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

“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.

This Thursday, October 5, 2016, a book seminar is being held at Resources for the Future [12:45–2:00 p.m. EDT: 1616 P St. NW, Washington, DC 20036] to revisit the lessons learned from the 1970s energy crisis (register here). Unfortunately, the book, Panic at the Pump: The Energy Crisis and the Transformation of American Politics in the 1970s by Meg Jacobs, Princeton historian and author, does not seem to apply Economics 101 to understand the real lessons of history.

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.

I spent many years in the library stacks and with dozens of specialists and insiders to understand the 1970s energy crisis. It was my inspiration for getting into energy scholarship and the inspiration of my two-volume treatise, Oil, Gas, and Government: The U.S. Experience (Cato: 1996). And so I eagerly ordered the book to see what the ‘mainstream’ takeaway(s) are compared to what economists learned: price controls cause shortages, whether with natural gas or oil or … whatever. If effective price controls were implemented today on toilet paper, we would have a shortage.

Here is the

I can say I was disappointed but not that surprised. The author is not an economist or historian but a

She is not schooled in economics or political economy.

So is this the ‘politically correct’ interpretation of the energy crisis? OPEC caused it, the US government failed to property regulate in the fact of OPEC, and the general public lost faith in enlightened government ….

Richard Nixon (1913–94) 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.

(1) Parts of this post are adapted from Robert Bradley, Capitalism at Work: Business, Government, and Energy (Salem, MA: Scrivener Press, 2009), chapter 10.