whole resource debate (Paul Ehrlich  … versus Julian Simon) is left undeveloped.

In my book that Jacobs references (Capitalism at Work), I develop a viewpoint that evidently was not explored. My account brings in some of the figures that Jacobs might see as more ideologues than sound scholars. But they understood that price controls were first and foremost responsible for the “panic at the pump.”

Here is an abridged excerpt from chapter 10 of my book:

Richard Nixon got on the wrong side of economic law three years before his Watergate-related resignation from the U.S. presidency. In August 1971, in a surprise decision, Nixon imposed the first peacetime wage-and-price controls in American history.

Businessmen reined in their surprise to pragmatically offer support. John Kenneth Galbraith and Paul Samuelson offered quick congratulations. There was public approval of the ‘temporary’ action that was intended to just quell inflationary expectations (as if the problem was psychological and not the inherent consequence of expansionary money). The inflation rate was then running at about 4 percent per year.

Free-market economist Milton Friedman, knowing that shortages lay ahead, lambasted the move. So did Ayn Rand in the Ayn Rand Letter. Murray Rothbard was fiercely critical (“on August 15, 1971, fascism came to America,” he wrote); he had seen price controls and shortages before.

Nixon’s edict disabled the market process responsible for coordinating supply with demand and allocating resources to their most profitable use. Predictably, oil shortages developed, which resurrected long dormant depletionist thinking and pointed policymakers toward conservationism. After all, if price controls did not allow prices to rise and “regulate” demand to available supply, then government had to—at least according to the majority of policymakers and neo-Malthusians whose worldview dovetailed nicely with public sentiment against the energy industry.

Birth of Peacetime Conservationism

The oil crisis, contrary to popular remembrance, did not begin with the Arab Embargo of October 1973. It began with petroleum product shortages that arose in late 1972 when price controls became constraining. In February 1973, Senate hearings on fuel shortages demonstrated, in the opinion of committee chair Henry Jackson (D-Wash),

One, there has been an unprecedented breakdown in our energy supply and distribution system;

Two, the fuel shortages now being experienced are far more extensive than anticipated;

Three, more severe shortages of fuels, particularly gasoline, are in the offing.

Expert testimony was heard about how 18 months of price controls were at the root of the supply shortfall, as were the lingering constraints of an earlier federal program designed to help the domestic industry in a time of oil surplus, the Mandatory Oil Import Program.

The U.S. Senate convened a meeting on energy conservation, identified as “the first congressional hearings to be devoted to this subject.” Demand was now decoupled from supply, creating an industry of thought, opinion, and passion as to what demand should be and what role government should play to correct oil-market problems.

The game was rigged thanks to Richard Nixon, whose original 90-day freeze would be but the first of five price-control phases and the starting point for more than seven years of price-and-allocation regulation under the Emergency Petroleum Allocation Act of 1973 (EPAA).

The March 1973 hearings attracted the first wave of energy conservationists and environmentalists from organizations such as the Environmental Defense Fund, Friends of the Earth, and the Sierra Club.

Ford Foundation’s Energy Policy Project: The New Mantra

The Ford Foundation, which had launched Resources for the Future (RFF) two decades before, was ready to make its own splash in energy research and policy. RFF had become a bastion of fact-based resource optimism, while Ford was moving sharply left under “liberal domestic reformer” McGeorge Bundy.

In late 1971, the world’s wealthiest private foundation launched a three-year, $4 million ($15 million today) effort headed by S. David Freeman. An engineer and lawyer by training, Freeman had worked in different capacities for government, most recently as head of Nixon’s energy policy staff.

Bundy defended Freeman as “a man of stature and integrity,” but he was other things as well—arrogant, an interventionist ideologue, and an implacable foe of the energy industry. Not since price controller John Kenneth Galbraith had the industry seen an intractable foe.

The final product of the Ford Foundation’s initiative was A Time to Chose: America’s Energy Future, released in 1974, a period of energy upheaval. The 500-page study came to three major conclusions:

· the energy crisis is real and long-lived;

· “conservation is as important as supply”; and

· the U.S. needs an integrated national energy policy.

Conservationism (as versus self-interested conservation) would now have a life of its own. Energy usage was a per se bad. Less was better. Energy appliances and motorized transportation would never be the same after President Nixon’s ill-fated action of wage and price controls.

Appendix: About the Event

“At this RFF seminar, Meg Jacobs, Princeton historian and author of Panic at the Pump: The Energy Crisis and the Transformation of American Politics in the 1970s,* will explore the history and politics of energy policy in the 1970s. In the book, she examines how the twin oil shocks of that decade—the 1973–1974 Arab oil embargo followed by the Iranian revolution five years later—caught American policymakers by surprise and discusses why they encountered so many challenges in devising effective solutions.

Even as the crisis gave momentum to the creation of the US Department of Energy, the lines for gasoline undermined public confidence in Washington’s ability to resolve the crisis. President Carter made some progress with the passage of his National Energy Act of 1978, but the political divisions made enduring reforms of energy production and use challenging. The result was a stalemate rather than a new framework for national energy policy. By the time of the 1991 Gulf War, Americans had continued to be substantially reliant on oil from abroad, including from the Middle East. Meg Jacobs analyzes these issues in her history of the energy crisis, providing a cautionary tale for today.”

 

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[1] In a different vein but also of importance, Enron and Ken Lay as we know them today would not have existed outside of the mixed economy, or the politicized energy economy. So both the energy crisis and Enron could have been prevented by a free market, and the former actually lead to some of the rent-seeking opportunities exploited by the latter.