US Energy Policy and the Pursuit of Failure 9781107333048, 9781107005174

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U.S. ENERGY POLICY AND THE PURSUIT OF FAILURE

U.S. Energy Policy and the Pursuit of Failure is an analytic history of American energy policy. For the past forty years, the U.S. government has tried to develop comprehensive policies on energy, yet these efforts have failed repeatedly. These failures have not resulted from a lack of will or funds but rather from an inability to differentiate between what could be undertaken and what could actually be accomplished. This book explains how and why various policy efforts have come about, shows why politicians have been eager to back them, and analyzes why they have inevitably failed. Over the past four decades, U.S. energy policy makers have pursued not just policies that have failed but also a policy process that leads to failure. Peter Z. Grossman is the Clarence Efroymson Professor of Economics at Butler University. He is coauthor, with Edward S. Cassedy, of Introduction to Energy (Cambridge University Press, 1998) and coeditor, with D. H. Cole, of The End of a Natural Monopoly: Deregulation and Competition in the Electric Power Industry. His scholarly articles have appeared in journals such as Energy Policy, Economic Inquiry, The Journal of Legal Studies, and the Journal of Public Policy. For seven years, Professor Grossman was a regular columnist on economic issues for the Indianapolis Star, and he has contributed commentary to many magazines and newspapers, including The Wall Street Journal and The Christian Science Monitor.

U.S. Energy Policy and the Pursuit of Failure PETER Z. GROSSMAN Butler University, IN

cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, S˜ao Paulo, Delhi, Mexico City Cambridge University Press 32 Avenue of the Americas, New York, NY 10013-2473, USA www.cambridge.org Information on this title: www.cambridge.org/9780521182188  C Peter Z. Grossman 2013

This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2013 Printed in the United States of America A catalog record for this publication is available from the British Library. Library of Congress Cataloging in Publication data Grossman, Peter Z., 1948– U.S. energy policy and the pursuit of failure / Peter Z. Grossman. pages cm Includes bibliographical references and index. ISBN 978-1-107-00517-4 (hardback) – ISBN 978-0-521-18218-8 (paperback) 1. Energy policy – United States – History. I. Title. II. Title: United States energy policy and the pursuit of failure. HD9502.U52G755 2013 333.790973–dc23 2012035035 ISBN 978-1-107-00517-4 Hardback ISBN 978-0-521-18218-8 Paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party Internet Web sites referred to in this publication and does not guarantee that any content on such Web sites is, or will remain, accurate or appropriate.

Contents

Citations in Footnotes

page vii

Preface

ix

Acknowledgments

xv

1

Crisis

1

2

Failure

45

3

Fuels

67

4

EIA

125

5

Morality

167

6

Apollo

218

7

Collapse

245

8

Crisis 2.0

286

9

Modesty

330

Appendix: The “Do Something” Dilemma, a Decision Problem

355

Bibliography

363

Index

383

v

Citations in Footnotes

All citations from original document collections use the following format: Library, item being cited, collection name, box number and date (month, day, year). Congressional Record citations before the 101st Congress (1989–90) were taken from bound volumes. They are cited by Congress number, page number, and date, as well as by speaker, if that is not clear from the text. Beginning with the 101st Congress, all Congressional Record data have been found online at The Library of Congress Thomas: http://thomas.loc .gov/home. All of these references were located with names and keywords and are cited by Congress number and date. All newspaper articles are included in the footnotes and are cited by title, publication, date, and page number, except for guest columns, which also include the author’s name if not specifically noted in the text.

Primary Sources BPL – George H. W. Bush Presidential Library Collections: John H. Sununu Papers, White House Chief of Staff, Jan. 21, 1989–Mar. 28, 1992: “Sununu” Phillip D. Brady Papers, Assistant to the President and Staff Secretary, Jan. 13, 1991–Oct. 1992, “Brady” CPL – Jimmy Carter Presidential Library Collections: Stuart Eizenstat Papers, Assistant to the President for Domestic Affairs and Policy (full term), “Eizenstat” vii

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Citations in Footnotes

Katherine (Kitty) Schirmer and Erica Ward, Associate Director of the Domestic Policy Staff (Ward succeeded Schirmer); combined papers cover the entire Carter presidency, entries are under “Schirmer/Ward” Chief of Staff (COS) Papers: Hamilton Jordan, Carter aide, COS from 1979– 80, “COS (Jordan)” Landon Butler, Deputy COS, “COS (Butler)” Frank Press Papers, Director, Office of Science and Technology Policy (OSTP), “Press” FPL – Gerald R. Ford Presidential Library Collections: Michael Raoul-Duval Papers, Special Counsel to the President, “Duval” Council of Economic Advisors (Alan Greenspan chair) Documents and Papers, “CEA (Greenspan)” Richard B. (Dick) Cheney Papers, Deputy Assistant to the President; later Assistant to the President; “Cheney” Glenn R. Schleede Papers, Domestic Council: Assistant Director for Natural Resources; Associate Director for Energy and Science, 1973–5, “Schleede” Frank G. Zarb Papers, Administrator, Federal Energy Administration 1974– 6, “Zarb” NPL – Richard M. Nixon Presidential Library Collections: Edward E. David, Jr., Papers, Science Advisor to the President, Director of the Office of Science and Technology (OST), Chairman of the Federal Council for Science and Technology, and Chairman of the President’s Science Advisory Committee, “David” Energy Policy Office (EPO) Papers, 1973: John A. Love, Director of the EPO June 1973–Nov. 1973, “EPO (Love)”; Charles J. DiBona, Deputy Director of the EPO and Special Assistant to the President for Energy, “EPO (DiBona)” John F. Schaefer Papers, Staff Assistant to the President, Council on International Economic Policy (1972–3); Staff Assistant to the President, Energy Policy Office (1973); and Deputy Assistant Administrator for Operations and Compliance, Federal Energy Office (1973–4), “Schaefer” WCPL – William Clinton Presidential Library WSP – William Simon Papers, Lafayette College (catalogued by Drawer number, instead of Box) CR – Congressional Record

Preface

On August 25, 1980, Congressman Jim Wright (D-TX) rose on the floor of the U.S. House of Representatives to address his colleagues about an energy bill, the Magnetic Fusion Energy Engineering Act of 1980 (MFEE). “[T]his decision and what flows from it,” Wright declared, “may well rank alongside the great discoveries of history, the discovery of fire and the discovery of electric power.”1 The legislation had dramatic intent. It would solve all of America’s long-term energy dilemmas by demonstrating the commercial feasibility of electric power generation by nuclear fusion, a controlled version of a hydrogen bomb. The bill made it “the declared policy of the United States . . . to establish a national goal of demonstrating the engineering feasibility of magnetic fusion by the early 1990s . . . [and] operation of a magnetic fusion demonstration [electric power] plant at the turn of the twenty-first century.” The bill passed the House with only six dissenting votes; later it would pass the Senate unanimously. The principal author of the bill, Representative Mike McCormack (D-WA), claimed it was “the most important piece of energy legislation passed by this or any other country.”2 The hubris of the bill was breathtaking. The passage of a piece of legislation portrayed as the catalyst of the next “discovery of fire”? Sustainable net energy from nuclear fusion had never been achieved in the laboratory, much less on the scale of a power plant. There were major scientific and engineering hurdles to be overcome. Essentially, Congress was legislating that there would be solutions by dint of the bill’s passage. Wright likened the effort to the Manhattan Project that led to the atomic bomb; McCormack compared it with the Apollo space program. Actually, it was comparable to 1 2

CR, 96th, 22898, Aug. 25, 1980. Quoted in “Nuclear Fusion Growth Aim of New U.S. Law,” New York Times, Oct. 9, 1980, D1.

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Preface

neither. Neither of those programs sought to create a technology that would be commercially successful. This program was expected to create a new technology for an estimated cost of $20 billion that would ultimately triumph in the marketplace. By 2050, McCormack predicted, all electric power would be generated by nuclear fusion. The fuel, a heavy isotope of hydrogen found in seawater, was sufficient to provide energy “literally . . . [for] billions of years.”3 In other words, it would resolve all U.S. energy problems essentially forever. In the months before the bill was passed, the United States had just experienced its second major energy crisis in less than a decade, and the American people wanted solutions. Fusion was the ultimate answer – and especially attractive to members of Congress because they really had not voted to do much of anything. The $20 billion was not authorized or appropriated. It was just a wish. It was a vote then for an energy solution without a concern about either cost or feasibility. As one lobbyist declared at the time, “Congress needed to vote for an energy thing, particularly one with the potential to save the world [and where] no extra money would be spent at first.”4 Within a few years, it became apparent that the technology was nowhere near where it needed to be to make this fantasy come true. The breakthroughs did not materialize, and by the early 1990s, so far from a demonstration of feasibility, the goal of fusion seemed farther away than when the bill had passed. A physicist told Business Week: “People have been saying ‘fusion is 30 years away – and always will be.’ Except now it seems to be 60 years away.”5 As of this writing (2012), the technological hurdles of fusion still have not been overcome. Yet, the MFEE Act was illustrative of the way U.S. energy policy had developed during the 1970s – and to a large extent has remained to this day: there is always a promised solution, usually through a technological wonder, or a group of wonders, that will settle America’s energy dilemmas once and for all. Officials generally promise that this solution will be achieved without imposing significant costs on voters, either because they claim it can be achieved cheaply or because the cost will be imposed on oil companies or other vilified groups with large resources. But in the end, there is no solution. The wondrous technological answer does not materialize. The MFEE was probably the most extreme example of a congressionally mandated energy 3 4 5

CR, 96th, 22897, Aug. 25, 1980. Quoted in R. Smith (1980, 291). Quoted in “Hot Fusion Is Burning Dollars – and Little Else,” Business Week, Oct. 15, 1990, 62.

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panacea, but the same year President Jimmy Carter signed a bill to turn massive amounts of coal into a substitute for oil and natural gas, and the year before that, he had proclaimed as a national goal that by 2000, 20 percent of all U.S. energy would be solar. Of course, Carter’s plans did not work out either. The liquefied, gasified coal program was a failure in all respects, and as of 2011, solar was contributing less than 1 percent to U.S. energy consumption. Nevertheless, policy makers keep returning to these sorts of ideas whenever there is believed to be an energy crisis. A technological energy solution has never been realized, yet there is always a next idea for policy makers to endorse. The United States continues in the pursuit of the latest version of the same legislative program with the belief that this time, things will be different. But the motivations, along with almost delusional thinking that has been exhibited in the past (as in the case of the MFEE), do not change. Members of Congress declare that the new legislation will be, as they avowed the last time, transformative; this time, Congress will act and America will discover fire. I began to study energy issues quite by chance. I was a business and financial journalist working in New York City in the late 1970s when I was asked to write a book for young people about the dramatic power failures of New York City and surroundings that had occurred in 1965 and 1977. The second of these I had witnessed, and I had accumulated a number of articles on what had happened and why. The book, In Came the Darkness: The Story of Blackouts (Four Winds Press 1981), was my introduction to the energy field. At the time I began it, I knew little about energy and little also about economics. I had experienced the gas lines of 1973–4; the ones in 1979 had less impact on me personally because at that time I did not own a car. But generally, I accepted the prevailing narrative about energy: America was rapidly running out of all fossil fuels; the country was dependent on oil from countries that belonged to the Organization of Petroleum Exporting Countries (OPEC), most of which wished us ill; the prices of oil and natural gas were going to rise continuously; nuclear power was inherently dangerous; and Americans would have to learn to get by with less energy and probably would be poorer because of it. Over the ensuing decade, I began to study economics and worked with an electrical engineering professor, Edward S. Cassedy, on a college-level text on energy and society designed for STS (science, technology, and society) programs. The first edition of the book, Introduction to Energy: Resources, Technology and Society (Cambridge University Press 1990), although full of

xii

Preface

useful information about the processes of energy conversion and the methods of resource measurements, reflected the 1970s’ narrative. Supply was dwindling but with the proper support, technologies such as solar heating would be successfully commercialized. It was a technology considered only five years away from mass adoption. As the 1980s passed, however, it became clear to me, first, that the narrative was wrong. The world was not running out of oil and gas. Reportedly, less than twenty years of oil remained in the United States in 1980, but in 1990, there was said to be about the same amount of oil left. Second, it seemed evident that the 1970s’ energy narrative was still the only way policy makers and much of the public ever thought about energy. As I was completing my Ph.D. in economics at Washington University (St. Louis), I returned to energy issues and wrote a working paper for the Center for the Study of American Business (St. Louis) on alternative energy. It was plain that no alternative energy technology, including nuclear power, had ever become truly cost competitive with conventional technologies; my argument was that top-down directed policy on alternative technology development was likely to fail if the goal was actually commercialization. The commercialization process was a far more complex set of social interactions than could be encompassed and directed through any piece of legislation, executive order, or agency diktat. This did not mean that government had no role to play in energy development but that its role needed to be rethought to account for the actual processes of innovation, adoption, and diffusion. I revisited the entire range of energy issues with the revision of Introduction to Energy, which appeared in a second edition in 1998. By the time Professor Cassedy and I had finished, I was becoming convinced that the U.S. energy policy process itself was, by its nature and construction, destined to fail. It was, above all else, crisis-driven and thus tended to lurch from extreme legislation like the MFEE to measures that were largely ineffectual to an unspoken acceptance of a status quo in which markets determined prices and quantities of energy resources; people complained when the price was too high and just used more when the price fell. But each time there were rising prices, policy makers declared a new crisis and brought out the exact same ideas that they had had in the previous crisis, and all of the themes could be traced back to the energy crises of the 1970s. Few policy makers seemed to have new ideas. Debates from the 1970s could have been cut and pasted into the Congressional Record of the last twenty-five years with little loss of consistency. The only changes were the target dates, the names of the legislators and presidents, and sometimes the preferred technology.

Preface

xiii

But the issues were framed the same way, blame was cast on many of the same players, and the solutions were based on the same assertions. It may be fairly noted that as a historian of policy, I have the benefit of hindsight, and the arguments I make about the consequences of policies that seem obvious today may not have seemed so at the time they were enacted. But there have been lessons of history with respect to energy that go back decades. Policy failures are not a recent phenomenon. Nevertheless, for the past forty years, it appears that policy makers have learned nothing from the past. That policy has always failed has seemed irrelevant to each new Congress, to each new presidential administration, and to each new agency head. It is as if officials are saying that they know their ideas will fail, but they will pursue them anyway because they cannot think of anything else to do. They will pursue a course of action that sounds pleasing to voters but has no chance of success. They will willfully pursue failure. Finally, that has been the story of U.S. energy policy, the pursuit of failure, a story that has seemed impervious to facts and remains mightily resistant to change. Hence, the title and the genesis of this book.

Acknowledgments

A book like this depends on cooperation and assistance from many people. Above all, I relied on a number of library collections, particularly those housing the papers of presidents Richard Nixon, Gerald Ford, Jimmy Carter, George H. W. Bush, and William Clinton, as well as the Library of Congress and papers in the libraries of Lafayette College and Washington State University. The staffs of all these libraries were extraordinarily helpful in locating pertinent records related to the events and policies in question. I would mention in particular the help I received from Jason Shultz (Nixon), William McNitt (Ford), Albert Nason (Carter), and Doug Campbell (Bush) as well as the assistance of Diane Shaw (Lafayette College, William Simon Papers) and Cheryl Gunselman (Washington State University, Mike McCormack Papers). Ms. Gunselman also put me in touch with Congressman McCormack, who gave a long engaging interview that provided a great deal of background on the making of energy policy during his congressional tenure, 1971–80. I owe special thanks to Professor Joseph Pratt, head of the Center for Public History and the Energy Management and Policy Group at the University of Houston (UH). Professor Pratt offered me the opportunity to spend the spring 2012 semester at UH teaching from a draft of my book, which in itself was of great value, as discussions with students helped me clarify my ideas. He also gave my manuscript a remarkably close and extremely helpful reading. Overall, my book benefited greatly from my experience at UH. I also received important help from my colleagues at Butler University, where I have taught since 1994. The Business School dean (Chuck Williams) and associate deans were entirely supportive of my efforts on this book, gave me a release from teaching for a semester, and encouraged me to take the opportunity to go to Texas. William Rieber, chair of the combined Economics, Finance, and Law departments during most of this period, xv

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Acknowledgments

was an especially strong advocate on my behalf, for which I will always be grateful. His successor as chair, Robert Bennett, was completely supportive as well. Professor Rieber read several of the chapters of the book in draft and made many helpful comments. Another of my Butler colleagues, Robert Main, provided insightful suggestions in his reading of portions of the text as well. Friends and former teachers from Washington University (St. Louis) also assisted me in this endeavor. The Weidenbaum Center on the Economy, Government, and Public Policy gave me the opportunity to try out some of my ideas both in academic seminars and in a public presentation during my sabbatical year 2009–10. For that chance, I owe special thanks to Murray Weidenbaum, Center Director Steve Smith, and Associate Director Steven Fazzari. I also benefited from comments by Lee Benham and Professor Weidenbaum, both of whom read portions of the manuscript. I was able to explore the issues of this book in presentations to other seminars and colloquia. In talks to Indiana University’s Vincent and Elinor Ostrom Workshop in Political Theory and Policy Analysis; the Foundation for Research on Economics and the Environment; the Searle Center for Law, Regulation and Economic Growth (Northwestern University); and the Southern Economic Association, I received excellent suggestions from many scholars and policy experts. The latter two presentations were facilitated by David Haddock (Northwestern School of Law), who has encouraged my work in this area for several years. I also wish to thank five reviewers of my proposal for Cambridge University Press who not only persuaded Cambridge to contract for the book but provided suggestions to get the project moving in the right direction; one reviewer for a helpful positive review of the entire manuscript; Professor James Smith (Southern Methodist University), a leading economic historian of U.S. energy, for a quick turnaround and helpful comments of a draft of Chapter 3; Charles Silverstein for useful feedback on Chapter 1; John Mugge, Larry Powers, Kayla St. Clair and Nathan Grossman for assistance in the development and completion of the book; my editor, Scott Parris, for his support of this project and acceptance of my occasionally revised timetable to completion; his assistant Kristin Purdy, for help in getting the completed manuscript in process; and the Cambridge production staff for the work they did in getting this book to press. Finally I wish to thank two people in particular. First, my dear friend and frequent collaborator, Dan Cole, Professor of Law at Indiana University (Bloomington), gave me feedback on this project just about every step of the

Acknowledgments

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way, from proposal to final draft, in the process reading finished sections and others that were only half-baked, calling my attention to lapses and mistakes, making suggestions of inestimable value to the final product. I owe Dan a great deal in general because his very active mind has led to many joint publications, but I am especially appreciative of the time he took away from his own busy schedule to give my work priority. Second, my wife Polly Spiegel (Ph.D.), in addition to love and companionship, has since we first met more than thirty years ago been a tough but exceedingly valuable critic of my writing. If I have produced readable prose in this book, much credit belongs to her; if there are lapses in the writing, it is almost certainly the case that I just didn’t listen to her. Peter Z. Grossman Butler University Indianapolis, IN

ONE

Crisis

Economists may not know much. But we do know one thing very well: how to produce surpluses and shortages. . . . 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 (1980, 260–1)

1. Introduction October 1973. That was when U.S. energy policy as it is commonly understood began. On October 17, the Arab members of the Organization of Petroleum Exporting Countries (OPEC) announced an embargo of oil against the United States and the Netherlands for their support of Israel in the 1973 Arab-Israeli Yom Kippur War. Over the ensuing weeks, the Organization of Arab Petroleum Exporting Countries’ (OAPEC) embargo led to havoc in the United States, its first national “energy crisis.” As gasoline and diesel fuel supplies dwindled, there were shortages that led to long lines of angry motorists and even angrier truckers, sitting in their vehicles in the winter cold waiting for a few gallons of fuel. The discomfort was acute and widespread. To make matters worse for consumers, when fuel was available, it was more expensive. By the end of 1973, the prices of all oil products were much higher than they had been just a few weeks earlier; there was economic “pain at the pump.” This crisis was, as a government official later observed, the first time members of America’s baby-boom generation had felt real economic deprivation, and they looked to the U.S. government to “do something.” Officials in the administration of President Richard Nixon and members of Congress promised action and soon began to introduce legislation, often the same pieces of legislation with slightly different twists. None of this legislation or any executive measures actually accomplished anything of 1

2

U.S. Energy Policy and the Pursuit of Failure

lasting import. Still, something did change, and that was the prevailing policy narrative. Then and for the next thirty-nine years (and still counting), there was a new understanding concerning energy policy, what it was about, and what it was supposed to accomplish. The story centered on America’s awareness of its reliance on a global oil market, framed as “dependence on foreign oil,” and the embargo had revealed that because of that dependence, the United States was vulnerable to OPEC “blackmail,” in which oil would be traded to America for political compliance. The nation’s very security and even its way of life were said to be at stake. Americans suddenly saw themselves as potential victims of embargoes ever after; exporters would use the so-called oil weapon, an embargo, and Americans would suffer or do their bidding.1 Furthermore, so the new story went, the price of energy was going up, probably way up and perhaps steadily, and still worse lay ahead. Soon, oil and natural gas would just “run out.” The United States was dependent on foreign supply because domestic supplies of oil and natural gas were disappearing. Books such as The Energy Crisis (Rocks and Runyon 1972) and, even more spectacularly, Limits to Growth (Meadows et al. 1972) argued that not just the United States but also the entire planet was running out.2 Yet, for a while longer, those who controlled the last few drops (namely, the members of OPEC) would set the price of oil, lifting it higher and higher to gain more power and wealth for themselves. The OPEC nations, even non-Arab members such as Nigeria, Venezuela, and Iran but especially the robed Arab oil “sheikhs,” were cast as the villains of the story, abetted by greedy major international oil companies, who, it turned out, were making fabulous profits at the expense of all the people sitting in their cars in the winter of 1973–4. 1

2

According to a 1974 study by the London-based Institute of Strategic Services, there would be little the developed world could do against repeated use of the oil weapon, which would likely produce “limitless” hardship including “economic ruin.” Quoted in the New York Times, “Study Warns of Perils in Mideast War,” May 10, 1975, 6. The neo-Malthusian “Limits” study undertaken for the Club of Rome argued that the world was running out of just about everything, pollution was getting worse, and famine and social collapse were the likely results. Oil and natural gas resources were expected to be entirely depleted no later than the 2010s, but more likely around 2000. See also Cheney (1974), which called for zero per capita energy growth as well as zero population growth to forestall collapse. A more recent version is called the “threshold hypothesis,” which argues that “for every society there seems to be a period in which economic growth (as conventionally measured) brings about an improvement in the quality of life but only up to a point – the threshold point – beyond which, if there is more economic growth, quality of life may begin to deteriorate” (Max-Neef 1995, 117).

Crisis

3

Many said the United States, therefore, needed an energy policy to break that dependence, possibly even to make the nation entirely self-sufficient – provided, of course, that at the same time prices were kept, as President Nixon put it, “reasonable.” To achieve both self-sufficiency and low prices, the country had to find or create abundant domestic energy supplies that would last for generations. That became the policy goal that would emerge from the embargo. But how was this to be accomplished? There were no plans in place, no clear ideas, no contingencies. Although officials had discussed the possibility of an oil cut-off since 1971,3 and despite many statements by Arab exporters that they might implement one (Akins 1973), administration spokesmen admitted that they had not planned for such an event as the embargo (de Marchi 1981a). Lack of preparation notwithstanding, however, Nixon quickly put together a scheme that he called “Project Independence”: a plan for complete U.S. energy self-sufficiency by 1980. The idea was dramatic, but it was conjured up suddenly in the crisis atmosphere more as a slogan than as a coherent plan. To sell it, he made direct reference to “the spirit” of the Apollo program that showed “whenever the American people are challenged with a clear goal . . . we can do extraordinary things.”4 The inference was plain: if the United States could put a man on the moon, Americans could solve any technological problem, including this energy crisis, even if at the moment no one actually had any idea as to how. Congress also started to take action. In fact, over the twelve months after the embargo, Congress considered about 2,000 bills that incorporated at least some provisions related to energy (Doub 1976). A few of these bills contained ideas that were as expansive as the one Nixon had proposed. Only a handful of proposals ever became law, but the nature of the debate was what persisted. Congress had adopted the same rhetoric as Nixon, and ever after energy policy would be articulated in the same way it was framed in 1973–4. Policy needed to end a debilitating and dangerous dependence and eradicate the threat of looming economic catastrophe because energy cost “too” much. 3

4

The National Security Council staff prepared a paper in January 1971, which noted the dangers of America’s energy situation. The paper argued that the problem “involves the probability of a significant increase in the payments made by oil companies to the oil producing countries – and consequent increased costs to the consumers and the oil companies – and the possibility of interruption or cut-back in supplies imposed by some of the OPEC countries” (U.S. State Department 2011, 199), emphasis in the original. Richard Nixon’s televised speech to the nation, Nov. 7, 1973; transcript at: http://www .presidency.ucsb.edu.

4

U.S. Energy Policy and the Pursuit of Failure

This basic narrative seemed to fit the events of the day, but it rested on an analysis that was mostly wrong – wrong on many of the facts, wrong on theory, and wrong mainly about what government could actually do. That is what this book is about. It recounts the failures of U.S. energy policy through successive administrations. The specifics are different from one administration to the next, but the premises of policy have remained the same. Succeeding chapters recount those failures, but this chapter is about that first energy crisis, in 1973; that was when the nation’s energy policy gained its narrative shape, making a history of failure all but inevitable. There was, of course, energy policy of sorts before the embargo. There had been government interventions in specific fuel markets going back to the beginning of the twentieth century. In the months before the embargo, the most conspicuous policies were controls on oil and natural gas prices. Oil price controls had been in effect since 1971, initiated as a part of general wage and price controls aimed at fighting inflation, the number one economic concern of the American people according to multiple opinion polls.5 Natural gas prices had been controlled even longer. Wellhead prices of natural gas had been determined by the Federal Power Commission since the 1950s, interstate gas transmission prices since the 1930s. The worry over a rising price level was legitimate, but price controls only made it impossible for market forces to adjust quickly to shocks like the embargo. Thus, far from helping consumers by keeping prices down, controls made the disruption of the oil market in 1973–4 much worse than it would have been otherwise. In fact, it was U.S. policy that turned the embargo into a major national emergency. During the crisis, the federal government took some steps to “do something” about it, but those steps tended to be the wrong ones. Nixon agreed to congressional demands for mandatory allocation controls that were added to controls on price. Thus, the entire energy production and consumption process had top-down direction with an “energy czar” (as that official was popularly called even then) to manage both prices and allocations and coordinate a market that entailed literally millions of purchaser and production decisions every day. No “czar” could have hoped to direct such an enormously complex set of decisions successfully. Incentives usually signaled to consumers and producers through market prices were hopelessly muddled – so much so that when more oil became available in early 1974, the shortages worsened. 5

The inflation rate reached 6 percent in 1970 and, despite general wage and price controls, was more than 7 percent in the summer of 1973.

Crisis

5

Meanwhile, government officials began to offer additional ideas, ranging from coupon rationing (that is, even more control) to nationalization of energy industries (government ownership as well as control) to retaliation against Arab countries. A few Nixon administration officials, notably among staff economists of the Council of Economic Advisors (along with outsiders such as economist Milton Friedman and the editors of the Wall Street Journal), did argue for reversing bad policy by ending controls altogether, but this was never backed by Nixon nor taken seriously in the halls of Congress. The debate in 1973–4 was over whose version of intervention would prevail: Nixon’s or one of the several plans advocated in Congress. When the crisis ended that same spring, there was actually no policy change of consequence. The country was no closer to energy independence than it had been in the fall; in fact, imports were to rise over the next few years. Furthermore, although many said the crisis had proved the United States needed “a comprehensive and coordinated national energy policy” (Doub 1976), it would take other crises to motivate the policy process. At times, future crises, unlike this one, would lead to large, costly national energy programs, almost delusional at times in the belief that legislation by virtue of its passage would make scientific and technical breakthroughs necessarily happen. For the most part, these programs were reversed, abandoned, or defunded when it became clear they had made little economic or technical sense in the first place. This book shows how energy policy has played out, with variations, apparent changes, of course, and most often confusion, in successive administrations: Ford (Chapter 4); Carter (Chapter 5); Reagan, GHW Bush, and Clinton (Chapter 7); and GW Bush and Obama (Chapter 8). Chapters 2 and 6 tackle some of the theoretical issues behind energy policy, Chapter 3 fills in some early history, and Chapter 9 suggests a different way of thinking about energy policy. However, in sum, this book is about how efforts at national energy policy have had an unfailing history of leading nowhere.

2. Framework of an Energy Crisis a. What Is an Energy Crisis? There really is no such thing as an energy crisis.6 6

Despite my belief that energy crises are not crises in any meaningful sense, I retain the use of “energy crisis” to refer to periods when that was the common understanding of events. “Energy crisis” should therefore be understood as referencing time periods, not catastrophes, or upheavals.

6

U.S. Energy Policy and the Pursuit of Failure

There are tremendous quantities of energy resources, and even if one resource is hard to obtain or expensive, adjustments in production and consumption will occur. Energy resources will never be per se inaccessible; disruptions are always temporary and in a real sense self-correcting, albeit sometimes relatively slowly, leading apparently to short-term macroeconomic impacts. Nevertheless, the claim of “energy crisis” has been ubiquitous for forty years. In 1971, the New York Times made the term official with a three-part series called “The Energy Crisis.”7 A book (Rocks and Runyon 1972) by that name came out a year later; it argued that all fossil fuels were reaching exhaustion and that the future of the human race depended on the development of nuclear fusion electric generation. Over the years, members of Congress have become especially willing to issue the cry “energy crisis” whenever they hear (a) from their constituents about problems related to energy or (b) when there is a problem that can be laid at the feet of the opposition party. Jimmy Carter viewed the energy crisis as something tangible if undefined, but to him it was ongoing and worsening even when it was “invisible” (United States Executive Office of the President 1977). What is an “energy crisis”? The designation is essentially an argument that goes like this: this situation related to energy bothers me so much that it should be defined as a crisis, and because I am discomforted, it must be evolving toward catastrophe. An energy crisis manifestation is a market disruption that causes a sudden price spike or a longer-term price surge, or that leads to a transitory shortage. A crisis means there is nothing, or just not enough, to buy at the gas station today, the light does not come on at 6 pm when one flips the switch, or either of these costs “too much” – meaning more than what consumers want, or have expected, to pay. A crisis may be a logistical problem, a financial issue, or, most likely, a political failure that gives producers and consumers the wrong signals, leading producers to deliver too little of an, or the wrong, energy product or consumers to demand more than current market conditions warrant. It is comforting in a sense to regard an energy market disruption as a crisis. To be laid off from work because there was a misallocation of natural gas, as occurred a few times in the 1970s, leads to personal distress; to pay 25 percent more for gasoline today than it cost last week because of turmoil in the Middle East is also unsettling and can be especially so for families on a tight budget. That politicians and commentators dub the situation a 7

John Noble Wilford, New York Times, July 6, 7, 8, 1971.

Crisis

7

“crisis” means it is important, of national or global significance, and should be taken very seriously – like a war, an epidemic, or an earthquake. Still, for all the short-term discomfort they create, “energy crises” have had little long-term macroeconomic impact. Although there have been several energy shocks to the U.S. economy over four decades, during this period, real U.S. gross domestic product has tripled.8 Politicians like to describe energy disruptions with militant rhetoric: energy “battles” and “wars” – flattering to those who are angered or depressed by having to pay more at the gas pump but extravagantly overblown rhetoric nonetheless. Mostly, however, an energy crisis is a declaration for government to do something to change it – even when there is really nothing to change. In fact, government actions have done little to solve these disruptions; if anything, disruptions have become bigger problems when policy makers actually tried to fix them. However, for politicians, an energy crisis is often an event with sufficient impact that it could cost them their office – personally a crisis for them but not objectively something that is a catastrophe for the national economy or (as some politicians have suggested at times) a threat to the nation’s very survival and way of life. An energy crisis is an arbitrary label given generally to various kinds of energy-related problems. Not surprisingly, then, policy typically does not provide solutions.

b. Energy Crisis Economics It is straightforward for government to manufacture a shortage: to set a price ceiling below the price that would prevail in a mostly free market.9 Probably many members of Congress as well as of the Nixon administration – especially those who once took a course in economics – would have acknowledged this. In the early 1970s, however, most of them would have argued for price controls anyway, for three reasons: First, they thought controls would help curb inflation. Second, they thought there was no “free” oil market to set a price by the economic laws of supply and demand. Finally, there was a growing belief that even if the market were free to set a price, it could not do so. That is, no possible free market price could exist, and so a government price at least protected consumers.

8

9

Some have argued that the United States has a long-term energy crisis: trends of increasing consumption and/or declining production that down the road will lead to disaster. This is the basic neo-Malthusian argument that appears frequently in this book. Basic economic texts usually treat this idea with reference to laws imposing rent controls or credit ceilings (see Mankiw 2009).

8

U.S. Energy Policy and the Pursuit of Failure

Chapter 3 considers in more detail the first issue – whether price controls are a sensible way to fight inflation. Briefly, suppressing price increases of a key commodity is not the same as stopping inflation, but policy makers were acutely aware of the political salience of inflation with voters. Polls had been showing for some time that it was the number one economic issue in the country. To let it linger, to let the market alone, would have made the most sense from the standpoint of economics, but it did not seem a viable political option. The Nixon administration and Congress believed that they needed to do something about inflation from 1971 onward, and that something became price controls. The second and third arguments – that price controls were necessary because the market was not setting the price and in fact could not set a price – are two related ideas that were based on important economic and technical assumptions made explicitly or implicitly throughout the 1970s. First, policy makers believed that the U.S. government needed to fix prices because the world oil market was run by monopolists in the form of tacit (or actual) collusion between the cartel of exporting countries (OPEC)10 and the major international oil companies (often called “Big Oil”), and without government protection, the cartel members and their corporate allies could charge whatever they wanted to, gouging American consumers. For some legislators and consumer advocates, this was the whole of the problem. Big Oil and OPEC had plenty of oil, they argued; they just sat on it to force up prices and make bigger profits.11 For other officials and energy analysts, the problem ran deeper. Their implicit model of the oil and natural gas markets was based on the belief that demand was going to keep rising regardless of price; supply would keep falling regardless of price. This analysis was based on a fallacy that trends observed in the past were sure to continue in the future even if surrounding conditions have changed. Although it might have seemed that one solution to high prices was for consumers to use less oil and gas, this particular model said no. They would keep buying more over time even in the face of rising prices. The beliefs about supply and demand were based on recent history: demand had risen every year since the end of World War II. What was left out of this analysis, however, was the fact that the real price of energy 10 11

Each country had a government-controlled national oil company that contracted with international oil companies for field production. In Senate testimony in January 1974, consumer advocate Ralph Nader said the oil industry was using the crisis to commit “billions of dollars of unarmed robbery.” Reported in the New York Times, Jan. 15, 1974, 1.

Crisis

9

Price S2

S1

p

D

qs [shortage] qd

Quanty

Figure 1.1. A standard model of a competitive industry, where the market sets a price at the intersection of the demand (D) and supply (S) curves. The dark bar (p) represents a fixed price ceiling, which leads to a gap between the quantities supplied and demanded.

had fallen for twenty years. Indeed, there seemed to be an unwillingness to connect these two facts. Only the first fact – rising demand – mattered; the second was ignored because the nominal price of energy had risen. The real price required adjustment for inflation and was not posted on a gas pump or a home heating oil bill. Now, in 1973, there were shortages, which surely meant dwindling supply. QED: demand rises, supply falls. Demand kept rising after 1971, however, because price controls kept prices artificially low, and domestic supply fell because price controls reduced incentives for discovery and new production. Further, because rising prices of world oil could not be directly passed on to consumers, controls also discouraged imports, exacerbating the problem. But this was not the energy crisis narrative. It became a singular aspect of the energy crisis that policy makers directly or implicitly invoked ideas they misinterpreted or misunderstood entirely. As elementary economics textbooks would have told them, policy makers in the fall of 1973 were in the process of creating energy shortages. The rigid set of pricing rules constituted a moving price ceiling. Prices were fixed and could only rise with the approval of the Nixon administration’s Cost of Living Council (CLC). When OAPEC announced an embargo along with a cutback of production, world oil prices had to rise, but by resisting this increase, U.S. price controls were guaranteed to make a bad situation much worse than it would otherwise have been. Consider Figure 1.1. In a normal market, the price should settle at the point where supply and demand are equal. Assume supply is initially S1; the

10

U.S. Energy Policy and the Pursuit of Failure

OAPEC embargo was initiated with a cut in supply, and supply declined, represented in the figure by a shift to S2. Normally, price would rise to the dashed line above p, and market quantity supplied and demanded would fall to the point where the second dashed line intersects the x-axis; constrained supply in fact means that the price has to rise because buyers bid against each other for a smaller quantity. The higher price dissuades some buyers from purchasing as much as they had originally planned (or from purchasing at all); people conserve or find some alternative product to substitute. With the price ceiling (p), however, the cost to consumers is too low, and there is no signal to tell them they need to change their behavior. The quantities supplied and demanded are not equal; the unsatisfied demand represents a shortage. Further, successive supply cuts that are not accommodated at once by price hikes mean that there is likely to be a persistent shortage condition; both at the wholesale and retail levels, supplies would be withheld until price hikes were allowed. It may have seemed paradoxical to some in the 1970s that the United States would have long gasoline queues, as well as higher prices, but retail prices followed gas lines as prices rose according to a set of government pricing rules days or even weeks after supply cutbacks had forced world prices higher.12 If prices had been allowed to find a marketclearing level, there would have been high prices more quickly but no gas lines and no shortages. Alternatively, if price controls were absolute, the country might have had longer queues but stable prices. The United States had neither definitively, and so had both queues and rising prices – the worst of both worlds (Hall 2003). Although illustrative of how a market is supposed to work, Figure 1.1 oversimplifies and arguably misrepresents the actual world oil market of 1973–4. First, the supply and demand curves should be more vertical – that is, inelastic. It has generally been agreed by most economists that at least in the short run, both curves were relatively inelastic so that the effect of a shift in supply would have a dramatic effect on price, whereas the quantity demanded would hardly decline at all. This seems intuitively sensible because it is difficult to change energy use radically in the short run. If the price of beef goes up quickly, a consumer can immediately switch to chicken, but if the price of gasoline soars, there is no available substitute to put in the tank. The consumer does have some choice – a new fuelefficient car, less driving, carpooling, shorter trips, and so on – although 12

Queuing is just price revealed in another form; the opportunity cost of time spent in line is a shadow price (Barzel 1989).

Crisis

11

most consumers do not react to a large jump in gasoline prices by rushing out and spending thousands of dollars on a new car. Of course if prices stay high for some time, a consumer will consider ways to reduce consumption further, including a new car purchase. This picture has been borne out in empirical studies, inelastic demand and supply curves for energy resources in the short run, much higher elasticities longer term (Brown and Phillips 1991). In the short term, a greater percentage of a consumer’s income will go to energy, producing hardship especially for low-income individuals facing a sudden price spike. This does not support an argument for controls themselves, however, which are by definition disruptive and inefficient (Arrow and Kalt 1979). Still, the argument for price controls expressed repeatedly in Congress and by officials elsewhere in government in the 1970s and afterward was that what the graph in Figure 1.1 depicts was not the real oil market. The figure shows a generic market with linear supply and demand curves, and unless both curves are vertical, they must necessarily cross, resulting in an equilibrium between quantity and price. But this result is a competitive market outcome. That is, absent price controls, the market would set the price based on the many bids of buyers and the offers of sellers; no one firm or group of firms would have undue influence or control of that price; but did this apply to the oil market? OPEC appeared to be a cartel and seemed to have gained pricing power – at least so long as it was willing to curtail output. Economic theory shows that if a cartel is successful, it will act as a monopolist and maximize profits at a price above, and a level of production below, that of a competitive market. Put another way, too little will be produced, and it will be sold at too high a price. There will be a limit to how high a price a monopolist will charge given that each upward ratchet of the price requires a reduction in output; at some point, the latter will be too high and profits will begin to fall. Nevertheless, the monopoly model did seem to have some explanatory power with respect to OPEC in the 1970s. OPEC’s market power led to a quadrupling of nominal oil prices (from just over $3 per barrel – $3/bbl – to more than $12) during the period of the embargo. In real terms, oil was arguably underpriced in the fall of 1973. As Figure 1.2 illustrates, the real price had declined for most of the previous decade, and, as the figure shows, had a pronounced downward trend. If price had followed inflation, oil would have cost in nominal terms around $4.50 per barrel in 1973. Still, even from that perspective, OPEC had market power to effect a price more than double that which merely accounted for inflation – and to put it into effect very quickly.

12

U.S. Energy Policy and the Pursuit of Failure

22.5 22 21.5 $/bbl

21 20.5 20 19.5 19 18.5 18 1

2

3

4

5

6

7 Years

8

9

10

11

12

13

Figure 1.2. Average Annual Real Price of Oil 1960 through 1972, constant 2005$. Data from nflationdata.com/inflation/inflation_rate/historical_oil_prices_table.asp.

At the same time, it may be argued that the oil market was never competitive, and certainly had not been for decades. Before OPEC, it was a tight oligopolistic industry, dominated by seven giant international vertically integrated oil companies – the so-called Seven Sisters (Samson 1975) – that had had their own international cartel arrangements earlier in the century. Now, it was argued that the international companies collaborated with OPEC to maintain high prices and profits, and together they controlled the oil market’s price and quantity. Moreover, even in the 1970s, although it would have been fair to say that there was no competitive market price for oil, the lack of such a price was caused not only by OPEC and the oil companies but also by the U.S. government. The federal government had controlled oil prices since 1971 and, even before the 1973 embargo, directly controlled some allocations as well. But government intervention in oil markets was not a 1970s innovation. State and federal agencies had manipulated quantities and prices of oil for decades. The domestic oil market had faced production controls imposed mainly by the Texas Railroad Commission from the 1930s to 1972, which were used to manipulate prices, and at various times, there were import restrictions as well. The oil industry had not always been unhappy about these interventions and at times sought government intrusion, especially when prices were low. However, some policy makers argued not only that a competitive market price was absent but that it was impossible. This assertion was hardly universal. In fact, in late 1973 and early 1974, various economists tried to calculate a market clearing price for the most visible petroleum product, gasoline;

Crisis

P

S

13

D

Q Permanent Shortage

Figure 1.3. In this graph, demand and supply curves are strictly vertical and thus an intersection of demand and supply is not possible, and the market cannot achieve an equilibrium price. The curves are also assumed to be moving in opposite directions over time.

the conclusion was that the market would have cleared – and the gas lines ended – at a price of $0.60 to 0.80 per gallon. The actual price (with the various controls that were in place in the United States) was between $0.40 and $0.50 (Leeman 1974).13 Then again, this sort of conjecture hardly mattered. The major branches of government concluded that because there was a price-setting cartel and rapacious Big Oil companies, the United States needed to retain price controls, and did so into the 1980s – with all the problems that government price setting entailed. Yet, according to some analysts, it was not only OPEC that made a free market in oil impossible. As depicted in Figure 1.1, the oil market would find an equilibrium price and quantity if allowed to. Even a fairly large shift in the supply curve (even if the curves were nearly vertical) does not change the basic logic of the graph; there is still an evident market-clearing price at the intersection of S and D. Many policy makers viewed the oil market as a special case, however. It was believed that the curves actually looked like Figure 1.3. Both supply and demand curves were completely inelastic, separate and moving in opposite 13

It should be noted that if controls had been lifted during the embargo, shortages would have ended, but only because prices would have risen substantially, not because of new sources of supply. Although production could have been expanded to some extent if the price warranted it, American (and other non-OPEC) oil producers would have needed some years to develop new wells. Thus, even if the United States had abandoned controls, OPEC would have retained pricing power for some time.

14

U.S. Energy Policy and the Pursuit of Failure

directions. There was already or about to be a perpetual shortage condition, a “gap,” it was argued, between supply and demand. But what were the assumptions behind this argument? As noted, they had to be that demand would grow inexorably regardless of price, and supply would shrink regardless of price. This gap was just a short-run phenomenon according to a few experts14 ; that is, the supply curve was fixed and vertical in the short run but was more elastic in the long run. That meant there would be a shortage period, but ultimately incentives for expanded energy production capacity could bring supply back to a point where an equilibrium with demand was possible – a point, it was to be hoped, at some reasonable price. To others, including many politicians, this was a condition that might persist for generations, getting successively worse over time as the gap persisted and grew inexorably. This idea gained intellectual credence with the publication of the neo-Malthusian Limits to Growth (Meadows et al. 1972) and through wide citation of M. King Hubbert’s (1969) work on resource exhaustion.15 The fear of “running out” was worsened by public misunderstanding of what cited figures on oil and gas reserves – the common measure typically found in articles of the period – really meant. Thus, in 1973 when it was reported in the New York Times that there were 11.5 years of reserves of natural gas in the United States, the report was given no context. Many readers assumed that by 1985, the country would have no more natural gas.16 Oil would be gone in perhaps twenty years. Reserves, however, measure only known resources that can be extracted profitably with current technology at current market prices (Cassedy and Grossman 1998). Thus, if the price rises, so typically do reserves; if the cost of drilling falls, reserves rise. New discoveries also may increase reserves. All of this says little about when the resources themselves might be exhausted. Many in policy-making positions, including presidents of the United States, have, in fact, embraced the neo-Malthusian view depicted in Figure 1.3, and it has motivated policy. But it was, and is, also nonsense. A leading economist described it as “intellectually bankrupt – though commonly held” (Alchian 1975, 4), but more pertinent was that “no such gap exists or can exist (except momentarily or when governments hold down the price 14

15

16

For example, “Statement of John G. Winger (Chase Manhattan Bank, head of the bank’s Energy Economics Division),” made to the Senate Finance Committee, WSP, FEO, Drawer 13, Nov. 29, 1973. Also, Twentieth Century Task Force (1977). The idea of oil and gas “running out” was taken as a given by many other scholars; see, for example, Manne (1975). The gap idea was also prevalent in the Ford Foundation study, A Time to Choose (1974). According to the Energy Information Administration, there were still about 11.5 years of proven reserves of natural gas in the United States in 2007, and the amount was rising.

Crisis

15

below the competitive level)” (Adelman et al. 1977). Figure 1.3 has bizarre implications: if the price is infinite (or just very, very high), people will demand the same amount of oil. The problem is no longer a monopoly price of oil but rather an arbitrary one that has no real limit. Supply, as shown, turns out to be inadequate to meet demand at any price; shortages become ubiquitous and inevitable. But consumers will not try to substitute or conserve any further than they absolutely must. In the meantime, the owners of oil – OPEC, Big Oil – can extract rents of enormous size, sucking most of the wealth out of the United States, if not the world. Yet, despite this fabulous opportunity for profit, there would be no ability to expand supply elsewhere. Although there is indeed ultimately some level at which supply is finite, this graph is not about some ultimate limit. It shows a market quantity that simply could not be expanded. In other words, there seemed to be conflation as to what might be available tomorrow with what might be available in a thousand years. Little would be available today, less tomorrow, still less in ten years, and so on until soon enough the “tap would run dry.” This kind of thinking marked the energy debate, particularly in the 1970s, but it has been repeated often since, with continuing predictions of near-term resource exhaustion.17 A gap, if not yet visible, was/is/will be coming. Yet, the debate often suggests nothing more than a great deal of technological and geological ignorance to go along with ignorance about economics – ignorance embedded in the implicit model behind policy.

c. The Cost of Living Council and Phase IV President Nixon instituted price controls in the summer of 1971, and by July 1973, the administration had tried three versions – or phases – of controls that had not worked particularly well. Thus, it was time for Phase IV. This new version was to take effect in August, and under Phase IV rules, controls on many products would be eliminated – but not controls on oil. Phase IV was aimed at the oil industry (natural gas was under a different set of price control rules that had been in place, as noted, far longer), and while previous phases had been time-limited, controls on oil were to be continued “indefinitely.” According to Phase IV, oil companies could only pass costs along to consumers, not extra profits, and even these cost-based price hikes had to be approved by the CLC, which promised to give all requests for 17

There have been continuing predictions of so-called peak oil, the point at which world oil resources would begin an inexorable decline to exhaustion. See discussions in Chapters 3 and 8.

16

U.S. Energy Policy and the Pursuit of Failure

increases intense scrutiny and only in due time. Prices might be permitted to rise “periodically,” the council said, using an imprecise term not initially defined, but only on a schedule permitted by the council, typically days or weeks after the price on world oil markets had risen. Just how they would determine that a hike contained “only” costs was not clear. What was likely was that delay in allowing a pass-along would have an impact on the market. Why would a company sell oil today when it could sell next week at a higher price? That was why steeply rising prices in the world market seemed especially problematic. Yet, the precrisis debate focused mostly on whether these controls should be augmented by mandatory allocation controls. There had been a voluntary allocation system in place since the spring, but there were many in Congress, especially opposition Democrats, who were adamant that mandatory allocation controls were needed. The only reason to endorse them, according to the head of the White House Energy Policy Office (EPO), John Love (the U.S. “energy czar”), was because Congress was going to try to force controls, and if the Nixon administration opposed them, it would be blamed for the shortages that appeared inevitable anyway. The administration did impose allocation controls just before the embargo on a few products, including propane,18 aviation fuel, heating oil, and diesel fuel. But for the Democrats’ leader on energy matters, Senator Henry “Scoop” Jackson (D-WA), who had advocated mandatory controls since April 1973, these few controls were not nearly enough. Phase IV did contain one innovation that was supposed to boost the domestic supply of oil. It divided domestic oil production into “old” oil and “new” oil. Old oil was measured as the amount pumped the previous year from a working field; this output under Phase IV was kept at a low fixed price; wellhead prices were allowed to rise periodically but not directly to world market prices. New oil was everything else and included imported oil as well as all oil from so-called stripper wells,19 which could be sold at something approximating market prices, although the prices of products derived from this crude – gasoline, for example – had to go through the CLC. There was no immediate price pass-along, so if refiners had to pay world market price for oil, they could not simply raise the price of gasoline to the wholesaler, nor could the wholesaler simply raise the price to the retailer. All of this kind of pricing was still controlled. 18 19

Propane is actually a liquid by-product of natural gas. These wells produced ten barrels of oil per day or fewer.

Crisis

17

The government capped the price of “old” oil first at $4.25 per barrel; in November, as the Arab embargo began to affect world prices, the CLC allowed old oil to rise further, to $5.25. Meanwhile, in the rest of the world, the price of oil rose to about $11.65 per barrel in December and to $12.15 early in 1974, four times the preembargo price. But the underpricing of this “old” oil made it relatively unprofitable for producers to pump much of it out of the ground. There was also a disincentive to use more costly enhanced recovery technology to extract more oil out of an established well that did not flow naturally to the pipe, especially if this left the quantity taken out of the ground unchanged from the previous year; it would all be classified as “old.” The exemption for stripper wells proved especially problematic. There were a few hundred thousand small oil wells in the United States with an average output of eighteen barrels per day (bbl/d). Most of these wells qualified as “old oil” except if the output was low enough for stripper designation. Because the price of stripper oil was at times more than double that of the fixed old-oil ceiling price, the rules created an economic incentive for producers of “average” wells to reduce output by almost half so that the well could be reclassified as “stripper.” In other words, the old oil–new oil pricing distinction may have provided some incentives for new drilling, but a new well takes time to bring on line. Meanwhile, domestic supply would fall as output was cut at thousands of wells for reclassification, a process that could occur at once (Vietor 1984). The old–new pricing did not, of course, solve the basic problem with government pricing itself. Overall, in the fall of 1973, oil products and especially transportation fuels were underpriced, and so demand typically exceeded supply. When the CLC allowed a price hike, it often was late and another would have been required immediately thereafter to equilibrate the market. Instead, consumers paid the additional price by standing on line. Phase IV had been meant to cure inflation, but inflation persisted as a problem anyway. Phase IV did not in fact cure anything.

3. The Embargo The October 17 embargo should not have been a great surprise. The day after the start of the Arab-Israeli War, which began on October 6, OAPEC members announced their intention to use oil as a weapon against any country aiding Israel. Ten days later, following the lead of the world’s largest oil exporter, Saudi Arabia, they announced an initial step: a complete embargo

18

U.S. Energy Policy and the Pursuit of Failure

against the United States and the Netherlands20 and a general production cutback of 5 percent. That cut, though small, was slated to grow each month by another 5 percent. The cutbacks were necessary for the embargo to have any meaningful effect. If production was unchanged, since oil is fungible, there would have been incentives for supply to be diverted to any customers willing to pay. If an Arab nation refused to ship directly to the United States, another country’s supply could simply have been used to replace it.21 By November 4, when the countries met again, it appeared that the production cuts were already much steeper than originally declared. It was reported that Saudi Arabia had cut production by 35 percent, and it was announced that OAPEC’s cuts would soon total 25 percent over their export level of September, around 5 million barrels per day (MBD). Another round of cuts – another 5 percent – was planned for December. In the United States, EPO officials estimated that by the first quarter of 1974, there would be a shortfall of 3.46 MBD, a reduction of almost 20 percent of normal demand (17 MBD) and more than half of U.S. imports. The precision of the estimate made it seem like a carefully quantified sum, and it suggested a dire result. It proved wildly wrong; at its worst, the embargo reduced U.S. supplies by around 900,000 barrels per day. Then again, most of the forecasts that came out during the embargo were wrong or at least confusing. The Washington Post in a December 23 editorial argued not incorrectly that the Nixon administration was clearly bewildered about the facts concerning oil. The embargo of October 17 did not produce any immediate distress because oil inventories reflected previous purchases, not future ones. But problems inevitably began to emerge. Because of the production cutbacks, all OPEC members recognized that this meant higher world prices.22 In fact, on October 16, the day before the embargo announcement, OPEC lifted the “official” price of crude oil from $3/bbl to $5.11. Individual countries went further. Soon after the $5.11 price was announced, Venezuela, although not part of any boycott, raised prices another 56 percent to more than $7/bbl. 20

21 22

The Dutch did not suffer from shortages and appear to have managed to acquire adequate supplies throughout the 1973–4 period. The only shortage experienced in the Netherlands was a shortage of official information on just how and from where the Dutch were acquiring oil supplies. Of course, that country did not have the destructive system of controls on prices and quantities that the United States maintained. See, for example, “Diversion to Dutch of Oil Is Suspected in the Netherlands,” New York Times, Dec. 31, 1973, 27. In fact, diversions occurred anyway; tankers were diverted in mid ocean to the United States during the boycott (Bryce 2008). Some non-Arab countries increased production to take advantage of the OAPEC embargo (Lane 1981).

Crisis

19

Libya, which did join the boycott, posted a price of nearly $9.23 Such independent price hikes beyond those authorized through OPEC were actually a sign of instability in the cartel, what has been labeled “up-cheating” on cartel agreements (Kreutzer and Lee 1989). This was a departure from what is typically the problem for cartels; normally cheating on cartel agreements means cartel member cut prices to grab market share. But for the time being at least, the up-cheaters were able to gain advantages without OPEC collapsing in the process. The CLC, meanwhile, recognized that these hikes needed to be accommodated, and it faced pressure from oil companies and wholesale and retail gasoline dealers to allow automatic price pass-throughs. But the council announced in October that it would hold off any decision for two weeks to allow its staff to consider how best to proceed. In fact, the council ultimately decided to accommodate world oil price hikes, but only once a month, in practice in the first week of the next month. In other words, if oil were purchased at a higher price on the tenth of any month, the price charged to retailers and consumers could not be raised until the first of the next month. Not surprisingly, at the end of October, gas station owners recognized that they were going to be allowed a price hike, and so many simply closed their doors or restricted sales (a few gallons per car) until November 1 (Lane 1981). More often, refiners held off supplies at the end of the month so they could charge wholesalers (and they, in turn, retailers) a higher price. Whatever the chain, however, the result was still the same: shortages were especially acute until the price was allowed to catch up. This pattern – stations closing or restricting supply at the end of the month – would repeat until the following March. In many cases, gas stations that remained open would see long lines, especially in cities where shortages became especially severe. Despite the talk for three years about an “energy crisis,” the potential impact of this oil “shock,” as many called it, had not been studied or predicted. White House economic advisors had not considered what might happen to the economy in the event of an economy-wide oil shortage until after the embargo had been imposed.24 Now with a crisis at hand, some sort of action appeared necessary.25 23

24 25

After the embargo was imposed and production cuts were instituted, unofficial world prices were in the $15 to $20/bbl range (Griffin and Steele 1986). This was higher than the posted OPEC price and far above the average of controlled and decontrolled prices in the United States (Bradley 1996a). “Oil Shortage – The Economy’s New Puzzle,” New York Times, Nov. 3, 1973, 85. One long-term hope was the creation of an international organization of consuming nations to counter OPEC. Meetings in November and in early 1974 led to the creation of

20

U.S. Energy Policy and the Pursuit of Failure

Shortly after the embargo was declared, EPO chief Love convened a group at the White House called the Energy Emergency Planning Group, and he created various task forces “not to study but to act.”26 The shortages, although “small” at first, were expected to get “significantly worse soon,” if the shortfall reached the enormous levels that were predicted.27 There were soon many proposals to deal with the immediate crisis, such as banning ornamental commercial lighting and prohibiting retail sales of gasoline on Sundays. But both within the Nixon administration and in Congress, there was a sudden belief that this was a longer-term problem that needed to be addressed at once and dramatically. What did a crisis apparently borne of energy resource import dependence seem mostly to call for? As Nixon would argue: energy independence, selfsufficiency for energy security. This was a remarkable step. The United States had some policies related to energy but nothing that could have been called an “energy policy.” Now there was to be a policy with a goal of complete self-sufficiency, energy autarky. This proposal was both breathtaking and absurd – especially so as Nixon as well as members of Congress demanded low energy prices to accompany self-sufficiency. But in 1973, before government officials could implement long-term policies, they faced an urgent short-term political matter. Officials were asked by an unhappy public to address the crisis. As Representative H. John Heinz III (R-PA) said on the floor of the House in early November, his office was “inundated” by outcries from constituents who demanded that Congress “get busy and do something.”28 But what could they do that would at the very least protect them with voters? Although most legislators arguably did not then (and most ever) really understand the complex issues connected to energy, they did understand the political side of the problem: they could not not “do something.”

4. The “Do Something” Problem At a time of perceived crisis, according to many scholars, the normal processes of government are suspended (e.g., Carr 1940; Ahrari 1987; Higgs 1987, 2009). Higgs (2009) has noted the “do something” problem in the context of economic crises, which he argues gives opportunities for rent

26 27 28

the International Energy Agency (IEA), but since it would take more than a year to form (it held its first meeting on Nov. 18, 1974), it could hardly be of use in this crisis. NPL, memo Love to Nixon, EPO (Love), Box 1, Oct. 12, 1973. NPL, “talking points” memo for John Love, EPO, Box 2, Oct. 11, 1973. CR, 93rd, 36337, Nov. 8, 1973.

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21

seeking. But there is also the need for politicians to respond to a situation that entails the implicit political threat. “Do something or we (the voters) will find someone who will!” But in 1973, the question was, do what? A model of the “do something” decision problem (Grossman 2012)29 draws mainly on the literature of the effects of shocks on policy, particularly Downs (1972). Downs, whose analysis of crisis policy making predated the energy crisis but seemed to prefigure it, noted that shocks produce public “alarm” followed by a can-do spirit calling for dramatic solutions.30 But the shock sets off a process – a process within government that occurs in steps of ascending commitment and cost. The cost that is most worrying for elected government officials is a loss of their electoral support. But shocks that produce perceived crises upset normal political calculations and require responses.31 First, political leaders must make a rhetorical statement in sympathy with their constituents, and some promise to “do something” more concrete. This shows engagement with the problem. Blame may also be useful rhetorically. If there is an identifiable villain, then finger-pointing makes headlines and shows concern. But a rhetorical step has its own political consequences. This becomes not just an aimless bit of speechifying but rather, as Mayhew (1974) has put it, “position taking.”32 Such a response, according to Mayhew, is especially important if there are actions that prove productive so that they can indulge in another part of the political process, “credit claiming.” At the same time, the hope of “credit claiming” has to be weighed with the uncertainty of whether there will be any credit to share. Doing the wrong “something” might instead result in blame. Thus, the initial reaction has to be able both to deflect criticism of inaction and to avoid blame from having acted inappropriately (Weaver 1986).33 In late 1973, there were statements about the need for government to act, but these were often general and vague as to what or how. As one 29 30

31 32 33

See the Appendix for an extended discussion of the model in Grossman (2012). Jones (1974) and Eyestone (1978) also provide useful insights into the response of policy makers to shocks. More recent efforts to integrate shocks into policy models include Kingdon (1984), Jones and Baumgartner (2005), and Sabatier and Weible (2007). See also Schlager (2007) for a discussion of these models. As Eyestone (1978) argues, there are large political costs in failing to respond to situations deemed especially distressing to the electorate. This also is a form of “framing” or “characterizing” of the issue on which there is a considerable literature (e.g., Sch¨on and Rein 1994; McAdam et al. 2001). Weaver (1986) argues, in fact, that “blame avoidance” is the more important consideration because voters are said to have a greater sensitivity to losses than to gains.

22

U.S. Energy Policy and the Pursuit of Failure

congressman argued, “I believe the energy crisis can be solved but only when this body takes the leadership of acting on proposals that are now before us.”34 The fact that there were dozens of proposals introduced within weeks of the embargo, some of them mutually exclusive, meant that constituents could interpret his remarks as they – or perhaps the congressman – wanted. Obviously, he forcefully expressed himself in favor of doing something and could not be taken to task for silence or inattention. But as long as a crisis atmosphere persists (especially if its effects are experienced acutely or persistently over time), doing something also means a second step: an expression of intent to act. Intended action is typically in the form of proposed new legislation or perhaps in reviving legislation that had been in the background when the issue was much less important to voters. But for the moment, it will not be relevant for elected officials actually to pass legislation. Any legislated acts would necessarily take time to debate and implement. Yet to propose, or at least cosponsor, legislation would signal a desire to act, an intention to address the matter. It is entirely possible that little more will need to be done. By their nature, “crises” emerge suddenly but often are resolved quickly without specific government actions. However, persistence leads to the third step in the trajectory: legislative action, implementation of policies to “do something.” Policy steps may be of a largely symbolic nature, but if there is no natural resolution of the problem, the logic of the “do something” process leads eventually toward passage of something perceived to be a “solution.” Whatever is proposed in a crisis atmosphere is likely to be accompanied by great uncertainty. There will usually be considerable emotion but little concrete data to guide policy. Rent seekers will be putting their own twist on the crisis, but often there are competing versions of solution legislation, which may reflect party or particular group interests. Most members of the public will have no clear idea of what can or should be done; elected officials are likely to be equally perplexed about the efficacy of any kind of action (Downs 1972). Estimation of costs and benefits will be highly subjective and largely guesswork with a general but unstated recognition that variances could be vast. Before the October 1973 embargo, energy policy was not foremost on policy makers’ agendas.35 In fact, arguably, a different crisis was far more consequential: corruption in the Nixon administration. October witnessed the resignation of Vice President Spiro Agnew and rising concern about 34 35

Manuel Lujan, Jr. (R-NM), CR, 93rd, 36337, Nov. 8, 1973. There is a significant literature on the effects of shocks to agenda setting in the political process. See, for example, Baumgartner and Jones (2009) and Sabatier and Weible (2007).

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23

the president’s involvement with the Watergate scandal.36 Still, there had been some attention on energy; in fact, a few measures had been sent to congressional committees earlier in the year. But until October, these ideas remained in the background, and the committees had not been ready to act on them. With the embargo, members of Congress initially engaged the policy process, as expected, through rhetoric, mostly blame rhetoric. They cast blame on the oil companies (as their constituents did), but they also blamed OAPEC, the Nixon administration, and the distraction of the Watergate scandal. Some, like Representative Michael Harrington (D-MA), chose to link the Nixon administration and the oil companies and blame both of them together. Nixon, for his part, blamed Congress, which he claimed had never acted on energy measures that he had asked for in the spring. But even while the speechmaking and finger-pointing continued, the administration as well as legislators took the next step: consideration of energy-related policy measures. Although it was uncertain just what actions would have the greatest benefits (or the lowest costs) politically, the president and many legislators hastily put together ideas for a new energy policy direction, based on a new evolving energy narrative. Energy “crisis” legislation came in two basic categories, symbolic actions and solutions (or really purported solutions) – categories that were not in principle contradictory. Indeed, Nixon’s own “solution” blueprint, Project Independence, contained both sorts of measures. Symbolic steps were widely suggested. In the aftermath of the Arab embargo, for example, Senator Charles Percy (R-IL) spoke of the need to turn off the “ceremonial holiday lights” around Washington, DC, as an example to the American people.37 Such gestures would be low-cost and easily implemented – measures that could actually be put into effect immediately. Moreover, symbolic gestures such as Senator Percy’s would be most beneficial politically because a darkened Washington holiday would have been a conspicuous sign that the government appreciated what every American faced. In fact, on November 25, 1973, President Nixon announced the curtailment of White House lighting over the Thanksgiving to Christmas period, and he asked all Americans “on a voluntary basis to reduce or eliminate unnecessary lighting in your homes.” It should be noted that these sorts of actions, which I have termed “symbolic,” were not necessarily presented that way by their proponents. 36 37

The so-called Saturday Night Massacre, Nixon’s dismissal of Special Prosecutor Archibald Cox, took place on Oct. 20, 1973. CR 93rd, 36559, Nov. 9, 1973.

24

U.S. Energy Policy and the Pursuit of Failure

The Nixon administration argued that the only short-term answer to the embargo was drastic conservation, and the EPO came up with a list of seemingly symbolic gestures that were nevertheless expected to cut consumption of oil by more than 2 MBD. Those estimates were as flimsy and as hastily put together as most of the legislation, but numbers gave proposals an aura of truth. Turn off lights, reduce winter indoor temperatures, drive more slowly, shut off holiday light displays – somehow this would add up to 2 MBD saved. There was no likelihood that these kinds of results were possible. But symbolism was extremely popular. In a number of cases, in fact, legislators introduced variants of the same symbolic bill. Nixon had asked to extend daylight saving time (DST) for the full year. Congress generally agreed, and in fact that action became law on December 15. But throughout November, legislators introduced bills to make this change for one year, two years, three years, or longer, or shorter – in any case it allowed the members to say that something should be done and then to put their names on a specific action, however limited or redundant. The daylight savings bill, like many of the symbolic proposals, was sold with extravagant but confusing claims as to its efficacy. How much oil would year-round DST actually save? In Congress, it was asserted in late October that DST would save 30,000 bbl/d or less than 0.2 percent of all oil consumption. When Nixon signed the bill in December (a two-year trial of year-round DST), he cited a figure of 150,000 bbl/d,38 and the New York Times cited the Interior Department that the savings would be 95,000 bbl/d.39 Nevertheless, getting the children up to go to school in the dark of winter – as DST meant in many states – was symbolism that could not be ignored, whether it saved 100,000 bbl/d or none at all. The gesture, however, was low cost in dollar terms and was an immediate “something.” This bill passed by lopsided margins. (The margin was more than 6 to 1 in the Senate.)40 38 39

40

Nixon signing statement, on signing the Emergency Daylight Saving Time Energy Conservation Act of 1973, at: http://www.presidency.ucsb.edu. Richard L. Madden, “Congress Votes Daylight Savings Time for Two Years,” New York Times, Dec. 15, 1973, 17. Actual realized savings were hard to measure but were clearly just a token amount at most. In fact, the bill had the virtue that one could claim almost any result without fear of empirical contradiction. By January 1974, bills were being introduced to repeal DST as a few legislators from farm states argued that their constituents were disadvantaged. Others claimed that sending children to school in the dark represented a safety hazard. There were reports of several children being killed in accidents.

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Symbolic gestures included more intrusive steps. Nixon also sought to make a mandatory national highway speed limit of 50 miles per hour, again a measure that could be implemented quickly and would be visible to every American driver (although perhaps with little general enthusiasm). This, too, was expected to have a profound effect on consumption patterns, with Nixon claiming a daily savings of 200,000 bbl/d.41 A number of congressional bills included measures as diverse as mandatory limits on commercial business hours to ending mandatory (desegregation) busing of students to banning Sunday gasoline sales (which was already a voluntary conservation initiative of the Nixon administration).42 The huge projected savings notwithstanding, little actually resulted. First, many of the restrictions were voluntary. More important, the prices of oil and gasoline were kept low; rigid “old” oil prices meant that U.S. petroleum product prices were consistently lower than world prices even after a price hike was allowed. That was the point of price controls that few policy makers talked seriously about repealing. But because of the artificial price ceiling, there was no particular economic incentive to conserving, and little conservation was in evidence. Gasoline consumption in the fourth quarter of 1973, for example, was actually 2.8 percent higher than it had been in the last quarter of 1972. In fact, for all the outcries, the speeches, the vilification, the demands from distressed citizens for Congress to “do something,” by the end of 1973, what had been accomplished either did little good or did outright harm.43 A few days into the new year, Congress added a compromise 55 mile-perhour national speed limit. There was also a more or less “Official Voluntary” ban on Sunday gasoline sales beginning in December. Many other voluntary measures were announced, but none of them could be monitored or verified, and they did little to cut consumption. Total petroleum demand (not just gasoline) in the last quarter of 1973 was above that of the same quarter in 1972. 41

42

43

Representative William Scherle (R-IA) argued that little fuel would be saved; few people would obey a 50-mph limit, and the slowdown would be bad for the trucking industry. WSP, Letter to EPO, EPO File, 13, Nov. 30, 1973. There was a suggestion that Indianapolis cancel the Indianapolis 500 because it used more than 40,000 gallons of gasoline, but the energy czar at the time, William Simon, dismissed the idea, calling the 500 “Americana,” although suggesting that the government needed to look at “the entire leisure industry” (White House Press Conference Jan. 23, 1974). Congress did authorize an Alaska oil pipeline, which Nixon had been seeking for some months before the crisis broke, but although there were extravagant claims as to what such a pipeline might mean to U.S. energy supplies, any impacts would be years in the future.

26

U.S. Energy Policy and the Pursuit of Failure

One area in which government efforts forestalled shortages was in heating oil. Owing to supply problems of the previous winter, refineries were urged to produce more distillates – of which heating oil was the primary output. But this was accomplished not so much by government directive but rather by a more flexible attitude on price. While the price of gasoline rose 32 percent (in real terms) during the embargo period, the price of distillates was up close to 50 percent, and fears of people freezing in their homes were never realized. It was, it should be noted, an unusually warm winter, but heating oil stocks were significantly larger than they had been the winter before as price hikes provided incentives for refinery production. Yet with the arrival of 1974, the “do something” process was not at an end, because the “energy crisis” did not end. In fact, one bill passed in November made the crisis more disruptive in the new year than it had been in the last two months of the old.

5. The EPAA and Its Consequences No action had a greater impact than the one Nixon agreed to in November. He signed the Emergency Petroleum Allocation Act of 1973 (EPAA), which Senator Henry Jackson had first introduced in the Senate in April.44 The bill added a mandatory government allocation system for gasoline and most other oil-related products to the mandatory government pricing system. Nixon had opposed this in the spring, but on November 27, with opinion in his administration sharply divided, he finally signed it. It was never intended to solve the energy crisis; it was just meant to minimize “its adverse impacts.” While there were already mandatory allocation controls on a few petroleum products, the EPAA extended the system to the “whole barrel” of oil-related products.45 Congress had sought this for “fairness,” and the Nixon administration agreed that the goal of the program should be to allocate for the benefit of the “ultimate consumers” of petroleum products. This completed the process of energy market centralization: now government had to decide where oil and gasoline would go and to whom as well as what the price should be. But the government could not anticipate where needs would be greatest and could read the signals only after the 44 45

S. 1570, introduced Apr. 13, 1973. Another reason for allocation controls was to help small refineries. In fact, the bill as drafted by Senator Jackson was intended mainly to secure supplies for small refiners who were losing out to the large operators as more and more imported oil was brought into the country. The bill stipulated that the government was to ensure that there were sufficient supplies of crude oil for all to operate at full capacity.

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27

problems of misallocations were already obvious to everyone. It never could overcome the inherent calculation problem of such schemes (Hayek 1945). So with the addition of this system, the oil market in the United States became even more chaotic, and consumer distress was only heightened. In charge of allocation and (as of the end of December 1973) price controls as well was reputed free-market advocate Deputy Treasury Secretary William E. Simon, who abruptly succeeded John Love at the beginning of December as head of the White House EPO, which was renamed the Federal Energy Office (FEO).46 Simon, who was later to become Treasury Secretary, had to come up with an allocation scheme as soon as possible and proceeded in what seemed the most logical (although definitely nonmarket) way: he chose to make allocations for 1974 on the basis of consumption in 1972 – the so-called base period. But this system would have worked only if the national economy had been entirely static for 12 months.47 As it was, this system guaranteed misallocations. Simon issued the allocation rules on December 12. “This is not rationing,” he insisted in his press release. “[Rather it is] a system to ensure the equitable distribution at the wholesale level.”48 It would cover everything from crude to refined products and was to become effective on December 27. Virtually everyone had to accept cutbacks; the airline industry, for example, was to be cut back by 15 percent. Fuel for general aviation (noncommercial flights) was cut even more. From the outset, Simon’s office was inundated with protests from individuals, firms, organizations, and most especially members of Congress, carrying protests on behalf of their constituents. Airline pilots threatened a nationwide strike. The rules were called “disastrous” and were said to have sown “tremendous confusion and alarm.” In some cases, it was reported that suppliers could not even meet the allocation requirements. This only illustrated the main problem with top-down directives: the rules tried to force suppliers at various points of the chain essentially to stop what they were doing and do something else to meet allocation demands – if in fact they 46

47

48

In a reorganization of energy policy and the renaming of the Energy Policy Office as the Federal Energy Office, Nixon had hoped to have Love remain but as deputy to William Simon. Love (as well as his deputy Charles DiBona) resigned rather than accept what Love saw as a demotion. “Love Quits Posts After a Shake-up in Energy Agency,” New York Times, Dec. 4, 1973, 93. This idea followed procedures of Eastern Europe’s central planners, who made allocations based on previous levels of consumption and consequently produced permanent shortage economies (Kornai 1992). Quoted in “Plan for Allocating Fuels Outlined By Energy Office,” New York Times, Dec. 13, 1973, 97.

28

U.S. Energy Policy and the Pursuit of Failure

could. As Simon was told when he authorized an increase in the production of jet fuel, “there is no way that these refiners can physically produce” the additional fuel in the time they were expected to produce it.49 Gasoline allocations were often greatly out of line with actual demand, and inevitably some places got too much, some not nearly enough. Florida’s governor protested that 1972 fuel use was not an accurate way to measure 1974 needs. The number of vehicles on the road in his state, he asserted, had grown in the previous two years more than anywhere else in the country. Arizona, too, which had had a significant population influx and a booming economy since the end of 1972, saw gasoline demand rise almost 10 percent in 1973, which meant that the base period allocation was set far too low. Wyoming, on the other hand, had plenty of gasoline. Allocations were also complicated by a priority system – agricultural production, sanitation services, emergency services, and a few others were to get 100 percent of 1972 base allocation. States were allocated 3 percent of the total allocation for that state to distribute according to particular state needs. Only after these groups received their allotments did wholesalers (and then retailers) get their supply. Furthermore, Sunday bans (even voluntary ones were mostly observed) on gasoline sales led to changes in driving patterns. Urban drivers did not take long trips for fear of running out of fuel with no open stations around, so driving and fuel purchases tended to be local. But because allocations were based on previous patterns, allocations to urban gas stations were too low; Chicago’s shortages in late January, for example, were said to be severe. Rural stations, on the other hand, which had received allocations based on years when urban dwellers took longer trips, often found themselves with surpluses. The system led to particular problems for truckers.50 By January, there were trucking strikes in areas where allocations did not meet demand. Seventeen trucking groups lobbied Congress and the Nixon administration intensively. They also wanted to be able to pass along their increasing fuel costs to their own customers. The White House promised action – including a promise to make sure that truckers were not subjected to price gouging by gas stations. Yet the problems for truckers continued, and in February, independent truckers struck for eight days and protested with a “roll” on Washington, which led to trucks circling the White House. There were also a few cases of violence as striking truckers shot at nonstrikers. The strike 49 50

WSP, various December 1973. Diesel fuel was also subject to allocation controls.

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29

ended only when truckers were added to the list of priority users entitled to a 100 percent allotment. As of February 1974, U.S. policy had made a shambles of the domestic market for oil products. It was reported that 20 percent of gas stations in the United States had no fuel to sell,51 a curious development given that in January the OAPEC producers had increased exports so that the total production cutback was only 10 percent, less than half the shortfall that was feared. Objectively, the situation seemed positive. The British magazine The Economist predicted an oil glut later in the year, a view echoed in an internal Office of Management and Budget (OMB) memorandum to Director Roy Ash.52 With stepped-up imports already coming to the United States from Venezuela and Nigeria (which were taking advantage of OAPEC’s cutbacks), there was every reason to assume that the problems should have abated.53 Instead, with government controlling prices and now all quantities as well, market forces that would have gotten supply to match demand were thwarted. U.S. policy had left nothing that resembled a functioning market. At the same time, the thrust of the debate did not change. Government was still searching for mechanisms to solve the energy crisis by the right sort of intervention.54 In fact, many policy makers thought a system of direct rationing, distributing coupon books as the government had done during World War II, was the answer. Senator Jackson’s congressional committee reported a preference for rationing, and the senator himself expressed “surprise” that the Nixon administration was reluctant to pursue it. Simon argued for standby rationing authority, but the administration said that rationing would be a “last resort.” Meanwhile, several states took matters into their own hands and devised interim rationing mechanisms. One that gained wide use was the odd-even system. People were entitled to gasoline on odd days of the 51 52 53

54

Reported in “Auto Group Finds 20% of Gas Stations Lacking Fuel,” New York Times, Mar. 6, 1974, 20. WSP, memo from Jack Carlson, FEO, Drawer 22, Jan. 29, 1974; Simon, however, thought the numbers used by the OMB were incorrect. Probably the longest lines developed in late February, when it was announced that retailers could add one to two cents a gallon for costs above those costs for the oil itself. The announcement was made on February 26, but the allowance would not take effect until March 1, creating incentives for widespread closures of gas stations – essentially having nothing to do with the actual availability of gasoline. Few in Congress suggested abolishing controls, but outside of government, there were those who opposed such widespread intrusion. Lee Iacocca, then president of Ford Motor Corp., in a speech to the National Press Club on March 7, 1974, argued that the government needed to “stand back and let the forces of the marketplace take over.” Some in the Nixon administration were for the abolition of controls, but Nixon never seriously proposed this.

30

U.S. Energy Policy and the Pursuit of Failure

month if the last digit of their license plate was odd; on even days if even.55 This afforded little relief and hardly provided a real solution to the allocation problem. But then none of the legislation that was passed in the immediate aftermath of the embargo offered anything like a solution that would end gas lines or lower energy prices. Still, the longer the problems lasted, the more they affected constituents directly, the more some definitive action would be sought. Thus, as energy rose to be overwhelmingly the number one issue with the electorate,56 several significant proposals among hundreds of legislative proposals came to the fore; some were quite radical in purpose and scope. These were on the table by November and were the focus for Congress just as it adjourned in December and when it reconvened in January.

6. Project Independence and Other “Solutions” In the midst of a persistent crisis, the best political strategy is to advocate for a “solution”; at this point in the process, the failure to act decisively is costly to an elected official’s support. The crisis emerges from the fact that the underlying issue is complicated and does not lend itself to simple solutions. But politically, a bold proposal offers what Jones (1974) calls a “public-satisfying speculative augmentation” even if its practicality may be in doubt. Its actual efficacy is not crucial. It must only seem to offer a way out. The fact that solutions take time only adds to their political appeal. Constituents are typically not able to judge the likelihood of success of any scheme; members of the government may not be able to either. But a promise to resolve the problem five or ten years in the future allows a legislator to back away later as conditions change, and the success or failure of the “solution” could become moot by the time the project was supposed to show results (Grossman 2012). It is the act of promising a solution that matters, not its accomplishment. In the winter of 1973–4, there was no idea more satisfying than a solution to what was increasing (and many thought would be long-term57 ) misery. 55 56 57

Meanwhile, the federal government printed rationing coupon books just in case they were needed. In an early January 1974 Gallup poll, 46 percent of the U.S. population named the energy crisis America’s number one problem. Many government officials thought it likely that the problem would last for years and would lead to coupon rationing before it was over (see various New York Times reports, Nov. 1973). In December 1973, some in Congress sought gas rationing. For example, Representative Herman Badillo (D-NY) in the House and Senator William Proxmire (DWI) advocated immediate gasoline rationing; according to Proxmire, it was the only fair

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31

The lines at gas stations actually were getting longer that winter; some people waited in the cold three hours or more for a fill-up. Violence increased; people were literally beaten – and in a couple of cases, shot – for trying to cut into gas lines.58 Of the major proposals placed quickly on the table in the weeks after the Arab embargo was imposed, the most important was President Nixon’s Project Independence. His plan had a programmatic goal of energy self-sufficiency by 1980, but Nixon’s first pronouncement in early November 1973 left unclear just how independence would be achieved even though the idea was (along with a promise not to resign over Watergate) the most talked-about part of his televised address. Nixon invoked both the Apollo program and the Manhattan Project in pledging a policy so that, “by 1980,” the United States would “meet America’s energy needs with America’s own resources.”59 There were two sets of specific actions. The first required no new legislation and would only temporarily reduce consumption of oil during the crisis: r prohibition on coal-fired electric utilities switching to oil; r reduction of 10 percent in allocation of commercial aircraft fuel; r reduction in home heating oil allocations of 15 percent; Nixon sug-

gested a wintertime indoor temperature of 68 degrees, a summer temperature of 75 to 78 degrees; r reduction of fuel consumption by the government itself (7 percent); and r consultation with the states on other fuel-saving measures. As for proposed new legislation, he suggested five short-term steps and a few for the long term. Short-term steps included the following: r year-round daylight savings time; r relaxation of environmental regulations (temporarily) where energy

savings might result;

r authority for the president to “impose special energy conservation

measures, such as restrictions on the working hours of shopping centers and other commercial establishments”;

58 59

way to distribute gasoline and heating oil. Indeed, rationing was widely expected to begin in the spring notwithstanding the reluctance of the Nixon administration to undertake it. Various reports 1974, e.g., “Violence Erupts at Gas Stations,” Washington Post, Feb. 21, 1974, A5. As the Congressional Quarterly’s “Continuing Energy Crisis in America” (1975) publication noted, Nixon “frequently” expressed the view that Project Independence would make the United States “completely independent” of foreign sources (p. 2).

32

U.S. Energy Policy and the Pursuit of Failure r r r r r

drilling on more federal lands (especially Elk Hills, CA); accelerated licensing of nuclear power plants; reduction in highway speed limits; government regulation of air and sea transport scheduling; and stand-by rationing authority.

And long-term steps included r construction of the long-proposed Alaska oil pipeline; r more (vaguely worded as to how in the speech) natural gas and coal

development;

r a new Federal Energy Administration;60 and r a $10 billion, 5-year energy research and development program.

A few of these proposals were, as noted, adopted quickly, but the rest went into the hearing processes of Congress and into competition with other “solutions” proposed by various legislators, especially by congressional Democrats. But add up everything Nixon proposed, and it left two questions hanging: Would this menu of legislation actually have led to energy self-sufficiency? Was energy self-sufficiency actually feasible? One might also have posed a third question: Was energy self-sufficiency a good policy to begin with? The answers to all of these questions were not immediately clear, but they were all the same: no. Energy independence, although seductive, was neither desirable nor feasible, especially within a seven-year time frame, and no, Nixon’s proposals would not have achieved it, unless he used his rationing authority to simply end imports, a step he did not plan to take – and for good reason, because it would have devastated the U.S. economy. The rationing he envisioned would only have been used to replace the chaos of gas lines, which could better have been achieved by the ending of price and allocation controls. But the rest of the package was clearly inadequate to the task of creating self-sufficiency. Imports comprised about 5.5 MBD, onethird of all oil consumed in the country, and his program if implemented fully might have conserved 10 percent of imports. Also, increased incentives for more drilling and the Alaska pipeline promised to add somewhat to U.S. supply. Otherwise, the Nixon administration had concocted a recipe for modest levels of conservation, modest increases in production, and a 60

Later, Nixon sought to upgrade energy issues to a cabinet position, the Department of Energy and Natural Resources. The FEA, as we will see, was in fact created; a cabinet department replaced it in 1977 after Jimmy Carter became president.

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33

halt to construction of oil-fired electric power plants, something that was happening anyway. Surely a government air schedule czar (as one of his new proposals suggested) would hardly have made much of a difference except perhaps to disrupt air traffic. And Nixon explicitly did not endorse steps such as natural gas deregulation (which some of his advisors advocated) that were politically sensitive but might have at least marginally increased domestic production. Yet as it stood, by no stretch of the imagination was this program going to lead to U.S. energy self-sufficiency. But then, Nixon, embattled as he was over scandals, more than anyone else, had to “do something.” Or at least say something. So he sought to gain the initiative in the policy debate, and he had quickly enunciated a farreaching long-term policy with a specific and dramatic goal, his immediate response to the embargo and the gasoline shortages. Self-sufficiency was clearly a popular idea given the embargo, but Nixon’s initial recipe for independence was so hastily conceived and so incompletely considered as to be useless as a practical formula for the intended result. Then again, what would have achieved it? Nothing actually. Selfsufficiency was practically impossible. Only through steps such as a ban on imports, draconian rationing, or huge new taxes on oil consumption could the United States have achieved independence from oil imports, but had the government done any of those, it would have seriously damaged the U.S. economy for many years. Yet self-sufficiency had seemed an ideal solution (at least in theory) because it implied an answer to the most worrisome feature of the energy narrative: U.S. dependence on foreign oil was said to threaten both the national economy and the nation’s political freedom in the world. The country would free itself from OPEC’s present and future political blackmail. Many experts assumed that not only Arabs but all exporters would find the “oil weapon” too persuasive not to use to pressure Western developed nations to accede to various political demands.61 As later chapters argue, OPEC’s apparent control of the oil market was short-lived. But conceptually, even ending imports would not have meant political freedom from OPEC and world oil markets. Indeed, political separation from the oil market was “simply impossible . . . even if the United States cuts imports to zero, our

61

For example, Mancke (1974) argued that since OPEC would have the bulk of reserves under its control (while our supplies dwindled) the oil producers would always be tempted to exercise political blackmail through the “oil weapon.” Paust and Blaustein (1974) regarded the oil weapon as a major long-term threat to world peace.

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U.S. Energy Policy and the Pursuit of Failure

friends will remain vulnerable and we will be vulnerable in consequence” (Adelman et al. 1977, 33).62 Nixon’s initial outline of Project Independence led to scathing criticism in Congress from Democrats who said the proposals were plainly inadequate and that his message was nothing more than a package of what Congressman Morris Udall (D-AZ) called “bland reassurances.”63 But none of Nixon’s congressional critics (or supporters) pointed out the inherent and insurmountable problems in any energy independence policy per se – and indeed Senator Jackson had adopted that same theme of energy independence, as did most of his colleagues, even as they rejected Nixon’s formula for achieving it. No matter, on January 23, 1974, Nixon tried again. In a lengthy message to Congress, he offered a much-expanded version of Project Independence. In addition to all of the pending items from his original message, Nixon stressed three basic goals: expanded energy resource production, expanded conservation efforts, and the rapid development of new technologies. But the program was in a number of ways counterproductive and contradictory. There was recognition that market prices for energy had risen but Nixon declared those prices “unrealistic.”64 Although what “unrealistic” prices meant was never clear, he decried the fact that consumers might be paying as much as a dollar per gallon of gasoline and noted a plan to punish “gougers,” although neither he nor anyone else in government bothered at that time (or since) to define just what constituted price gouging. Energy companies were to be given tax breaks to produce more but then were to be hit with a “windfall” profits tax,65 making it unlikely that they would undertake much new exploration. The mixed messages were confounding: incentives on the one hand; disincentives for the same activity on the other. In the end, there still was nothing in this extended plan that would likely 62

63 64

65

This point was also made in 1979 by Jimmy Carter’s first Secretary of Energy James Schlesinger, who noted: “Briefly stated, it is necessary to provide adequate military deterrence in the region. That will require a visible and continuing American military presence.” From: Memorandum From Secretary of Energy Schlesinger to President Carter: Protecting Our Vital Interests in the Persian Gulf, Aug. 23, 1979. (U.S. Department of State 2012, 729). CR 93rd, 36401, Nov. 8, 1973. Given that prices were controlled, it could easily have been argued that if the price was unrealistic, it was a government, not a market, failure, and the solution that would have seemed most sensible would have been price decontrol. Windfall or excess profits were by definition a slippery term. In effect the government was stipulating a price that oil should sell at and then would impose a tax on profits made when the oil sold above that price. This is discussed again in Chapter 4, but no one has ever given a convincing argument that government can know the price a commodity should sell at, and certainly with all of the distortions in the oil market in 1973, no one did at that time.

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have led to anything like energy self-sufficiency. Producers could not have been enticed by a system of controlled “realistic” energy prices and the intention of taxing away profits that were “too high.” Moreover, if prices were to be kept (artificially) low, consumers had no incentive to conserve, either. How could both goals be achieved?

a. The Energy Policy Conundrum Nixon told Americans that his policies could provide the two things they really wanted to hear: the American people could have energy self-sufficiency and moderate prices simultaneously.66 The second part limited policy options greatly; it precluded any policies that imposed higher costs on consumers either through direct taxes such as gasoline levies or through actions that seemed likely to force prices higher. This combination, selfsufficiency and moderate prices, represented what I term the “energy policy conundrum,” which is basically this: there was no solution to U.S. energy problems because the problems were posed as energy dependence and high energy prices, and to solve these two together demanded steps that were mutually exclusive. The most cost-effective energy resources in 1973 were oil, gas, and coal, particularly oil, which provided most of America’s transportation fuel, as well as a significant share of home heating, industrial process heating, and fuel for electric power generation. Consequently, the only way to have even approached energy self-sufficiency (or really oil self-sufficiency) with available technology would have been to make the price of energy much higher, effectively rationing, if not actually through high taxes. The enormity and potential costliness of a real undertaking toward autarky was not explained (or perhaps not appreciated) by officials or understood by citizens (Bryce 2008). What sounded good simply missed the point of how much the largest economy in the history of the world depended on fossil fuel energy. Some saw this as a problem, but actually it had resulted from the fact that cheap energy had helped the country grow astonishingly rich, the wealthiest polity in human history. OPEC had increased prices, but even then oil was relatively cheap and, in many applications (especially transportation), could not be replaced by anything remotely like it at a comparable cost. High prices were needed for independence, whereas lower prices required that producers had to be encouraged to drill everywhere, but especially in 66

A December 1973 Harris survey showed that Americans were overwhelmingly opposed to any program that raised gasoline and oil prices.

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U.S. Energy Policy and the Pursuit of Failure

countries where lots of cheap oil could still be found (like Saudi Arabia), making us more dependent on foreign oil. In other words, what politicians promised to do simultaneously were two things that could not be done simultaneously. Programs that made such contradictory promises were destined to fail. Thus, the policy conundrum: tell the people you will give them the policy they want and they in fact will get nothing. Give them something less, and another political actor can always promise more – even if he cannot deliver. There was no way out. Or was there? Nixon touched on what was potentially the resolution of the conundrum: $10 billion for new technology. With a new technology that simultaneously produced large quantities of domestic energy at low prices, then the conundrum would be solved. Nixon suggested that a combination of synthetic fuels or “synfuels,” along with nuclear “breeder” reactors would do the trick. The former promised oil and gas substitutes from American coal (liquefied or turned into a gas) and hydrocarbon deposits in shale67 ; the latter was a nuclear power reactor designed to both “burn” nuclear fuel and convert nonfissile ores into fissile plutonium that could then be used to run other reactors. In theory, it would produce more fuel than it used, enough according to proponents to last for 1,000 years. But neither of these technologies was remotely cost-competitive in 1973 (or ever, for that matter). In fact, breeder reactors had yet to be demonstrated on a commercial scale, although Nixon had come to agree with the head of the Atomic Energy Commission, Glenn Seaborg, that breeders were both possible and necessary.68 Yet even with speeded development, given the long lead time and licensing process for any nuclear power plant, commercial breeder reactors could not have made a large-scale contribution to energy production by 1980; even 1990 would have been an unlikely time frame to have relied on breeders. 67

68

There has been some confusion in recent years about oil shale. U.S. oil reserves have risen since 2010 because of drilling technologies that allow producers to exploit cost-effectively deposits of liquid oil that were hard to extract because one had to drill through the rock to get them. There are probably tens of billions of barrels of such shale oil, but there are probably hundreds of billions of barrels of hydrocarbon deposits locked into the rock in formations such as the Green River formation in the U.S. West. These rock deposits (called “oil shale”) were the ones government policy intended to bring to market, but exploitation has never been cost-effective, and there appear to be many environmental issues connected with oil shale development that have never been addressed. Seaborg had argued passionately and persuasively for a breeder program in 1971. NPL, Tape Cabinet Conversation 53–1, April 13, 1971. In 1973, it had become a major focus for the administration. Unsaid in most discussions within the administration was that the breeder reactor was an extremely difficult technology and posed problems both of catastrophic accidents and proliferation of nuclear materials (Cassedy and Grossman 1998).

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The barriers to synfuels – notably drawing hydrocarbons out of shale rock – seemed less daunting from a cost standpoint, but only if OPEC kept raising the price of oil endlessly; admittedly, many pundits and experts were claiming that this was certain to happen due to the “gap.” But according to the Department of the Interior, to get 500,000 bbl/d of oil shale by 1980 – much less than Nixon was apparently counting on – would have required a “crash program.”69 With an astronomically high price of oil, uncompetitive synfuels could have become competitive at some point; with high prices of oil and (what was thought to be) dwindling supplies of natural gas, the United States would have had an incentive to conquer the breeder sooner or later. So, in the end Nixon’s solution to the conundrum was to announce that he would solve it by keeping prices “realistic” (presumably with controls) along with the technological wonders of breeder reactors and synfuels, which might make controls unnecessary since fuels would be abundant as well as domestic. The promise was what I call “the technological panacea” solution.70 This is not to be confused with basic technological progress. The technological development Nixon alluded to was a leap that would be so dramatic, it would reconcile low prices and domestic superabundant quantities of energy. Technology would be, as one observer put it, like the cavalry in an old western movie, “riding over the hill to produce a sudden solution” (Abelson 1988). Senator Jackson meanwhile had his own version of a technological cavalry charge, in the form of legislation that came in several parts and was also meant to provide a solution to the conundrum. He, too, never abandoned the rhetorical theme of independence, claiming that he had gotten that idea first.71 By late December, the Senate voted on Jackson’s proposal72 to double Nixon’s R&D plan by spending $20 billion over ten years on nonnuclear energy research, development, and demonstration (RD&D). This would lead, proponents argued, to widespread commercialization of new technologies and energy self-sufficiency by 1983. But the legislation 69 70

71

72

WSP, unsigned undated memo from the Bureau of Mines, “Comments on Project Independence,” Drawer 13. Even before the embargo, there was a school of thought among scientists and economists termed “cornucopian” that viewed societal problems as inevitably yielding to human ingenuity and technological development. See, for example, Simon 1980. Jackson called for self-sufficiency “as rapidly as possible” even before Nixon had called for energy independence, CR 93rd, 34973, Oct. 18, 1973. Jackson’s RD&D (research, development, and demonstration) bill was passed and signed into law several months after the end of the energy crisis but never produced the results Jackson was expecting. The National Energy Research and Development Act of 1973, Public Law 93–577, signed by President Ford, December 1974.

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U.S. Energy Policy and the Pursuit of Failure

was remarkably short on specifics, amounting to a scattershot $20 billion for various new, commercially unviable energy technologies. It was unclear as to how $20 billion was supposed to lead to massive replacement of energy sources that had been utilized for more than one hundred years. It was pure hope tinged with a belief that if we announced we could do something – as John Kennedy did with the Apollo program73 – had a timetable (ten years), and had enough money, then scientific and technical breakthroughs would carry the day. But the idea was completely unrealistic. Still it sounded fine and had bipartisan support in the Senate, passing by a vote of 82 to 0. Like Nixon’s Project Independence, Jackson’s scattershot RD&D program – somehow – would solve the conundrum in the longer term. But unlike Nixon, Jackson had a specific plan to solve the price problem in the short run, in fact immediately. Oil prices were to be rolled back to the level of May 1973 – by congressional decree. No thought was given to the economic consequences of such a step. If taken, it could have induced far more serious shortages than had been seen during the embargo. Whenever the market price was above the ceiling price, as it was in the winter of 1974, there would have been shortages that no amount of cajoling or punitive action would have corrected. The additional implicit price could only be borne by consumers enduring large queuing costs or by forcing the oil companies to absorb painful losses – perhaps toward ultimate nationalization of that industry, as some of Jackson’s fellow Democrats sought. Jackson seemed unclear as to what he thought would happen. On the one hand, he thought that the oil companies had manufactured the crisis (calling it on occasion “the so-called energy crisis”) to boost profits; on the other, he believed that prices were going to go “up and up and up” reflecting, it appeared, a belief in the supply–demand gap. But his solution, a decreed rollback, was a genuinely harmful idea, one that would have harmed the very people he claimed he wanted to help.

b. Defining Energy Independence down In the months after proposing Project Independence, Nixon administration officials framed all energy proposals in the context of self-sufficiency. In early 1974, energy czar Simon promised a major effort “to ensure the success” of Nixon’s proposal. More task forces were formed to recommend ways that coal production could be doubled, oil and gas drilling on the Outer Continental Shelf (OCS) could be developed, nuclear plant planning and 73

As Chapter 6 explains, the Apollo analogy is actually inapt.

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licensing time could be reduced, oil shale and geothermal energy74 projects could be undertaken, and a second Alaskan pipeline built. Simon was the first to put a general price tag on such efforts: $50 billion spread out over the next ten – not seven – years. This would be financed with an array of new taxes, including new excise taxes on natural gas and electricity, and well as taxes on oil companies.75 Still, it was evident that Simon did not believe he could solve the policy conundrum. New taxes would mean higher prices – a point he noted that needed further discussion for “longterm consideration.” While Simon was trying to figure out a way to approach the selfsufficiency goal of Project Independence, other members of the Nixon administration realized that energy independence by 1980 or 1983 or any time soon thereafter was technically as well as politically impossible. But Nixon had set a rhetorical standard that everyone adopted, so every discussion within the administration was in the context of Project Independence. It just would not actually mean “independence” as Nixon himself had presented it: complete energy self-sufficiency. The FEO’s Director of Policy Analysis suggested that the goal should be thought of as having the “capability” for independence from imports, a qualification that Nixon himself used, in a late January speech, only to return to the terms of autarky in March.76 But an unsigned memo from the Bureau of Mines in the Department of the Interior was pessimistic even of the “capability.” It argued that Project Independence required so many increases in output from so many fuel sources that although it might be physically possible, it was doubtful it could actually be accomplished. Or, as the head of the U.S. Geological Survey put it archly, the goals could be accomplished “if Murphy’s Law is supplanted by a new 74 75

76

Geothermal energy would take the heat in the Earth’s crust and utilize it for heating and electric generation. Simon also seemed to think that there had to be change in the way Americans thought about energy, an “energy ethic” as he noted in the margin of a report, saying that the United States needed to “change from a nation of energy wastrels to a nation of energy conservers.” Nothing was suggested as to how such an ethic would be generated. WSP, memo from Simon to Nixon, “Energy Policy Framework,” Drawer 13, Jan. 7, 1974. Simon in a February 1974 speech acknowledged that self-sufficiency by 1980 was “unrealistic.” He also used the phrase “capability for self-sufficiency.” Although he would continue to use the terms “self-sufficiency” or “independence,” as treasury secretary, he would, as we see in Chapter 4, keep defining it down so as to become unrecognizable. Finally, to him, it meant having a diversity of suppliers so that actions by one nation or even a group of nations could not produce shortages. In other words, his definition of independence was in some sense greater dependence – just more diffuse. This view was endorsed in an unsigned, undated (although it was in 1975) Department of State paper, “A Contingent Energy Strategy,” which urged maximization of “the political and geographical disparity of [U.S.] suppliers” (U.S. Department of State 2012, 135).

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law that states ‘whatever can go right, will.’”77 By February, Simon received an internal FEO report on Project Independence. It concluded: “A program of maximum energy resource development and of conservation will reduce reliance [by 1980] on foreign suppliers of petroleum to 4.4 MBD.” It noted that the non-Arab oil production potential was expected to be 6.8 MBD, 3.8 MBD from the more secure Western Hemisphere, suggesting that although self-sufficiency was impossible, dependence on Middle East OPEC regimes could be reduced. The report added that by 1985 imports could, with great effort, be reduced to as little as 1.5 MBD.78 But 4.4 MBD hardly seemed the definition of self-sufficiency, and in the ensuing months “independence” would be redefined still further downward. The presentation and pursuit of solutions occupied Congress for the first couple months of the year. Coal state legislators, for example, wanted to make the United States a “Coal Economy,” arguing for more utilization of coal in its solid natural state for electric power and industrial heat, as well as for coal-derived synfuels. A few others in Congress thought solutions lay in industrial policies, greater centralization than was already in place. Representatives Michael Harrington (D-MA) and Morris Udall, for example, argued for nationalization of the natural gas industry. Udall also proposed a “stiff tax” on gasoline and other oil products – a proposal that was considered politically toxic by most of his colleagues because it raised prices rather than lowered them. Taxes on the demand side came to the floor once in a measure by Representative Charles Vanik (D-OH), but his plan was hardly the stiff tax Udall envisioned. Vanik sought taxes of four to eight cents per gallon of gasoline and ten cents per 1,000 cubic feet (tcf) of natural gas. The money was to go to an Energy Development and Supply Commission that would use it “to develop low-cost environmentally sound energy sources.”79 The bill went nowhere. Indeed, more common was something like Representative Silvio Conte’s (R-MA) bill that called, as Udall’s bill had, for natural gas nationalization, but he said it was intended “to secure adequate and reliable supplies of natural gas and oil at the lowest reasonable cost to the consumer.”80 The costs of some of these programs potentially made them politically undesirable but a way around that was to impose the costs on “bad actors,” 77 78

79 80

WSP, V.E. McKelvey to Simon, Drawer 13, Jan. 19, 1974. WSP, FEO Office of the Assistant Administrator for Economic and Data Analysis and Strategic Planning, Report, “United States Self-sufficiency: An Assessment of Technological Potential,” Drawer 13, Feb. 6, 1974. H.R. 12621, Feb. 5, 1974. H.R. 12104, Dec. 21, 1973.

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and so the new tax proposals taken most seriously were those directed at oil companies, not consumers. These proposals were, for the most part, viewed as the way to finance self-sufficiency. Jackson’s legislative initiative on tax matters, S. 2598, was first introduced in the Senate in October 1973.81 The legislation was taken up in earnest in November and December when amended versions were passed first in the Senate, then in the House, but reconciliation initially failed as disagreement arose over the nature and extent of a tax that was to be levied on what were considered excessive “windfall” profits of the oil companies. The sticking point was not the really problematic question: just what constituted a windfall profit? Rather, the conflict was over just what parts of the energy industry would be subject to such taxes. President Nixon was himself in favor of windfall profits taxes on producers who pumped crude oil out of the ground and those who brought it into the country in tankers, but the bill that emerged from the House also placed taxes on profits from refining and marketing – an extension Nixon opposed. Moreover, the taxes in the congressional legislation were to be applied retroactively, another component that the president, as well as many Republicans in Congress, opposed. Congress thus adjourned for Christmas without a bill. But both houses of Congress were determined to take it up again, and Jackson especially made it clear that despite the setback in December he intended to both extract funds from, and to discipline, the oil industry. Hearings on S. 2598 were, it was said, going to be a way to “provide a straightforward explanation for the crisis” (Vietor 1984). But before any explanations were forthcoming, Jackson in his opening statement labeled recent oil price increases “unconscionable.”82 Over the three days of testimony, the hearings produced a chance for legislators of both parties to pillory a group of oil company executives, people who were less popular even than were the members of Congress themselves.83 Republican Senator Jack Javits (NY) charged explicitly that the energy crisis had been manufactured by the oil companies to increase their profits.84 Senator Abraham Ribicoff (D-CT) declared that the oil industry had “misled” the government and the 81 82 83

84

A similar bill H.R. 11450 was introduced in the House by Representative Harley O. Staggers (D-WV) in November. “Oil Rollback Price Legislation.” Hearings before the Committee on Interior and Insular Affairs, United States Senate, Jan. 31, 1974. Even administration officials expressed contempt for oil company executives – at least in private. Secretary of State Henry Kissinger, for example, termed them “idiots” whom he found “revolting” (U.S. Department of State 2011, 503, 634). “The belief is that in order to make money, [the oil companies] are taking advantage of the situation in which a shortage is widely advertised and that there only appears to be

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American people, and that the major oil companies were using the embargo to frighten people into removing price controls. In the process, Ribicoff suggested that this national emergency would be used by the big companies as a pretext to swallow up independent oil companies and gain greater control of the market. It was, the oil executives retorted, not a hearing to gain clarity about the energy situation, but rather what amounted to “a criminal trial.” There were two key problems for the oil companies: the first was that their low standing with the public made them an ideal target politically. The second was, as Vietor (1984) explains, that members of Congress doubted their “facts.” Data about oil were industry data; there were no independent sources to corroborate them. Consequently, the companies were constantly challenged on the validity of the information they had provided to Congress. Because most Congress members were inclined to disbelief for political reasons, company testimony was dismissed as a string of alibis and manipulated data. There was no resolution of this conflict and most in Congress were content to concur that everything that had transpired was the fault of the oil companies. In reality, although oil companies had taken advantage of the rules, the rules themselves had done far more to create the crisis than anything the oil companies had done. But Congress believed that a central component in solving the political dilemma of the energy crisis was to threaten the oil industry as Jackson did. “[The oil companies] are heading for a new experience, inviting not just an excess profits tax but punitive action as well,” he said. And so in late February, S. 2598 passed both houses of Congress. It had other components besides the price rollback and the expanded windfall profits tax. There were some rather trivial odds and ends in the bill such as the creation of an “Office of Carpool Promotion” in the Department of Transportation, and the prohibition of the use of government limousines by “any officer below cabinet level.” But basically S. 2598 came down to two nontrivial (but ill-conceived) directives aimed at the price problem: First, the price of oil was to be set back to the level, not of May, but rather where it had reached in the fall, a maximum of $5.25/bbl. Second, a new government energy office, the Federal Energy Administration (FEA),85 would be created and charged with control of the oil industry. The agency would be required under Jackson’s bill to specify the rules and

85

a shortage where there is in fact, none.” Hearings Jan. 21, 1974, part 2 Committee on Government Operations, 118–19. This was one area in which the Nixon administration proposal and Jackson’s bill agreed, and the FEA came into existence under a separate statute in May 1974.

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standards for all contracts relating to oil production, refining and sale. Although S. 2598 talked about “voluntary agreements” among oil companies and contractors, these would be involuntarily and closely supervised by the government. It would be the government essentially setting the contract price – a price that had to be set at a level that would now and in the future largely preclude any windfall profits.86 On March 6, 1974, Nixon vetoed S. 2598 specifically over the price rollback provision. Even though he was the one who had imposed price controls in the first place, he thought Jackson’s bill went too far and argued correctly in his veto message that the rollback would lead to “longer lines at the gas pump.” The only question for administration officials was whether to veto it on a Friday, lest Jackson “demagogue it over the weekend.” His veto, on a Wednesday as it turned out, was sustained, the override falling 8 votes short in the Senate. Jackson vowed to retry the rollback provision in Congress as soon as possible. Eleven days later, the Arab embargo ended. By then it hardly mattered; OPEC had reversed itself on production cuts, and gasoline supplies were rising in the United States anyway. A recession in most of the industrial world including the United States had begun and dampened demand for all forms of energy. Even though U.S. politicians and consumers alike took the embargo as a harbinger of things to come, Arab OPEC members were aware that in fact the embargo was a failure in all respects (Alhajji 2005). It did not reverse American policy or public opinion; if anything, the United States became more pro-Israel as a result. In the United States, the gas lines were gone; the alternate number rationing was over. Yes, prices stayed a bit too high for consumers’ liking, although they found that they could price shop as the New York Times reported in March. But overall, the first national energy crisis was over. No longer was energy the number one issue in the nation. Instead, the Watergate scandal would dominate the headlines until Nixon’s resignation later that summer. But by the spring of 1974, what did this national trauma mean for U.S. energy policy? In terms of tangible action, very little. With the crisis over, the demand for new, radical legislation faded. Of course, there were still some measures in place: price controls on oil and gas and the expanded allocation system. A new agency (the Federal Energy Administration) was finally established in a separate bill that spring to take charge of these controls – the CLC went out of existence – and was to be in charge of energy policy. There was more money for research and development, a breeder 86

From S. 2598.

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reactor program was underway, and there were high hopes for solar energy with the passage of a solar RD&D bill introduced by Representative Mike McCormack (D-WA). But there was no windfall profits tax, no nationalized natural gas system, no major subsidies for synfuels, no punishment of Arab producers or major U.S. oil companies. It was more or less what had been in place before the crisis. Given the “do something” imperative and the perverse directions the policy process had taken, that ending was perhaps the best for all concerned. Politicians could claim they tried to “do something”; even Nixon could make that claim and blame Congress for its failure. In the meantime, the country was spared policies that would clearly have been costly and were actually worse than those in place. Still, one might think that policy makers would have considered the end of the crisis as a time for a more thoughtful, long-term approach to energy policy. After all, the perception of the energy issue had changed. But the crisis narrative remained even after the crisis was over, and (as Chapter 4 explains) Nixon’s successor picked up the banner of energy independence. But it was taken up without the sense of urgency of a crisis to motivate a major change in policy. Despite the national ordeal of gas lines and the fears of foreign political blackmail, as of the mid-1970s America did not have an identifiable energy policy. There were those who lamented this fact. But Americans would discover in time that the only thing worse than no energy policy was actually having one.

TWO

Failure

The first assumption for any commercialization activity by the government is that the market either has failed or will fail to make the optimum choice. It may be a failure in selection, i.e. the market will not select the “proper” process or product, or it may be a failure in timing, i.e. the market will not make its choice at the proper time – will not commercialize soon enough. In either case, the basic presumption is that the government policy maker can make a better selection than can the market. – Unsigned Carter administration document “Competitive Considerations in Government Commercialization Projects,” March 1979, emphasis in the original.

1. The Premise of U.S. Energy Policy This book is about the serial failures of U.S. energy policy, failures that have been extraordinarily wasteful, with little learned by policy makers in the process. Congresses and presidential administrations cannot seem to find new answers to lingering questions and so have repeated failed policies because they appear to promise solutions that in reality they do not and cannot provide. But they are politically expedient even if the chances of practical success are close to zero. The book is also about the premises and goals behind those futile attempts at policy, which are themselves based on failure of a different sort. For if energy markets clearly provided for our energy needs efficiently and equitably, without disruption or discomfort, there would be no need for any sort of energy policy except for a one-sentence plan: “Let the markets decide.” But instead, most policy makers have at least tacitly assumed that America needs to have a top-down comprehensive energy policy because energy markets have failed.

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U.S. Energy Policy and the Pursuit of Failure

Of course, energy is of singular importance in modern society. At present, the United States consumes annually around 100 quadrillion British Thermal Units (BTUs) of energy (100,000,000,000,000,000 BTUs, or 100 quads for short); it is a fantastic sum to be sure, so large that it is hard to comprehend its meaning. In more everyday terms, our consumption works out to the energy equivalent of about 800 billion gallons of gasoline a year, about 2,500 gallons for every man, woman, and child in the country.1 As people generally understand, even if they cannot appreciate what those magnitudes mean, energy resources are a necessary condition for an industrial, advanced, wealthy society. Yet the importance of energy notwithstanding, it is not the case that the United States must have a national energy policy. That only becomes necessary if we assume that energy markets are failures and that government policy can make things better. Government organization of energy production and consumption – that is, national energy policy – must presuppose both of those propositions: government entry will improve economic and social outcomes over what markets alone can achieve. The first condition, market failure, has been stated often before. Since the eighteenth century, academic economists have typically assumed that market failure is a necessary condition for government intervention in any economic activity. David Hume, for example, argued that public goods (such as national defense) typically needed government provision. John Stuart Mill and Henry Sidgwick in the late nineteenth century explored how unfettered market allocations could be inefficient and might be improved by interventionist policies (Medema 2007). Arthur Pigou (1932) famously proposed government tax policy to align the social costs of industrial activities with the private costs of production. In the 1950s, Paul Samuelson (1954) and Francis Bator (1958) wrote classic articles on the nature of market failure and the inability of markets to reach optimal allocation under certain conditions. Kenneth Arrow (1962) added an important argument about why markets left on their own might fail to deliver the optimal amount of socially useful innovations. Overall, these led to the following principle, to quote one textbook (Weimer and Vining 1992), “When is it legitimate for government to intervene in private affairs? In the United States, the normative answer to this question has been based on the concept of market failure – a circumstance where the pursuit of private interests does not lead to an efficient use of society’s resources or a fair distribution of society’s goods.” 1

Enough gasoline so that every family of four could drive 250,000 miles.

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For decades, government officials, too, have emphasized the importance of the market failure argument. During the Carter administration, it was stated, essentially, that a market failure (or the expectation of a future failure) was the only valid reason for government to become directly involved in energy markets.2 Before undertaking major energy programs, the document said, it was important for government officials to state “precisely” where the market failure lay and specify why markets would not correct any problems on their own. Government action had to be based on “the basic presumption . . . that the government policy maker can make a better selection than can the market.”3 Executive Order 12866, issued during the Clinton administration, continued that line of argument. It explicitly required that on matters of regulatory planning, “Each agency shall identify in writing the specific market failure . . . or other specific problem that it intends to address . . . that warrant new agency action, as well as assess the significance of that problem, to enable assessment whether any new regulation is warranted.” Presidents as well as lower-ranking government officials have at least nodded in the direction of this requirement. President Clinton, for example, in arguing for a public–private partnership to develop an 80 miles-per-gallon (mpg) “supercar,” noted that there were “a lot of things we need to be working on that market forces alone can’t do.”4 Although he was not explicit about just what those “things” were, the reference seemed an important justification for the need to spend more than $1 billion of public funds on that particular energy project. Of course, every piece of energy legislation and every energy policy proposal have also entailed a set of specific goals often grandiose in scale and scope. But in the end, the underlying premise to use government to attain such goals is that a relatively unfettered market should, but will not, achieve them. The market failure argument raises two important questions with respect to energy policy. First, are market failures being accurately identified? Second, does government action actually represent an improvement? It is often assumed that if there is a failure in a market, government intervention 2

3 4

The market failure argument is at least implicit in many of the papers advocating government intervention in the Nixon and Ford administrations as well. In the United Kingdom, the Financial Services Agency referred to market failures as a condition making intervention “necessary” (quoted in Booth 2008). CPL, “Report from the DOE Office of Competition: Competitive Considerations in Government Commercialization Projects.” Press, Box 11, Mar. 21, 1979. William J. Clinton, “Remarks Announcing the Clean Car Initiative,” Sept. 29, 1993. Available at: www.presidency.ucsb.edu.

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can make production and allocation more efficient and/or more equitable (Mankiw 2009). But it does not follow from this that government will make anything better. Then again, if government tries and fails, what can be done about its failure? Government failure is indeed possible (Wolf 1979; Mitchell and Simmons 1994; Winston 2006), in fact, may happen frequently in all realms (Mitchell and Simmons 1994), and as this book argues, is likely with respect to energy policy. But government failure is more elusive than market failure. It is harder to analyze systematically, harder to measure, and, above all, harder to solve. Although government intervention is considered an antidote to market failure, just what intervention (and by whom) solves government failure? These are issues that this chapter addresses.

2. The Nature of (Energy) Market Failure In a strict sense, energy markets fail. Always. But then so do all markets. And so does the organization of economic activity outside of markets. As Nobel laureate economist Ronald Coase observed (1964), all forms of economic organization, governments, and firms as well as markets, are “more or less failures.” This is inevitably true of markets if the assumption is that only the neoclassical model of perfect competition represents a market without flaws, “unfailed,” so to speak. Bator (1958) explained, “It is the central theorem of modern welfare economics that under certain strong assumptions about technology, tastes, and producers’ motivations, the equilibrium conditions that characterize a system of competitive markets will exactly correspond to the requirements of Paretian efficiency” (p. 351). The standard X-supply-demand graph shows this; at the point where the downward sloping demand curve crosses the upward sloping supply curve, demand will be satisfied at a price that suppliers can meet while achieving at least normal (or zero economic) profit.5 The market clears; resources are used efficiently; firms could not achieve a higher return doing something else; and consumers are able to maximize their utility subject only to their budget constraints. No reallocation of these resources can make anyone better off without making someone worse off – the definition of Pareto (or Paretian) efficiency.

5

That is, the profit will equal the opportunity cost of capital, the return on the next best use of that capital.

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The “strong assumptions” Bator notes include that information is complete and symmetric; that all firms produce a homogeneous product; that all buyers and sellers are price takers; that suppliers have free entry into, and exit out of, the industry; that there are no externalities – all costs and benefits accrue solely to parties that are involved in the production and consumption of the good; and that the cost of transacting is zero. Although the idealization of perfectly competitive markets, which these assumptions describe, has usefulness as a theoretical model and as a pedagogical device, it is obviously unrealistic, and asking real markets to conform to it precisely is absurd. Demsetz (1969) termed using a model of perfect competition to compare to real-world outcomes the “nirvana approach,” and he argued instead for a “comparative institution” approach that would examine realworld outcomes under alternative but plausible institutional arrangements. In other words, the goal of economic analysis should not be pursuit of the perfect, but rather of the best possible. Or, as Coase has put it, the kind of economic organization to choose is the form “that fails least” in a given situation. He has also argued (1959, 29) that the ubiquity of failure means that society should think very carefully before imposing “special regulations” on a market simply as an automatic response to a perceived market imperfection. There are three “classical” reasons for market failure: nonappropriability (or noncollectability), indivisibilities, and uncertainty (Arrow 1962). These reasons explain the four major categories of market failure: externalities, public goods, imperfect competition (especially a so-called natural monopoly), and incomplete or asymmetric information. It is also often argued, as Weimer and Vining (1992) do, that distributional inequities should also be on this list.6 Even a cursory glance at the reasons would suggest that all of them might apply to energy. Nonappropriability/collectability due to externalities – both negative and positive – would seem the most obvious source of energy market failure. Virtually all economic activities create spillovers of some sort – costs that are borne by parties outside the transaction or benefits that the producer or consumer cannot appropriate, conditions that create a divergence between private and social costs and benefits (Dahlman 1979). The key issue is that if there is a cost (in the case of a negative externality) that is not borne by the transactors, then the market price of the product will be too low, and too much of the good will be produced. When benefits are nonappropriable to the transactors, too 6

Although Kaplow and Shavell (2002) argue that efficiency and equity goals may be antithetical.

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little of the good will be produced, and the price will be too high. In these cases, theory suggests that to overcome a negative externality, government intervention can force the price higher, or in the case of a positive externality, government can provide a subsidy that will encourage the producer to expand supply. Pollution is the most commonly analyzed negative externality to energy production and consumption. The cost of pollution is often quite evident, yet if a producer or consumer of the good that creates pollution is not asked to bear any of its cost, the price will not reflect the total cost of production. Pigou (1932) focused on the idea of a tax to bring the private cost in line with the social cost. Thus, the externality is internalized with the help of conscious government policy. While Ronald Coase (1960) correctly noted that there were costs in trying to measure and apportion responsibility for negative externalities that might make such a tax inefficient, much of the analysis of negative externalities for the past eighty years has followed a Pigovian approach. The typical rule of thumb for welfare economists is this: tax polluters to internalize negative externality problems (Kaplow and Shavell 2002). Energy extraction and consumption have spillover costs. Some have argued that the “true” cost of a barrel of oil for the United States is as much as $500 and a gallon of gasoline over $10 (Copulos 2006). According to another researcher, a gallon of gas should have cost $4.37 in mid-2010 (when the price was about $2.80), if we include costs of pollution, defense of oil shipping lanes, and baseline impacts on the climate.7 In this view, U.S. taxes hardly cover any of these external costs; indeed, federal gas taxes are thought of primarily as user fees for the nation’s highway system. If these estimates are credible, then Americans clearly produce and consume too much oil and derived petroleum products because they are sold at too low a price – seemingly a clear rationale for government intervention through higher taxation. At the same time, it can be argued that government intervention is costly, and spillover costs such as defense of shipping lanes are already paid for by general taxes, which reflect the fact that fossil energy resource use has societal benefits as well. Furthermore, a significant amount of general tax revenue comes from energy companies. A study by the Tax Foundation 7

Ian Parry (Resources for the Future) cited in Ezra Klein, “Think Gas Is Too Pricey? Think Again,” Washington Post, June 13, 2010, at: http://www.washingtonpost.com/wp-dyn/ content/article/2010/06/12/AR2010061200167.html. Environmental impacts of oil production were a very public concern during the spring and summer of 2010 given a large oil spill in the Gulf of Mexico.

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found that between 1981 and 2008, the oil companies alone paid $388 billion in federal and state income taxes and that governments collected an additional $1.1 trillion on all excise and sales taxes placed on petroleum products (Hodge 2010). This amount was often paid directly by consumers, but when government taxes gasoline or crude oil, regardless of whether the tax is placed at the pump, at the wellhead, or any other place along the production line, the cost will be paid largely by the consumer (in the form of higher prices) – which in the case of energy means that energy taxes will be paid by nearly everyone.8 Because gas taxes are highly regressive and other taxes – income taxes, for example – are less so, it may be that although the market is inefficient (that is, too much energy is produced), it is more equitable as is than it would be after an attempt to cost every spillover into the price of oil or any other energy product. In other words, an attempt to improve efficiency may make resource and income distributions less fair. Similarly, it has been argued that subsidies for research on clean energy technologies are too low. In fact, some of the proposed new technologies could in theory overcome some of the external costs noted earlier, but entrepreneurs could not hope to appropriate all of those gains. If, for example, an innovation in energy technology enables defense costs to fall, government will use the resources saved for other things – perhaps directly benefitting producers of other kinds of goods – that are nonappropriable to the energy innovator. Moreover, the fact that the innovator bears all the development costs and has only a modest probability of success in the first place means that he or she will not assume the risk, and innovation generally will be undersupplied. It was on this basis that Arrow (1962) suggested R&D needed nonmarket subsidies, a point a number of scholars have argued specifically with respect to various energy technologies (e.g., Goulder and Robinson 1982; Roncaglia 1989). According to one study (cited in Brown 2001), the social return to government-sponsored R&D (this includes R&D of all types not just energy) is 50 percent greater than the private returns. That is, much of the benefit is nonappropriable. Thus, subsidies would seem warranted, but exactly how large should government subsidies be? And to whom should they go? On what basis? The opportunities for unproductive rent seeking are ubiquitous. And with respect to energy, it is not clear from empirical evidence that subsidies have produced much in the way of social benefits. One study of government energy research and development spending from 1980 to 2000 found 8

Because of low demand elasticities in the short run the upward shift of the supply curve will mean higher prices with little decrease in quantity demanded, making the consumer’s burden especially great.

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that most of the spending was on major projects – more than $9 billion – but altogether that spending produced “no quantifiable economic benefit” (Fri 2006), and in other cases, government energy incentives skewed markets in such a way that actual innovation appears to have been retarded rather than furthered (Grossman 1992). Arguably, on many occasions when government officials have assumed market failures with respect to new technologies, they have been wrong, and the market has been more correct in not risking resources on large-scale alternative energy projects (Grossman 2009a). Public goods are another example where there are nonappropriable benefits, and public goods have problems relating to indivisibilities as well. Energy resources are not, generally speaking, public goods, not if the conditions of joint supply and nonexcludability are strictly applied. Clearly, consumption of oil or natural gas, to use those examples, does diminish the ability of someone else to consume the same good, violating the basic definition of joint (or nonrivalrous) supply. In fact, as more people consume oil, it presumably becomes harder and more costly to supply. Similarly, it is easy to exclude consumers from consumption of oil; if they do not pay, they do not obtain the good. Indeed, that these products have a (relatively) competitive market price illustrates that they are rivalrous. An energy product is not like a lighthouse for which a free rider can still consume the light9 (in fact, can consume the same amount as someone who might pay), nor is it a service like national defense where, if payment for it were voluntary, it would be impossible not to provide benefits to a free rider. In markets for energy, products are broad and divisible, pricing is not a theoretical problem, consumers can acquire exactly the amount they prefer and can afford, and in fact, overall, consumers of energy resources follow general economic behavioral assumptions. This is quite different from a public good. Because people are assumed to want to consume different amounts of such goods but those quantities cannot be circumscribed, as a theoretical matter, there is never a Paretian efficient level of production and consumption if left to the market alone. The market necessarily fails, and scholars have generally believed that public goods should either be operated by government or subsidized by government for the full social benefits to be realized. Although energy products and services are not strictly public goods, there are public goods aspects of energy supply. It may be a matter of national security to be able to utilize energy resources on demand.10 It has been 9 10

There is a significant literature on the public good characteristics of a lighthouse (e.g., Coase 1974; van Zandt 1993). As Chapter 3 discusses, this has been asserted especially in times of war.

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argued that these public goods aspects of energy might warrant policies aimed at storing energy resources and regulating their production to ensure reliability. Imperfect competition would also readily apply to energy markets. One of the textbook examples of indivisibilities in production is an electric company, said to be a natural monopoly with pervasive increasing returns to scale. A natural monopoly is described by a falling average cost curve over the entire range of demand, where average costs exceed marginal costs. This means, first, that one firm will always control the market and, second, that because it is assumed that efficiency requires marginal cost pricing – as we find in perfect competition – efficient production will never be achieved by the market alone. Strict monopoly profit maximization would lead to pricing well above marginal and average costs, which leads in turn to deadweight losses for the economy as a whole.11 Although the view of the electric power industry as a natural monopoly is probably incorrect (Grossman 2003a), the industry has evolved as a set of government-owned or regulated investor-owned local monopolies, because they were believed to be natural monopolies, and it was in the interest of the companies themselves to foster that belief. Natural gas distribution has also been thought to be naturally monopolistic and has been heavily regulated when owned by private firms. The oil industry has been dominated by several large companies for the past hundred years – companies that at times have been accurately accused of cartel behavior and at other times (as seen in Chapter 1, and again in the next chapters) have faced a considerable amount of government intervention with respect to prices and production. In many countries, all energy production and distribution is government owned. And, of course, the leading oil exporting countries formed a cartel, the Organization of Petroleum Exporting Countries (OPEC), to manipulate the price and quantity of oil on the world market.12 Only perfectly competitive industries achieve Pareto-efficient outcomes, and energy resource production fails a Pareto test on just about every dimension.13 Oligopolistic industries, monopolistically competitive ones, as well as monopolies and cartels all entail significant departures from the 11 12

13

In fact, if average costs are higher than marginal costs, a natural monopoly forced to charge marginal cost would lose money. There is some question as to whether OPEC should be considered a cartel in the normal economic sense of a colluding industry. This issue is discussed in Chapter 7. But see discussions in, for example, Plaut 1981; Adelman 1982; Mead 1986; Alhajji and Huettner 2000; Smith 2005. Arguably, there is product homogeneity at least within the markets for each energy product, but otherwise these industries fail Paretian tests.

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Paretian ideal.14 In theory, government interventions should be designed to eliminate deadweight inefficiencies and lead to an efficient level of pricing and output. But regulated energy industries do not reach Pareto-efficient price-output levels either, and in fact government public utility boards do not try to achieve them (Gordon 2001; Grossman 2003b). Then again, they could not even if they wished to do so. Efficient outcomes through government regulation can be achieved only if regulators have full knowledge of present and future consumer demand patterns and present and future supply constraints. If such knowledge existed, then the problem of pricing and output would be easy and commissions could simply point to the data to set efficient levels of output. But that is not possible. And so far from seeking an objective of welfare efficiency, such commissions have been at times exemplars of the problem of regulatory capture, leading to large-scale social losses (Rasmussen and Zupan 1991; Upadhyaya and Mixon 1995; Bradley 2003). In sum, market failure in energy industries is ubiquitous because of the nature of their organization, and government regulation or even ownership of energy extraction and production might be justified on those grounds alone. But then this conclusion assumes that government analysis of the exact nature of a failure is correct and that steps taken to overcome it will not involve even greater failures. Information problems are a perpetual barrier to efficient regulatory efforts. Of course, limits to information and the uncertainty are themselves causes of market failure. As Layard and Walters (1978) note, uncertainty alone may mean that some potentially desirable markets might “not exist at all.” In theory, uncertainty should not in itself impede efficient outcomes but only on the unrealistic assumption that fair insurance markets would exist to cover every risk (Layard and Walters 1978, ch. 12). Instead, uncertainty is ever-present in market transactions. There are other sorts of informational barriers; for example, information may be asymmetric, and in the short run this may mean that some producers can set inefficient prices based on proprietary information.15 Importantly, the future scope of government interventions creates its own uncertainty that affects investment decisions. This may change simply as the result of an election that creates concerns as to the nature of the rules (and the costs 14

15

Some oligopolistic industries such as ocean shipping may not even be able to reach a competitive equilibrium, because of what is termed an “empty core” problem (Sjostrom 1989). DiLorenzo (2011) argues that asymmetric information is not a market failure and in fact is an example of specialization and division of labor, which is the basis of competitive markets.

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they impose) under which an investment undertaken today will be subject to tomorrow. But even regulatory delay can be costly and discourage investment. Information is essential in energy industries because it is relied on for vast capital expenditures. Information provides guidance to current and future supply, demand, price, and so on. At times, the ability to forecast energy markets has seemed straightforward. In the post–World War II period, changes in energy consumption moved in lockstep with gross domestic product. But that picture was illusory, because, as noted in Chapter 1, the real price of energy was falling. When the trend stopped in the 1970s, energy market participants had a much greater difficulty estimating precisely the demand even for the current year, much less well into the future. Allocations of capital thus were not only large but also more risky.16 Then, too, the large capital requirements are a barrier to entry, especially given that capital markets are not “perfect” either; incomplete, as well as asymmetric, information can be another source of capital market failure. As a result, capital markets will not perceive the true level of risk and return and so will not finance many energy projects that could pay off. Knowledge about supply and demand patterns and other features of energy markets is valuable in overcoming uncertainty, but “knowledge markets” are themselves problematic. Information is indivisible and cannot be fully appropriated by the person who first acquires it. Indeed, information about world energy resources and potential for development has aspects of public goods (Layard and Walters 1978). It can be sold until it becomes public knowledge, at which time the discoverer can gain nothing further. These characteristics also affect innovation in which proprietary technological developments cannot be protected except with property rights such as patent and copyright laws. Even these are of limited duration and may be hard to enforce beyond national borders. It should be noted that restricting the flow of knowledge through patents allows the owner of the patent to temporarily gain monopoly control over her or his innovation. This in itself creates an inefficient market for that innovation – deadweight losses from monopoly – even if the goal of patent law is to provide incentives for a more productive economy in the long run. Nevertheless, patent law may be said to solve one market failure by creating another. 16

For example, Eastern electric companies assumed a continuation of electricity demand growth throughout the 1970s and in some cases had 40 percent overcapacity by 1980 (Cassedy and Grossman 1998).

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Questions of fairness and social justice arise with respect to energy first because of its central role in modern society. Adequate energy supply is along with food and medical care often considered a necessity of life, and provision to all, a social good. When the price of energy rises, it is likely to be argued that government has a role to reduce the burden on the poor just as it does in the United States with subsidies for food (food stamps) or medical care (Medicaid). From this standpoint, the market may be unable to meet demand fairly and so represents a type of correctable failure. The fact that energy companies also will on occasion report large profits leads at least to the appearance that they benefit disproportionately at the expense of society; high energy company profits typically provoke demands for government intervention. Overall, it is clear that energy markets fail in a variety of ways leading to calls for government intervention: through tax policies, regulatory actions, redistributive programs, and information management. The question then is, will government make an improvement? Or, will it fail more dramatically, costing society even more resources than those lost from a failed market?

3. The Nature of Government Failure A significant amount has been written on government failure, but typically such writing has referred mainly to specific wasteful government programs.17 Far less has been written about the nature of government failure than about market failure. Students in any introductory economics class will almost certainly hear about the latter but little about the former, even though (following Coase) government, too, always fails and as Wolf (1979, 112)18 notes, generally for the same kinds of reasons as markets. “In both cases, incentives influencing individual organizations . . . may lead to outcomes that diverge substantially from what is socially preferable. . . . [N]onmarket failures are due to the absence of nonmarket mechanisms for reconciling calculations by decision makers of their private organizational costs and benefits with total costs and benefits.” Ultimately, Wolf argues, the “value” placed on government programs to correct market failures is simply the cost of those programs, rather than the “social” value-added that government programs are supposed to provide above that of the market. Yet, it is at least 17

18

For example, the Cato Institute blog @Liberty (http://www.cato-at-liberty.org) runs a weekly “This Week in Government Failure,” post often describing examples of government programs that produce more costs than benefits. Wolf includes various nonmarket organizations such as foundations and state-supported universities.

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possible to make such a value calculation. This is typically operationalized through benefit-cost analysis (BCA) (Winston 2006). But BCA with respect to government programs is inherently problematic. Although market success may have implications for social value-added, market activity starts with a bottom-line calculation that has clear parameters and is straightforward to measure. On the other hand, calculation of social benefit, presumably the maximand of any government intervention, is a slippery measurement problem in any instance. The central quandary is the quantification of nonprice inputs and outputs, and the comparison of those numbers to market outcomes. When a nonmarket outcome relies on an intervention, it can only be compared with a state of the world in which that intervention did not occur. In other words, the determination of whether social benefits were increased by government intervention may rely on a counterfactual that can appear arbitrary and hard to justify. If these numbers can be calculated, the problem is conceptually uncomplicated: were there measurable social benefits and were those benefits greater than if government had allowed the market to continue unimpeded? This should be resolved with simple arithmetic. In the latter case, the unimpeded market, a social BCA would have been (counterfactually) x, and a government program produced y. If y > x, then the government intervention would have added value. But the exercise is much more complex as a practical matter. It often relies a great deal on projections and estimates and parameters that are controversial and suspect, and there may be an assumption in the counterfactual of a continuation of trends that had existed previously but that may not have been sustained by the market. For example, energy consumption forecasts, as noted, were typically based on a long-term rising demand trend. Once prices rose in real terms, however, this trend stopped. Furthermore, the presence of government intervention itself may change the entire dynamic of the market, creating various kinds of effects, some of which may well be negative. As the Office of Management and Budget asked in 1970 with respect to energy policy proposals of the Nixon administration to reduce energy demand, “Does government have available to it means which will correct these [market] distortions without introducing other economic inefficiencies into the market?”19 It certainly seems that government intervention can produce net social benefits and one can construct ways to quantify them, ex post, but the imposition of government measures means that comparisons of what happened with what would have happened are unreliable. Indeed, the 1970 report suggested that 19

NPL, OMB Report, David, Box 7, Nov. 13, 1970.

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although there are energy market failures from externalities, interventions have been based on projections that had tended to be overly pessimistic, and thus whatever numbers were generated ex ante to justify government intervention tended to be inaccurate. There is also a long-run problem, perhaps the key element in government failure. To continue to produce Pareto improvements, government programs, like market-based alternatives, would need to innovate to lower costs and improve output. But once they are established, government programs essentially become legal monopolies, often deeply entrenched with no way to measure how competition – even interagency – might improve outcomes. Thus, even where people might agree that some government intervention is warranted, there is little reason to expect continuing improvement and rising net benefits. In general, it is not clear why increased social benefit will be more than a one-time phenomenon (if that), because a monopoly has little reason to disturb the status quo. True, there are often oversight committees and even consumer watchdog groups, but such monitoring groups are inclined to be motivated by purely political factors or interested only in maintaining adherence to the original mandate of the program (or both).

a. Four Categories of Government Failure Wolf (1979)20 has usefully divided government, or nonmarket, failure into four categories similar to those for market failure (although as he argues these are not to be thought of as “duals” of market failure categories). His list: internalities, hasty implementation/rising costs, derived externalities, and distributional inequity with respect to influence and power. Internalities arise because government agencies must necessarily develop their own standards and metrics to manage the program in question. In private industry, sales, profits, are bottom-line considerations that can be used as metrics to determine the success of investments and to govern personnel issues such as promotions, salary increases, staff increases, and other aspects of operational development. Government agencies have no such metric to use and so rely on internally driven standards that may have little to do with efficient delivery of program output. Goals of government managers may become, for example, simply the perpetuation of the program and the continual increase in the program’s budget, raising the cost of the program regardless of its effectiveness in correcting a market failure. For personal reasons (in accord with economic theory), agency and program heads typically 20

The remainder of this section is derived primarily from Wolf (1979).

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seek to maintain the strength and viability of their departments and will argue that shortcomings in effectiveness mean that they need to increase their budgets, not rethink the character and scope of their programs.21 Improvements are said to depend on expansion of personnel and increasing generally other inputs of production. But this means that costs are necessarily rising while the metrics of effectiveness may remain unclear, be set far in the future, or may even be self-contradictory.22 Sometimes, budget expansion is easy to justify: congressional authority may require that a program expand; for example, the 2007 ethanol mandate meant greatly expanded subsidies, development of new technologies, and a fourfold increase in output. This should also mean more paperwork, field inspectors, and so on in the Department of Energy. But whether the program is being managed more effectively or is successful in correcting some market imperfection is not likely to be a factor in the evaluation. Capture (Stigler 1971; Peltzman 1976) is another possible internality. It may mean that over time, the government entity works for the benefit of the industry whose market has been presumed to have failed or for other special interests at the expense of social welfare on the whole; this seems to be true of public utility regulation (Bradley 2003). But when capture is evident, the result is not correction of the failure but rather acceptance and assurance of long-run market output inefficiencies. For example, capture may allow an industry to avoid competition under the veneer of government control or permit participants to collect economic rents with the regulators’ approval. Yet, in the process, intervention actually perpetuates and accentuates market failure. Internalities may also arise simply from bureaucratic sclerosis. Officials may adopt a set of management standards at the outset of a program that become agency norms that are nearly impossible to change even as external conditions evolve. Thus, internal costs again will rise while efficiency declines. As Wolf writes, at times only a scandal may lead to change – a scandal that “may or may not be related to agency performance” (p. 118). Will internalities lead to greater social costs than, say, the externalities intervention was meant to overcome? Internalities are in many cases almost impossible to measure, because any analysis also demands a counterfactual. It depends, too, on whether the market failure was correctly identified in the first place – which, as we will see, is often a dubious proposition. But the fact 21 22

The public choice literature gives both the theoretical arguments and the empirical analysis of agency behavior (see, for example, Mueller 1989). Wolf notes, for example, government goals to raise all test scores to the mean.

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of internalities means inefficiencies in output of government programs – that is, government failure. Failure of U.S. government energy programs may be more likely from the second category of government failure, hasty implementation/rising costs. The problem typically emerges from the process by which a program is initiated. As Wolf explains: As public awareness of the inadequacies of market outcomes grows, demands for remedial action intensify. Dissatisfaction with existing circumstances may result in misperceiving the cause of market failure. . . . With rewards frequently accruing in the political arena to publicizing problems and initiating action labeled as a remedy, nonmarket activities may be authorized which have quite infeasible objectives. (p. 124)

This repeats the observation by Downs (1972) noted in Chapter 1. Earlier still, in 1968, economist James Schlesinger, later to be the first U.S. secretary of energy, observed that in these kinds of circumstances with intense demands for remedial action, “agencies . . . are put under unremitting pressure to produce glamorous new programs – before the necessary analysis has been performed.” As framed by the “do something” problem, this approach leads to proposals such as Project Independence, which was not achievable either technologically or economically. Ironically, Schlesinger proved the best exemplar of the problem he identified. During his tenure, the United States embarked on the commercialization of synfuels and a vast expansion of utilization of solar energy, mandated at times of “unremitting pressure” before careful analysis had been performed. Yet, as such technological leaps are pursued, costs can only rise and in fact would become extremely high if pursued to the stated end.23 Clearly though, this represents a misuse of resources, and a nonmarket, government, failure. It is odd that spillovers are assumed to emerge from market transactions but not from government ones. If an energy program is undertaken, especially one in which, to quote Schlesinger, the “necessary analysis” has not been performed, the probability of unintended costs – derived externalities – seems likely to approach 1.0. Consider the ethanol mandate of 2007. It has had impacts on, among other concerns, food prices, the environment, international relations, water tables, and internal combustion engine performance (especially nonautomobile engines). None of these external costs were carefully analyzed before the bill was passed, and, as of 2012, there have 23

They might in fact be infinite. In 1980, Congress passed a bill mandating a demonstration nuclear fusion electric generating plant by 2000. The goal has never been achieved, and there is still some doubt as to whether it is even achievable (Grossman 2010).

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been no clear governmental efforts to weigh the costs and benefits of further development of the program. No doubt, as the required ethanol production rises, so will unintended costs. Wolf attributes part of the problem of derived externalities to the different time horizons of political actors and individual consumers. Political timetables mean that the legislator or president must “do something” before the next election cycle. In this case, it meant passing a bill with a mandate to be fulfilled in fifteen years when its success or failure probably will not matter to any political actor’s election prospects. In fact, it will probably be the case that side effects will manifest themselves later and therefore not make any difference in the initial election cycle unless a spillover creates a crisis in itself. There, of course, may be unintended benefits as well. For example, the Internet arose from a government program in which no such innovation was intended. But with energy programs, the most noticeable spillovers have been negative, exacerbating market failures in some instances, in other cases, essentially creating failures where they did not previously exist. Distributional inequity is inevitable with respect to government programs in general and with energy programs in particular. Organizations of various types – environmental activist groups, traditional and alternative energy companies, consumer watchdogs, and so on – stake millions of dollars on the outcome of energy legislation, a rich source of rent seeking over the past four decades. In some cases, rents are direct pecuniary benefits such as subsidies and government contracts. Of course, in the process of adding more funds to one set of energy projects, inevitably other rent seekers will be denied funding. Tax breaks in one area will typically mean current or future tax increases in another. Influence may be reduced for some groups and increased for others. Collective-action problems (Olson 1968) mean the best organized lobbyists will be rewarded, often at the expense of the best ideas as well as the economy generally. Instead of employing resources in their most economically productive uses, government will direct resources to the most politically efficacious use. When resources are misused in markets, it means there is a market failure. Where rent seekers vie for influence, there will likely be government failure. Winston (2006), in weighing the evidence presented in “30 years” of scholarly research, concludes that “the welfare cost of government failure may be considerably greater than that of market failure” (p. 3). One reason for this is the absence of a clear institutional mechanism for correction. There is an array of institutions – including the U.S. Constitution – for government intervention in the event of market failures. But there are no laws or norms that specify how a government failure is overcome, except inexactly

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through constituent voting. A strict demand for BCA with decreased funding or elimination for those that fail might be useful but is likely to be simply overridden whenever a favored program fails the test. In reality, there’s no specific or simple answer. Government failures will be corrected only when political leaders cancel or substantially revise programs, and they are most likely to do so because a program has become embarrassing in some way that strips it of its political benefits or because economic and technological shocks create crisis-driven “do something” demands that lead to alterations in funding priorities. But the rule of thumb is that the longer a program persists, the more difficult it can be to change, much less end (Jones and Baumgartner 2005). Interest groups invest in maintenance of the status quo or in adding to the rents they already receive.24 Many programs that seem extremely inefficient persist for decades, while others are terminated simply because a different constituency managed to divert funds away from one program to another. This may occur for ideological reasons – for example, a change in administrations or congressional majorities that leads to favors for different interests (Cohen and Noll 1991). But there is no equivalent Pigovian tax default answer to an internality or a derived externality, no regulatory fix to mandated regulatory objectives that are infeasible or to the problem of regulatory capture, no unredistribution mechanism to take the rents from one group and give them automatically back to the groups that previously had had them. There is in fact no set of laws that prevents the government from repeating the same kinds of mistakes in program after program or from identifying and trying to correct a market failure that either does not exist or in fact involves small social losses that are only increased by intervention.

4. Market Failures and the Goals of Energy Policy It would seem a logical step to assume that for energy policy to have a chance to succeed, government authorities must, as a Carter administration document says, specify the nature and extent of the market failure they seek to correct. Then there must be a clear analysis of how proposed action will lead to improvement over continuation of a relatively unfettered market. But has this really been the case in practice?25 24

25

North (1990) points out that organizations form to adapt to, and adapt, institutions to their own benefit. Once a law is passed empowering an agency, both the agency and its beneficiaries would work to see that their benefits are preserved and even increased. Thus, North documents cases in which inefficiencies from government failure have persisted for decades, even centuries. See also Anthoff and Hahn (2010) for a review of specific efforts to solve energy and environmental market failures.

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Consider the goal Nixon announced for his energy policy: energy independence. Exactly what was the market failure that this prescription would have solved? It seems that the argument in 1973 was that the energy market failed because of OPEC’s market power and the oligopolistic nature of the industry that required government regulation. Moreover, there was an implied public goods argument: world energy markets threatened U.S. national security and economic well-being, whereas purely domestic markets sustained them. If foreign entities could not sell to the United States, they could not impose conditions on energy prices and quantities, but also on America’s foreign policy.26 Since the 1970s, some observers have argued that the public goods problem goes beyond secure access to energy resources. It is claimed that energy markets make the United States more vulnerable to terrorism and require the need for deployment of military forces around the world to protect resource countries as well as shipping lanes (Ames et al. 2004). These also argue, it is said, for energy autarky. These market failure claims are not without some foundation, but calls for energy independence are usually sounded when, as in 1973, there is a disruption in the oil market, or, more recently, when the prices of oil are high, or when there has been an upsurge of conflict in the world (although this has generally meant only higher oil prices). In response, programs are proposed and sometimes implemented (as we will see with respect to the Carter energy program) without any consideration of feasibility, efficiency, or equity. Project Independence was a purely reactive proposal that would not have achieved its stated objective without some kind of technological breakthrough or a legal prohibition of imports. That still would not have severed America’s ties to the world oil market. As already noted, the United States would have, at a minimum, had to continue to defend oil shipping lanes because most other industrialized nations do not have the petroleum resources to even contemplate self-sufficiency (Adelman et al 1977; LaCasse and Plourde 1995; Bryce 2008). At the same time, a self-sufficiency program would have raised prices and weakened the U.S. economy, hurting poor consumers especially, and making such things as the defense of the world oil market relatively more expensive, because our national wealth would have been diminished. In other words, although an energy independence program might have reduced OPEC’s price-setting ability (which has only been intermittent since the 1980s anyway), it would not have solved public goods problems, it would not have enhanced questions of equity, and it would not have enhanced efficiency within the economy as a whole. America would 26

Although as pointed out in Chapter 1, this was a superficial analysis of the world energy market.

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have been pumping high-cost domestic oil and even higher-cost synfuels in place of cheaper foreign oil. That would have meant that resources would not have gone to their highest valued use, and the economy would have been the poorer for it. Within the Nixon administration, there was sometimes a debate as to whether the nation was really dealing with market failures at all and whether what was perceived as market failure was in fact government failure. In 1970, the chairman of the Council of Economic Advisors, Paul McCracken, asked the Justice Department if there were antitrust issues connected to the major energy companies pending as the administration was considering energy legislation. Claims of cartel behavior or monopolistic control would be an obvious example of a market failure requiring intervention and perhaps justifying large-scale government controls. But Richard W. McLaren, Assistant Attorney General in charge of the antitrust division, shot back that the problem was government failure. The major obstacle, he wrote to McCracken, “consists of restraints which are imposed by Federal and State Governmental bodies.”27 Congress has, of course, been no better in judging its ability to legislate around a perceived market failure. Senator Henry Jackson’s 1974 bill that would have rolled back energy prices (which Nixon vetoed) presumably was intended to improve equity, making oil cheaper. But it would likely have led to costly effects. Above all, it would have exacerbated shortages, shutting down businesses, impeding commerce, reducing overall economic efficiency drastically, and improving equity only in the sense of making everyone stand on line or accept a bureaucracy’s rationing plan. The heavy retroactive tax on oil company profits would have added money to the treasury but would surely have reduced incentives for further investment, already reduced by controls on prices. In general, then, although the major legislative proposals brought about by the 1973 energy crisis were at least tacitly directed at what could be deemed market failures, they would hardly have improved social welfare and would have produced various kinds of failures as well. But then, the rationale for Project Independence, as well as the other 2,000 pieces of legislation, was largely political to begin with; there was no careful analysis of the need for, or the outcomes of, any of the proposals of 1973–4. In subsequent chapters, this book shows that one particular marketfailure argument recurs. It is not the energy market itself that is presumed to fail but rather, as noted earlier, that capital markets have failed. 27

NPL, letter R. W. McLaren to P. McCracken, David, Box 7, (undated) 1970.

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According to many government officials at various times over more than half a century, the capital market has been too timid and has failed to recognize the implications of information that government officials claim should be decisive. At its heart, the argument has been about resource depletion. Why, various presidents, congresspersons, and agency heads have asked, does the capital market fail to lend to alternative energy projects when the world is running out of oil and gas? Jimmy Carter believed the world would see rapidly declining oil production by 1989 and that natural gas resources, too, would be gone. Gerald Ford, Bill Clinton, and both presidents Bush were pessimistic, albeit not quite so alarmist, about resource availability and believed there were unpursued opportunities to make large profits in alternative energy development. But if they were right, then money was being left on the table – something that economists claim is not supposed to happen at least in the long run. It seemed companies were forgoing the huge profits that could be had when oil became too scarce to extract. There were genuine reasons, it was thought, for this kind of market failure: the certainty of depletion was not the problem but the risk of backing any given project was highly uncertain. The size of the commitments was also potentially massive, and even if successful, there might be a lag of a few years between the large start-up costs and any significant returns. Thus, capital markets were understandably reluctant to provide financing, but because of that reluctance, energy projects of enormous social benefit (and private profit) were not undertaken. To overcome that market failure, the U.S. government needed to spend tens of billions of dollars in subsidies and tax benefits for synfuels, solar power, wind, ethanol, and so on.28 The inherent failure of the capital market like that of any market certainly can be reasonably claimed, but it does not follow necessarily that the signal the market is giving – a lack of interest in financing alternative energy projects – is itself based on a misperception of future returns, or an informational problem with respect to the exact nature of the risk. Indeed, as we will see, history suggests that it has been government, too ready to make hasty judgments about what

28

Of course, there have also been subsidies to oil, gas, and other conventional resources and technologies. In aggregate, these have been larger in absolute terms than subsidies for alternatives; in fiscal year 2010, for example, subsidies for oil and gas amounted to just under $3 billion, more than for most alternatives except biofuels and wind. But on a per-unit-of-energy basis, subsidies have been much higher for alternatives. Subsidies alone for ethanol, for example, in 2009 were more than $5 per million BTUs – more than the market price for natural gas, and many times any tax or other preference given to natural gas production. This is not intended as a defense of oil or gas subsidies. It is argued in Chapter 9 that these should all be eliminated.

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markets should be doing, that have had much less accurate perceptions of what those returns were likely to be. A more complex issue is one related to externalities. Estimates of potential damages from CO2 buildup and climate change vary from negligible to catastrophic. Projections are generally based on computer models of questionable reliability, although scientists generally support the notion that greenhouse gas buildup will have important environmental impacts. Thus, fossil fuel markets that do not reflect the discounted value of those costs are not efficient. To forestall climate change, it has been argued that the U.S. government must undertake immense expenditures on new energy technologies and mandates to end the wide utilization of CO2 -producing fossil fuels. Yet, examples of government failure with respect to climate policy quickly became evident in countries pursuing more interventionist policies. According to Helm (2010, 195), regulatory capture has become “the norm rather than the exception.” U.S. efforts in this area are addressed in the final chapter of this book, but the prospects are not promising, especially if climate policy is modeled on energy policy (Ellerman 2012).

5. Conclusion It may be argued that policy makers, in the midst of what is perceived to be an energy crisis, must react for the public good even though they are unable to foresee how the process will end. But a peculiarity of energy policy has been that the goals, the programs, and the structure of policy have all too often been repeated. That is, policy makers, not just historians, could have the benefit of hindsight if they would only use it. Instead, history is forgotten in the headlong rush into programs to quell dissatisfied, dismayed constituents. Policy makers propose solutions to market failure that have been tried before and have been shown to create failures that are far more costly. To solve one failure, policy makers have embraced policies that create a worse one. Economists like to say there is no free lunch. In the United States, policy makers promise a political free lunch simultaneously comprising energy independence and low energy prices. The promise cannot be fulfilled, but the rhetoric seems to have political benefits. There is, however, no “free” solution to energy market failures, and the cost is usually a lot higher than most officials understand or admit. Even though history would suggest that is exactly how such a process will evolve, U.S. government officials replicate it anyway.

THREE

Fuels

Oil experts, economists, and government officials who have attempted in recent years to predict the future demand and the prices of oil have had only marginally better success than those who foretell the advent of earthquakes or the second coming of the Messiah. – James E. Akins (1973, 462; after saying this, Akins made several predictions, most of which were wrong)

1. Introduction Until the 1970s, there was no national program that could be termed an “energy policy” (Clark 1987). Arguably, until around 1970, there was no such thing as energy policy as a socioeconomic, political construct. There were, to be sure, policies related to production of various energy resources. The general heading for these policies was “fuels.” For most of the first seven decades of the twentieth century, government intervention in fuel markets was justified at least implicitly by market failure. One of the earliest concerns was related to national defense, that is, a market failure due to a public goods problem. Military fuel needs will vary but will be paramount in the event of war, and military planners thought it imperative that resources be left in the ground or otherwise kept in storage to be available in the event of a national military emergency. Because there is no particular incentive for private producers to save resources today as insurance for such a contingency, the argument was that government needed to have direct control over at least some fuel resources. No doubt there was truth to the proposition that a modern armed force needed fuels, and not surprisingly, national defense energy issues came to the surface most strongly during and after both World Wars.

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Of course, throughout the century, energy resources were becoming essential to all of modern life, not just warfare. Whereas in earlier eras, people relied on the wood they chopped or gathered for heating and cooking fuel and used animal power or wind for transportation, by the early twentieth century, people were increasingly procuring energy resources from markets. They bought electricity from central power stations; they drove automobiles powered by burning gasoline or rode in trains powered by coal; they operated factories run on the power of coal or oil or natural gas. Ocean and coastal shipping became fossil-fuel powered.1 Food came to market through marketed fuels, was cooked (mostly) with marketed fuels, using devices such as stoves and toasters that were themselves made with fuels and that were in turn powered by them. But the markets that provided these essential benefits were said inherently to fail beyond a public goods problem. They were said, above all, to be afflicted with problems of imperfect competition, mainly monopoly. Few industrial enterprises seemed more monopolistic and more powerful than major energy producers. It was ironic, however, that often the energy producers themselves begged for relief from government on the grounds that energy markets were too (“ruinously”) competitive. These contradictory arguments were sometimes used in reference to the same industry. Electric power companies would claim that they were natural monopolies but then would plead with legislatures to declare them legal monopolies to protect them from competition (Bradley 2003). The firms agreed to be regulated, leading to the creation of many of the state public utility commissions tasked with the job of controlling the monopolies by setting prices that allowed the electric company a “fair” rate of return and did not unduly burden consumers.2 Such policies produced winners, redistributed benefits and attracted rent seekers in great numbers. From 1900 to 1970, the number of interest groups, lobbyists, and advocates associated with various fuel industries grew enormously. As a consequence, markets were regularly distorted in favor of one group or another. But the evolution of fuels policies into a more comprehensive energy policy not only required an encompassing idea of “energy”; 1

2

Until the late 1800s, more transoceanic travel was by sail than by steam (North 1958), but developments in ship engine technology and steel hulls made steam-powered ships dominant by the 1890s. It is worth noting that although most electric power regulation is at the state level, there are federal regulations and the Federal Power Act (1920, amended 1935) and the Public Utilities Holding Company Act (1935) brought federal regulation to bear on electric power particularly when power is sold and transmitted across state lines.

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it also needed a constituency – fuels lobbies – that had an interest in keeping energy issues on the policy agenda. Although there was advocacy for all fuels industries, it was the oil business that attracted by far the most attention from both interest groups and from the federal government (Clark 1987). Even by the 1910s, oil had become, as one congressman put it, “indispensable” to the American way of life.3 Yet, the government’s relationship to the oil industry was ambivalent to an extreme. The oil business has been the beneficiary of a century of tax preferences, worth literally hundreds of billions of dollars, as well as periods in which government manipulated market prices and quantities to maintain oil company profits. But the oil business has also been attacked probably more than any other business in American history. Especially after the revelations about John D. Rockefeller’s company, Standard Oil (Tarbell 1904), oil companies were regularly accused of monopolistic practices – even after Standard was broken up. Just about any time oil made news, Congress sought to find explanations in illicit monopoly and cartelization behavior; this was true whether the companies were making money or losing it, raising prices or dropping them. From a government perspective, there were seldom problems with fuels that did not warrant a congressional investigation of the oil industry – a practice that has persisted into the twenty-first century. Through most of the century, the future of oil (and natural gas) seemed forever problematic. Forecasts of impending – sometime in the not-toodistant future – shortages were ever-present. Even in the midst of gluts, someone would predict a looming shortage. One solution to potential U.S. oil shortages, as of the middle of the twentieth century, was cheap foreign oil, but that solution was viewed as a problem in itself. Although some domestic oil refiners and consumers were happy with imports, the domestic industry and its supporters in Congress were not. They wanted relief from competition, which they received after World War II in the form of import quotas. Problems in energy industries before 1970 led a few members of Congress to argue for outright socialization, but most officials were disinclined to do it. Instead, they opted for regulation added in piecemeal fashion, while at the same time making rhetorical tributes to the “free market.” Yet, over time, state and federal governments turned oil and natural gas markets into creatures that were anything but “free.” After seventy years of policy efforts, there was a government-controlled domestic oil cartel and barriers 3

In proposed resolution H.R. 175, 64th Congress, submitted by Representative Charles H. Randall (CA).

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to foreign imports. The natural gas “market” became even more an artifice of government, with controls extending from the wellhead to the consumer, where prices were not just manipulated, they were dictated. These institutional innovations were inherently fragile, depending as they did not only on market conditions but on geology as well. Still, they seemed to provide what they promised: price stability, industry profitability, and supply reliability. They worked – until they did not. When the energy rules could no longer function coherently, rather than scrap them, the first response of the federal government was to try to make them work by injecting more government into the process, by adding on more unworkable, uneconomic regulations. In the months before the Arab oil embargo, officials became convinced that it was time for a comprehensive national fuels policy, now referred to as an energy policy that would look at the entire mix and try to develop policies to maintain an advanced industrial economy. But the first places they looked for solutions happened to be where most of the problems had originated in the first place. They held onto the same type of policies, making them more perverse in the process and ensuring that not only would they ultimately fail but also that failure would have greater consequences when it arrived.

2. Coal: A Special Case The first market fossil fuel, coal, is also one distinct from oil and gas in a few important respects: first, for the past 100 years, there has never been a fear of a physical shortage.4 Coal has been cheap and abundant; as of 2010, at current rates of consumption, the United States had 249 years of proved reserves. But abundance has not precluded industry turmoil – turmoil that engaged policy makers at times throughout the twentieth century. Though there has been plenty of coal in the ground, there were nevertheless occasional shortages due usually to labor strife, which was a regular problem through the first fifty years of the century. Weakness in the industry was another problem. Mines closed, often because prices were too low to be profitable. The industry, once given the title “King Coal” (Sinclair 1917; DiCiccio 1996), was losing its importance. The twentieth century saw a transition in the U.S. energy mix from one dominated by coal to one increasingly 4

Actually, in 1956, M. King Hubbert argued that world coal production would peak in 2150 when annual production would reach 6.4 billion metric tonnes. However, that production level was reached in 2007 and was subsequently surpassed with the limit not yet in sight. See a discussion of Hubbert’s predictions in Smith (2012).

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dependent on oil and gas. Yet, coal was still important enough (vital to some industries such as electric power) that coal strikes created a sense of national emergency, and federal officials were often mobilized to deal with it. Even military forces were mobilized (for example, in 1902 and 1922) because of strikes by coal miners. Because coal is abundant and cheap, as problems have surfaced with respect to other fuels, people have asked how much more use can the nation get from it? At the same time, coal has a great disadvantage: it is dirty – more polluting in combustion than oil, much more than natural gas. Coal’s emissions of CO2 are more than double those of gas; emissions of other pollutants are so great that coal-burning typically requires large expenditures on pollution control. Because coal is dirty, environmentalists have argued that the United States should stop using it altogether. The politics of coal has thus pitted the coal industry (and coal state representatives), who have wished to see the United States expand coal production, against environmentalists (and their supporters in government) who have hoped to see production reduced or entirely ended. Early federal involvement in coal often followed problems that threatened to prevent coal from reaching the market. A strike, termed the Coal Crisis of 1922–3, brought on by falling coal prices and subsequent wage cuts after World War I, led to violence and threatened the U.S. coal supply. The prospect of a winter without coal was serious enough to warrant the involvement of President Warren Harding. His main proposal was establishment of the U.S. Coal Commission to make policy recommendations (Clark 1987). Declaring that the health and well-being of the nation required a dependable supply of coal, the commission concluded that unless all stakeholders in the coal industry could “set their house in order” themselves they would need to come under a “system of public administration” (Willits 1924); in other words, the commission suggested that if necessary there would be a virtual nationalization of the coal industry. This did not happen, however, and the strike was settled in large part because nonunion mines were making a profit at the expense of the mines shut down by the strike. As for Congress, it was unable to find any legislative answers. That changed during the Great Depression. Not only was all business activity low, depressing energy demand, but by this time, coal was also clearly diminished in importance. The coal industry was plagued by overcapacity, overproduction, and a shrinking workforce and was losing money. An unsigned comment in the Yale Law Journal noted simply that the industry was “in a chronic state of turmoil and disorder” (“Bituminous”1935, 294).

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The Bituminous Coal Act of 19355 (later revised in 19376 ) was intended to remedy the problem by creating a National Bituminous Coal Commission, which was responsible for enforcing an industry code of fair competition. The commission had vast powers and could fix prices, wages, and working hours. Its power over the market was so great, in fact, that even scholars who supported an intervention initially hoped this one would be temporary (e.g., Rostow 1941), and in fact, when that bill lapsed, nothing replaced it. In the ensuing years, policy makers have addressed problems such as mine safety,7 but the condition of the coal industry has been one of constant weakness. Still, the abundance of coal would, in times of crisis, lead policy makers to consider greater coal consumption both in its solid form and in either liquefied or gasified form, as coal-derived synthetic fuels. Coal state legislators and industry lobbyists have frequently tried to steer the debate over energy to a particular solution: make coal the fuel of tomorrow and create a U.S. coal economy.8 In times of crisis, this has seemed plausible. Most often, however, dirty coal has appeared to be the fuel of yesterday.

3. Oil 1900–70 Before the energy crisis of 1973, there were essentially four problems with oil in the United States9 First, there were continual fears that the country was about to run out of it; second, when there was abundant supply, there was so much of it, it was wasted; third, consumers and small producers were said to be endangered by predatory giant energy companies; and finally, small U.S. domestic companies fretted that they were about to be put out of business by cheap imports. If this list seems to embody many contradictions – for example, if consumers were endangered by predatory oil companies, should the United States have feared cheap imported oil or welcomed it? – it does. All of these problems were nonetheless regarded as market failures needing to be solved by government interventions. But 5

6 7 8 9

There were essentially two coal industries, hard (anthracite) and soft (bituminous) coal. They had slightly different histories, but in many respects and in many instances such as 1922, they faced similar problems and were treated as one by policy makers. In the Depression, however, the bituminous side of the industry faced a much more dire circumstance and so was the focus of the 1935 Act. The first bill was declared unconstitutional by the Supreme Court because of various labor provisions in the act. The Coal Mine Safety Act of 1952, for example. As an example, in 1976, coal miners’ union president Arnold Miller penned an op-ed, “Coal Is the Answer to the Energy Problem.” New York Times, June 6, 1976, 124. This list of problems is, to an extent, applicable to natural gas as well, but gas is treated in a subsequent section.

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as October 1973 demonstrated, there were great shortcomings in what emerged.

a. The Problem of Forecasts According to forecasts issued throughout the twentieth century by wise men and women, experts, and government officials, the United States has usually been “running out” of oil. There is, of course, an existential truth in this: the world has less oil every time people consume any. Oil resources are being depleted. But the real questions are these: when? And does it matter? Often the forecasts that become the basis of policy prescriptions, and at times actual policy, claim that serious oil and gas depletion is imminent/soon/at least within a couple decades – something that is a concern now. When such forecasts are prominent, it usually means one thing: A glut of oil is around the corner. This pattern goes back more than one hundred years. Nevertheless, there have been several times when government officials believed that the market’s lack of attention to depletion was a sign of market failure. Although the impetus for government action has usually been the actuality (albeit only temporary) of some kind of disruption, the underlying rationale for policy has been that the market is unwilling or unable to take into account the “fact” that supply is disappearing; markets have carried on as if this “fact” were irrelevant. Only in an emergency has the market as well as the general public focused attention on this “fact.” It is true, however, that temporary shortages of one fuel or another (but most especially oil) have highlighted: (a) the importance of energy resources, (b) the growing demands of energy consumers, and (c) the uncertainty about the future. Such episodes have given immediacy to a neo-Malthusian argument that energy resource supplies will soon fail to meet demand, and industrial society will be profoundly affected. Predictions of depletion leading to catastrophe have a long history. In the mid-nineteenth century, economist W. Stanley Jevons (1865) argued that Britain’s economy would soon crash due to a shortage of coal. By 1886, a leading U.S. geologist claimed that young people living then would live to see oil’s exhaustion. Impending depletion of oil was predicted by experts in the first decade of the twentieth century and essentially every decade thereafter. In fact, experts of all types have made frightening forecasts about approaching resource depletion – both for the United States and the world as a whole. Although there is an ultimate limit to available natural resources, the more compelling issue is that there is uncertainty about just how much

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oil or gas will be available next year or even tomorrow. Better technology has meant that estimates of the quantity of recoverable resources are more accurate, but there must inevitably be uncertainty until it is pumped out of the ground. Uncertainty is an important matter; in the face of it, people must still make significant decisions about vast investments in energy production as well as in energy-intensive capital. Of course, estimating resource supply is difficult, sophisticated technology notwithstanding. In fact, the most common resource estimation method is an old one, termed the “volumetric” method in which geologists, using maps, aerial surveys, and knowledge of the kind of formations that are likely to have oil, gas, or coal, project on the basis of known producing sites how much more is likely to be found. There are also purely mathematical projections of finding rates versus consumption rates to estimate how many more years of supply are likely to be available.10 Although surface mapping of geological formations has helped resource companies find new oil and gas fields, uncertainty remains. Future demand is also uncertain and difficult to predict. Too often predictions have been based on previous trends, and the future is seen simply as a mere continuation of the trend regardless of underlying fundamentals. On the eve of the 1973 energy crisis, for example, many experts assumed that absent strong government intervention, energy demand trends would continue indefinitely. One expert argued that by 1985, total energy consumption would reach 131 quads (Emerson 1971), up more than 80 percent from 1971 when the forecast was made. Another article by a leading academic energy policy expert noted two projections for the year 2000 – the pessimistic one was for something more than 200 quads (almost triple the level of 1971), the more optimistic one, 170 (White 1971). In fact, the United States has never consumed much more than 100 quads; in 2009, the total was 94. Nevertheless, forecasts of continually rising demand had ready believers in the Nixon administration and in Congress. In fact, the Bureau of Mines 10

Actually, the more sophisticated historical approach does project trends based on finding rates and consumption and extends them into the future. But given that the resource is finite, the trend, if upward sloping, must necessarily peak and then decline. This is represented by a logistics curve, an S-curve giving an early segment when the resource exploitation begins, a middle period of wide, exponential growth of exploitation, and a flattening third late-time section as exploitation ceases to grow; with exhaustion of the resource, production falls to zero. But the logistics method assumes inevitably that trends continue until they are forced by the finiteness of the resource to stop. It is a mathematical guess, but one that since M. King Hubbert (1974) has had a high degree of salience among those who believe that peaks are imminent.

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(BOM) made its own projections in 1971 arguing that fossil fuel use would increase by only about 2.5 times by 2000 over 1970 levels but then only if nuclear power increased by a factor of 250 (cited in Mancke 1974). The U.S. Atomic Energy Commission saw electricity demand per capita expanding fourfold by 2000, and given an expected population increase of 50 percent, this implied an almost sixfold increase in total electricity consumption.11 This prediction was based on the trend showing demand expanding by 7 percent per year since the end of World War II. Experts and policy advisors never recalled the maxim attributed to economist Herbert Stein: “if a trend is unsustainable it will stop.” Stein, of course, meant it would stop on its own, but with energy, officials assumed at least tacitly that only through intervention would the trend in energy demand growth stop; the market would never provide incentives for people to use less, even with total resource exhaustion close at hand. As Glenn Seaborg, head of the Atomic Energy Commission, predicted, the world’s resources of oil and natural gas would be gone by around 2020.12 Pessimistic supply predictions are typically grouped under the category of “peak oil” – that is, when the world will be consuming far more oil (it works for gas, too) than it is finding, endangering our fossil-fueled way of life and leading to a total disappearance of the resource.13 Often, proponents of this view suggest that absent coercion to reduce consumption, there is nothing that can prevent this ultimate, catastrophic exhaustion from occurring. What is often missed in any “peak oil” analysis is the economic fact that barring government distortions of market pricing, declining output will lead to higher and higher prices for oil, providing incentives for consumers to substitute away from it and for alternatives to be supplied, a process that will unfold over time. Nevertheless, at the time of this writing in the twenty-first century, there are still many people (pundits especially) who are writing about the “gap” described in Chapter 1; demand will increase, supply will shrink, and the result will be shortages. Supply will cease to equal demand.14 But why supply and demand should not equilibrate at a higher 11 12 13

14

This was cited by Wilford in his 1971 New York Times series, “The Energy Crisis,” noted in Chapter 1. Chairman Seaborg offered this prediction in April 1971. For discussion of peak oil, see, for example, Hubbert (1977), Ehrlich et al. (1977), Campbell and Laherrere (1998). There are also social movements in the United States that see an apocalyptic future when energy supplies have run out and we need to rely solely on local production, often referred to as the “peak oil movement” (Morrigan 2010). There are a vast number of such articles. For example, see http://www.marketoracle.co .uk/Article18948.html. Recent books include Kunstler (2006), Deffeyes (2006), Heinberg (2003, 2009), and Worth (2010).

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price is not explained (or perhaps just not understood); the result would actually be high prices, possibly with deleterious (but likely temporary) economic effects. But ever-rising prices from the exhaustion of oil and gas, if and when it comes, will play out over time, probably decades, in which real energy prices will trend upward but will fluctuate depending on economic growth conditions and world political circumstances. Industrial society will likely adapt, not collapse, as some pessimistic scenarios assume (especially Meadows et al. 1972). Still, assuming that theorists are right that the peak of production is already at hand, it will be the case that long before the taps run dry, oil will be so expensive that it will be used only in rare circumstances in which a substitute does not exist (Adelman 1991; Smith 2012). Short-term guesses about how much oil will be available over the next few years are more likely to be accurate than long-range projections because they are based on known reserves, not forecasts of the future. The most commonly published statistic for resources such as oil and gas are proven (or “proved”) reserves, which are those resources that are known or likely15 to exist and be extractable economically with current technology (Cassedy and Grossman 1998). This number is the basis for news reports that say we have x years of oil or gas left; this number is the reserve-to-production ratio, and it is often misunderstood. Many, including policy makers, have assumed that if there are ten years of oil reserves, then the country or even the world is in trouble because resources are running out rapidly.16 But typically the reserves change little from year to year and will not always change in the same direction. As of 2008, the United States had petroleum reserves of about 12 years at current production rates, but it had had 12 years of reserves for several years. In fact, reserves may rise; natural gas reserves in the United States, after falling slowly for three decades, have been rising since around 2010 as new discoveries have been made and improved technology has allowed for economic exploitation of resources that had been too costly to tap. Some energy experts have noted the failure of past forecasts and hedge their estimates, sometimes calling them projections rather than predictions.17 But other experts, after recognizing how far off past forecasts had been, argue that now experts know better, and current forecasts 15 16

17

Based on flow rates and increasing understanding of the geology of producing fields (see Cassedy and Grossman 1998, ch. 2, for a discussion). As a letter writer to the New York Times put it, “We are being propagandized on all sides by government, nuclear plant pushers, and electric companies, who emphasize that we have but thirteen years left of natural gas” (Robert Rienow, published Sept. 29, 1972, 42). The Department of Energy under Reagan in 1981 pointed out that even the “ ‘best estimate’ projection is not a prediction and should not be regarded as one” (U.S. Department of Energy 1981, 19).

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are more likely to be correct. For example, Akins (1973), writing before the energy crisis of 1973–4, noted how inaccurate most forecasts had been, and then he said that more data made for better predictions going forward. He predicted rising prices, OPEC ascendency, and, citing an estimate that there were at most 500 billion barrels left in the world, exhaustion of resources outside OPEC by 2000. Since he made that prediction, however, more than 500 billion barrels have been consumed, and world reserves as of 2011 were more than twice that amount.18 Colin Campbell argued in 1989 that we were approaching peak oil, only to revise his thinking in 1998 (Campbell and Laherrere 1998) and suggest 2008 as the peak oil year, with what appears to be a very convincing set of tables and graphs to support that view. A few years later, the date was pushed ahead to 2010. But the gloom of forecasts has not been matched by behavior in the market – taken as a sign by forecasters not of their own failure but rather that energy markets intrinsically fail, because they do not account for a bleak, peak future. So, from that perspective, government must step in or at least try to. Few note the obvious: if history is to be a guide to policy, why not consider the history of forecasts? Why should there be action today based on a new forecast when action taken yesterday was based on a forecast that proved erroneous? Why believe that next time the disaster scenario will be right?19

b. The Shortage Mind-set and Its Consequences In 1906, Theodore Roosevelt sought the option to declare federally controlled lands off limits to oil (as well as coal or gas) exploration to prevent exhaustion of key fuel resources, a request that Congress did not endorse. However, two years later, the U.S. Geological Survey (USGS) estimated the maximum future oil supply of the United States at 23 billion barrels, and there were calls for conservation measures to prevent depletion (Ridgeway 1982). Roosevelt’s successor, William Howard Taft, in 1909 did protect 3 million acres of lands in the public domain in California and Wyoming from right of claim through executive order, an action that sparked a decadelong debate about government’s proper role in mining regulation. But it was clear that oil was already perceived as an essential fuel, and the U.S. Navy 18 19

Akins was correct, however, in saying that optimistic price predictions of $1/bbl oil by 1980 made in the early 1970s were likely to be wrong. The Energy Information Administration has conducted a self-analysis of the accuracy of its own annual oil price forecasts. These are published annually in conjunction with the International Energy Outlook. The mean absolute error of all oil price projections made during the past several decades is more than 50 percent.

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was especially vocal in its demand that the government needed to preserve a strategic reserve in case of war. Taft’s action protected lands known to have oil and gas reserves that were to be left in place unless needed in a national emergency. Six years later, the U.S. BOM made the USGS seem like it was run by a bunch of Pollyannas. The BOM put future domestic output of oil at only 6 billion barrels,20 making careful stewardship of resources all the more urgent – an urgency that was heightened by U.S. entry into World War I. In the first two decades of the twentieth century, after each gloomy forecast, new oil discoveries were made. Oklahoma saw some of the largest finds. Nevertheless, in 1917, the USGS confirmed the estimate of 6 billion barrels, although that was only for “proved reserves”; it said nothing about ultimately recoverable resources. Yet, at war’s end, the gloom about future supply was widespread, and USGS director G. O. Smith expected U.S. oil resources to be exhausted by 1929 (Nash 1968).21 Not only did government foresee near-term shortages, but also oil experts and industry officials became pessimistic. One oil company executive said that absent some major new finds, shortages were likely within ten years (Clark 1987). Partly in response to these gloomy forecasts, the Coolidge administration formed a commission, the Federal Oil Conservation Board (FOCB), the initial charge of which was to report on conserving the apparently declining U.S. oil supply (Clark 1987). But few policy steps were taken. The major oil companies more or less gave up on U.S. exploration after 1920 because they assumed the forecasts were correct and so they went elsewhere around the world looking for new supplies. Unnecessarily, it turned out. These forecasts, like the ones before them, were followed by great finds and eventually an oil glut. By the early 1930s, the United States, in the midst of the Great Depression, had a vast surplus of oil. The economic downturn had already reduced demand, but more important, there were spectacular discoveries in East Texas, and the price of oil fell to merely a few cents per barrel. Nevertheless, a decade later, during and after World War II, there was great concern about security of supply, and when the war ended, there was gloom again. When some brief shortages during the war were followed by fears of shortages to come, a sense of crisis in the “do something” spirit led government officials to propose the first true major alternative energy commercialization program – synfuels, synthetic oil from coal and shale. 20 21

For reference: in the 2000s, the United States consumed about 6 billion barrels of strictly domestic production every three years (source: Energy Information Administration 2010). The BOM even began a pilot program to develop synthetic oil from shale, although little came of it at the time (Blair 1976).

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Michael Straus, director of the War Resources Council, and BOM Director R. R. Sayers were the leading supporters of synfuels, especially liquefied coal. Their enthusiasm began during the war. It was known that Nazi Germany was already using the technology22 extensively to fuel its war machine, and Straus was convinced that the United States needed to move to large-scale production at once (Vietor 1980). That proposal never advanced, but with the assistance of two Democratic legislators, West Virginia Congressman Jennings Randolph and Wyoming Senator Joseph O’Mahoney (representatives from two coal states), Congress did pass the Synthetic Liquid Fuels Act in 1944, which authorized $30 million to construct coal liquefaction plants to demonstrate whether producing liquefied coal on a commercial scale could be accomplished cost effectively. The oil industry was wary of the new program but ultimately did not oppose it after Straus reassured them that the government did not intend to get into the oil business.23 The program had barely gotten started, however, when the war ended, leaving the future of synfuels uncertain. This was especially true because this program was criticized for the notable involvement of the oil industry on the program’s advisory board. But with a heating oil shortage in the winter of 1947–8, which some in the oil industry had been warning about months before, there was a renewed sense of crisis and the specter of looming shortages ahead. President Truman responded by asking for price controls, and Interior Secretary Julius Krug sought an emergency allocation plan. Also, synfuels development was moved back to the top of the energy agenda (Vietor 1980).24 Although the original synfuels bill was intended as an R&D program, Secretary Krug, who was now fearing that shortages were to be the rule, wanted to move quickly toward commercial production. He asked Congress to authorize construction of three demonstration plants each capable of producing 30,000 barrels per day (bbl/d) of synthetic gasoline. Later, Krug sought approval of a $9 billion program (more than $82 billion 2011 dollars) to commercialize synthetic fuels, ultimately to reach production of at least 2 MBD of oil equivalent (MBDOE; 22 23

24

Actually there were three processes: the Lurgi, Fischer-Tropsch, and Bergius processes. These are described in technical detail in Lee (1982). Interior Secretary Harold Ickes did in fact exercise a great deal of control over the oil industry during World War II as head of the Petroleum Administration for War (Nash 1968) and unsuccessfully sought to extend that control afterward. Only the year before, Krug had submitted a report suggesting that shortages might occur because of transportation bottlenecks and other nonenergy resource constraints, but with shortages now a reality, he changed from optimist to pessimist on the availability of oil (Goodwin 1981). In fact, lack of drilling equipment, tankers, and energy infrastructure disrepair in the United States were major reasons for the oil shortages (Vietor 1984).

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Bradley 1996a). Defense Secretary James V. Forrestal also endorsed the expanded synfuels program for national security reasons, an endorsement that took on added urgency with the beginning of the Korean War. Forrestal and other proponents argued that the United States needed to be energy self-sufficient in case of war. As Senator O’Mahoney pointed out, America’s vast coal reserves, if developed into synthetic fuels, would make the country “independent of any foreign source of supply” (quoted in Vietor 1980). As Krug, Forrestal, and the BOM conceived it, the synfuels program was to be the first self-conscious effort at government-directed commercialization of an alternative energy technology. In arguing for such a program, proponents were making market failure arguments. The country needed such a costly government program because of a lack of foresight in private industry, high levels of risk, and imperfect capital markets. These, it was assumed, kept private entrepreneurs from undertaking what was, to government officials like Krug, an obvious opportunity for a profitable business proposition. Add to that the positive spillover national security benefits, and here was an argument, the first time in U.S. history, for a high-level government program for commercial development of alternative energy. There simply was not a sufficient crisis atmosphere to induce such a major commitment to synfuels. By the time the debate moved to Congress, the heating oil crisis passed, and supplies of petroleum products were mostly adequate. Congressional leaders decided simply to extend the original bill for three more years with an additional $30 million, and several small pilot facilities were in fact constructed.25 Although synfuel proponents in the BOM believed that the cost of synthetic oil would soon be competitive with petroleum (they believed synthetic gasoline could be produced for about 11 cents per gallon), the oil industry disagreed.26 Company experts testified that synfuels were nowhere near cost-competitive with oil, claiming that liquefied coal would cost as much as four times more than petroleum, and oil shale about twice as much (Vietor 1980; Goodwin 1981). Soon after President Eisenhower took office, the program was wound down with the pilot oil shale plants sold to private purchasers. 25

26

It was to be extended one last time in 1950, with total authorizations of $87.6 million by the time the act expired in 1955 (Bradley 1996a). Bradley calculated that total synfuel subsidies were more than $100 million for the period 1944 through 1955. Representative Charles Wolverton (R-NJ) tried to test the capital market failure argument by proposing a government guaranteed loan of $400 million to private interests that would build and operate a coal synfuels or oil shale demonstration plant capable of producing the synthetic equivalent of 10,000 bbl/d (Vietor 1980). The bill never passed, but there did not seem to be any private firms interested in taking it on.

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Nevertheless, the war and its aftermath, with the ongoing problem of feared shortages, led officials to begin to recast the problems of fuels as an “energy” issue. Synfuels were, after all, attempts to turn one fuel into another and a commission appointed by President Truman to study “materials policy” (known as the Paley Commission after its chairman, William S. Paley) believed the United States would have to come back to that idea. The commission pushed the idea of an energy policy to cope with a pessimistic outlook: “The time will come,” the commission’s report argued, “when civilization’s energy needs will outrun nature’s declining stores of fossil fuels available for economic use” (United States National Security Resources Board 1952, 106). There would have to be substitutes – the report even suggested there would be the need to harness solar energy – but there would be mostly a return to coal to replace exhausted supplies of oil and natural gas (Barber 1981a). These changes would require the United States to develop a broad fuels policy – that is, an energy policy. But there was no real effort made to implement that idea, and even less interest in new technologies except for nuclear energy, although, as is discussed later, the interest in nuclear had little to do with energy policy. Through the 1950s and ’60s, the United States enjoyed great prosperity with low oil prices and abundant supplies. This did not mean the end of gloomy forecasts. Even in the 1960s, when there were no apparent shortages, Congress heard testimony that the United States was running out of oil and gas.27 Throughout the first seventy years of the century, in fact, the impending shortage argument was raised often, with the general underlying assumption being that government had to find an answer. But if the government had really believed their doom-laden forecasts, there was one obvious way to cope with it: raise the price of oil products considerably, presumably through high taxes, which would also have curtailed some of the era’s prosperity. In any case, if some officials contemplated high energy taxes, their views were seldom heard and never taken seriously.

c. Waste, Conservation, Antitrust, and the Birth of a Cartel (Not the One You Think) Oil production in the United States faced a vexing institutional problem. Property rights in oil fields were hard to define, and property holders had difficulty contracting around the problem. Traditionally, oil was subject to 27

Noted by Senator John Pastore (D-RI), on a Nixon-era tape. NPL, Cabinet Conversation 53–1, Apr. 13, 1971.

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the rule of capture (Hardwicke 1935; Drummond et al. 2004); if a person wanted to own oil, he or she had to pump it out of the ground. Of course, the problem is that oil is an unseen and migratory resource, and a pool of oil might stretch underground over thousands of acres, but the pool could theoretically be extracted from a few strategic spots. Because those thousands of acres might cover hundreds of separate properties (owners of the surface land held the right to drill on that property), anyone who sank a drill bit too late might find little remaining oil where weeks even days earlier there would have been a lake of it. Thus, a producer who tapped a productive underground source had an incentive to pull as much of the oil out of the ground as quickly as possible. Indeed, news of a highly productive oil strike led inevitably to a rush to drill as quickly as possible on adjacent properties. Oil presented a classic common-pool resource problem. It was valuable, and haste in recovery led to gains to the driller but also to waste, which in the first decades of the 1900s was widely observed.28 It should be noted that in the early part of the twentieth century, the only way to know the extent of an oil field was to drill it; thus, one productive well might mean a localized small pool or a gigantic oil-bearing region. But one successful find raised the odds that there was more to be found, and each well brought in dozens of companies with drilling equipment. Production was typically “frantic,” and the rush to capture meant a sudden surge of supply that reduced prices so quickly and drastically that drilling elsewhere would become uneconomical. Thus, the incentive structure inherent in the right of capture created two problems with respect to development of the resource: first, any find was going to be depleted more quickly than if an oil-bearing region were individually owned, because a single owner would have had the incentive to maximize the return on investment, extracting the resource at the maximum efficient rate (McKie and McDonald 1962). Second, oil in a field was going to be, over time, increasingly expensive to extract. The history of any given oil field in the early twentieth century went something like this: When a field was first discovered, pressure that has built up in oil-bearing sediments (from water or associated natural gas) allowed the first units of the resource to be brought quickly and cheaply to the surface (so-called gushers). But as the field was intensively drilled, the pressure was dissipated. Although oil remained, it had to be pumped out of the ground, significantly raising the costs of production; if cheaper oil could be extracted elsewhere (which in the early twentieth century was usually the case), much of the oil in the first field would simply be left in the ground. If, alternatively, the field 28

Oil storage on site often was highly inefficient, contributing to the waste problem. Oil was often stored in open tanks (leading to losses from evaporation) or even in pits in the ground with attendant spillage, leakage, and evaporation.

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had been exploited at the maximum efficient rate, in which well pressure would have been slowly reduced, much more oil would have been extracted economically. In other words, with the property rights based on capture, oil production was grossly inefficient. There are a few possible solutions to the property rights problem. The entire petroleum industry could be nationalized, turning sometimes disputed private property into public property, although creating wellknown (political) incentive problems and excessive bureaucratization. This approach has been suggested periodically from the early twentieth century and into the twenty-first.29 In 1916, for example, America’s only Prohibition Party congressman, Charles H. Randall (CA), proposed a resolution (H.R. 175) that the secretary of the interior study whether it was advisable for a federal takeover of “the entire oil-producing area of this country.” In testimony, however, Randall left no doubt where he stood on the matter, claiming two paramount reasons for nationalization: preservation of oil supplies that would be needed by the government (notably the military) and protection of consumers against the predation of large oil companies.30 It is also of note that Randall’s proposals followed reports of extraordinarily wasteful drilling in Oklahoma, which led to state legislative action. But arguments for a national takeover never gained traction as most officials maintained at least a rhetorical adherence to private property and free markets (the latter often given even while the same officials were proposing heavy forms of regulation). While nationalization was shelved, there was a more direct question of how the federal government would treat oil production on federally owned lands. Federal lands were essentially open access for mineral exploration, established that way by practice even before the California Gold Rush in 1849 and formalized by the Mining Act of 1872 (Clay and Wright 2011). But as noted, some in government believed the lands had to be protected from exploitation for national security. In general, however, the property rights problem seemed to call for contractual solutions. That is, the goal of efficient extraction would be achieved if holders of surface property rights could form contracts that would permit optimal extraction practices and if government would allow these contracts to be enforced. There were essentially three possible solutions: consolidation, unitization, and prorationing. Conceptually, the first two of these are 29

30

Including economist Brad DeLong, who argued in 2010 for nationalization of the entire U.S. energy industry with the oxymoronic aim of depoliticizing energy; blog post, Apr. 15, 2010, “After Copenhagen, What?” At: http://delong.typepad.com/sdj/science climate/page/2/. Petroleum and Gasoline hearings of the Subcommittee of Mines and Mining, the House of Representatives, Apr. 3, 1916, p. 4.

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simplest. Consolidation simply means that one operator buys all the lease rights over the pool and extracts the resource at a profit-maximizing rate as a private owner. Unitization also assigns resource exploitation to a single firm, but in this case, the firm pays out the stream of rents to the initial holders of the surface drilling lease rights. Shares of the “unit rents” are determined at the outset of the contract and remain unchanged. To permit changes in share allotment would be problematic because optimal extraction practices make it impossible to maintain any clear conception of which bit of oil belongs to which lease holder. That is, as oil is extracted, the migratory character of the resource means that it flows to the drilled wells, which are placed not to reveal whose oil is whose but rather to extract it most efficiently (Wiggins and Libecap 1985). Thus, the central problem in both consolidation and unitization is to decide on who gets what. Valuing the individual leases for purchase under consolidation or the shares under unitization can become matters of dispute, and the history of attempts at such forms of contracting have revealed clear problems in this regard. But there was a second institutional problem with both solutions: antitrust laws discouraged efforts at voluntary consolidation and unitization contracts. Oil was from the start of the new century a focal point of antitrust law, beginning with the breakup of John D. Rockefeller’s Standard Oil, which became the target of both muckrakers (Tarbell 1904) and Roosevelt’s trust busters.31 Yet, even at the state level, there was wariness on the part of government officials over any contractual relations that seemed to be monopolistic in character, and state laws reflected that feeling. A 1907 revision of Texas antitrust law, for example, made parties to unitization contracts potentially guilty of a felony (Bradley 1996a). Federal law remained at least a question mark, especially because Congress continually obsessed over monopolistic practices in the oil industry and the impact on American consumers (Clark 1987). To other observers, the main problem seemed the opposite: overcompetition (Stocking 1925). As late as 1927, a law professor lamented that “overcompetition and overproduction” were inevitable unless the federal government relaxed enforcement of antitrust laws against cooperative contracts (Gibbs 1927). It should be noted that it was never completely clear that 31

Ironically, when Standard was dissolved in 1911, it had already lost much of its market power because it had not played a major role in the first large discoveries in Texas in 1901, which instead produced two companies, The Texas Company (later Texaco) and Gulf Oil, that were themselves to become major oil producers. Then again, state laws initially made it difficult for non-Texas companies to enter the market, limiting Standard until such time that Texas and Gulf were competitive (Pratt 1980).

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the Sherman Act was applicable to unitization contracts, but lack of clarity only created uncertainty and made potential participants wary of them. With unitization and consolidation problematic, that left prorationing. Prorationing is an agreement that allows all drillers with leases over the field to continue to drill, but their output is controlled by quota. Quotas can be adjusted automatically to reflect changes over time and quota allotments – sales and extracted quantities can be monitored and measured – can be enforced so long as government recognizes the validity of the agreements.32 In fact, this was the route government authorities encouraged, and the development of prorationing also showed the ambivalent relationship between the oil industry and government policy makers through the first half of the twentieth century. Experiments with prorationing began at the state level and were federalized only later. Oklahoma became something of a laboratory for development of policies to reduce waste in the production of oil and gas. In 1905, the state legislature passed drilling regulations, but problems in the field increased enormously with the Glenn Pool oil find near Tulsa in 1907. In addition to the usual problems of wasteful overproduction, major oil companies began building pipelines for cheap transport of Glenn Pool oil. It was the drillers themselves – wildcatters and small oil companies – who then petitioned for legislative action, revealing differing interests within the oil industry. Small producers felt that a key to success was to fight the major integrated companies (including the successors to Standard Oil and the Texas giants, Texas Company and Gulf Oil) as much as it was to bring in new wells. Over the years, the small operators would become politically important, especially at the state level, and a considerable amount of government action was undertaken on their behalf. Even though the large integrated companies would dominate refining and distribution of petroleum products worldwide, there were hundreds of small domestic producers who would in fact exercise disproportionate political influence in twentieth-century U.S. oil policy. Even in and after the 1970s, as energy crises brought about a frenzied search for energy “solutions,” legislation continued to offer special benefits and protection for small operators.33 32

33

It has been argued that absent government interventions, the oil companies would probably have agreed eventually to mutually beneficial voluntary agreements to unitize or proration fields (Bradley 1996a). High transaction costs might have made this inefficient, but ultimately government determined the outcome with many short-term benefits and many long-term problems as a result. For example, different pricing rules were applied to stripper wells. For a discussion of independent oil producers, see Olien and Hinton (2007).

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In the Oklahoma case, the small producers wanted government intervention to force higher oil prices, which had tumbled because of the amount of oil that was being pulled out of the ground (and in the hasty overproduction sometimes spilled back onto it), and to regulate the large companies that had set up pipelines. Drillers felt the pipeline operators were discriminating against them in transporting oil. In 1909, the legislature obliged, passing a law to bring pipelines under common carrier regulations while it designated the Oklahoma Corporation Commission (OCC) to hold hearings on how to reduce waste and raise prices (Nash 1968; Clark 1987). By 1913, the OCC had tried to proration two major fields and to set a floor price for crude. This effort mostly failed. The floor price was unsustainable, and waste continued until 1915, when an even bigger field produced even greater amounts of waste. However, the legislature tried again and produced a bill that was termed a model, with the OCC designated as the authority to determine prorationed quotas (Clark 1987) to be based not only on company output history but also in part on market demand. Still, with only one state taking this route, the problems of overproduction continued – at least for a while – because there was no way that Oklahoma could control all of the domestic market. Within two years, oil supply had stabilized, and with the U.S. entry into World War I, prices started to rise rapidly. The nominal price of oil went from around $0.50 per barrel to $1.50, and a few years after that to as much as $3.50 (Libecap 1989). Suddenly, where only a couple of years earlier oil was spilling all over the ground, now supplies were believed to be dwindling again. One area in which the federal government had already taken action was with the tax code. In 1913, federal legislators from oil states had included in the Revenue Act the first “depletion allowance” through which (in its initial form) oil producers could deduct 5 percent of gross revenues from taxable income to account for both the cost of discovery and the declining value of oil assets (Nash 1968). The depletion allowance was increased during World War I and then again during fears of shortages in 1926, when the allowance was increased to 27.5 percent of gross revenue, a level that was retained (although often challenged) until the mid-1970s. Although most in Congress seemed to worry about antitrust issues, a few in the federal government noticed the waste problem. In 1922, Senator Robert LaFollette, Sr. (R-WI) began hearings over oil leases sold under the 1920 Mineral Leasing Act. The act, which was intended to limit oil and gas exploration on federal lands primarily to ensure the availability of resources in the event of war, had quickly led to scandal. The sale of leases at Teapot Dome, Wyoming, eventually put President Warren Harding’s secretary of

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the interior, Albert B. Fall,34 in jail, but the hearings also raised anew questions about wasteful overproduction of oil in the United States. Calvin Coolidge, Harding’s successor, formed the Federal Oil Conservation Board, which consisted of the secretaries of interior, war, navy, and commerce, to deal with the problem of a rapidly dwindling supply of oil – or so it was believed. As part of this effort, the board was to study conservation, which it took to mean both reduction of end-use consumption and reduction of waste in production. The FOCB endorsed many of the prorationing rules as well as the principle of interstate cooperation. But even as the FOCB was contemplating an America with little oil, domestic U.S. oil companies and wildcatters began finding the next big fields. Within a year of the FOCB’s creation, there were new finds in Oklahoma and Texas, and soon after even more were discovered in both of those states and New Mexico; as it happened these finds occurred just as the economy was slipping into the Great Depression, dampening demand for energy. Suddenly the big fuel concern was transformed once more from depletion and high oil prices to wasteful overproduction and the precipitous fall in prices. From a price of about $1.50 a barrel in the mid-1920s, oil fell below $1 by the end of the decade, reaching a low point finally of around $0.10 per barrel after the biggest strike of all, the giant East Texas oil field. But at ten cents per barrel, it was hardly worth it to take the oil out of the ground. Actually, the precipitous fall in prices was at least partly deliberate. The largest oil companies – such as Texas Company, Gulf Oil, and the Standard Oil offshoots, which would be known as the “major” oil companies – had reengaged in domestic production but wanted some kind of control system to make domestic oil production more profitable. When the major companies sought government intervention, the Texas legislature refused, and the major companies believed that voluntary unitization agreements were probably not going to be accepted by antitrust authorities. In fact, in 1929, Attorney General William Mitchell had announced that voluntary agreements by oil companies to curtail production would likely violate the Sherman Act (Vietor 1984). With so much oil available, the major companies began to advocate for prorationing, and they decided on a scheme to provoke the smaller companies into using their political supporters. They, the majors, started to produce an enormous quantity of oil, 34

Fall was ultimately convicted on charges of accepting bribes in return for his decisions on oil leases at Teapot Dome. He served time in jail, although there have been convincing arguments that the leases were “the only efficient oil rights arrangement on federal lands through 1930” (Libecap 1984).

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a million barrels a day or one-third the total U.S. demand, from East Texas alone (Blair 1976). The extraordinarily low price from this overproduction put great financial pressure on the small independent oil producers and forced them to join in lobbying for prorationing. The effort succeeded. In 1932, the Texas legislature passed the Market Demand Act that specifically allowed the Texas Railroad Commission to establish quotas with the avowed aim of raising prices largely for the benefit of the small independent producers. Initially, the Texas law was not successful in constraining production. Nor did the Oil States Advisory Committee, a group established by the governor of Oklahoma, succeed either; in fact, that pact between Oklahoma, Kansas, New Mexico, and Texas was voided by the courts (Libecap 1989). But the new Franklin Roosevelt administration was in favor of production curbs, and Congress brought oil prorationing enforcement under the National Recovery Act (NRA) in 1933. According to the NRA, it was illegal to ship oil produced above state-prorated quotas if the oil was destined for interstate commerce. Established quotas were to be guided by overall oil market demand estimates that were being produced by the BOM, the government agency most responsible for carrying out national fuel policies. It seemed finally that a prorationing system was in place that would be effective in reducing production, keeping prices high enough so that small producers could be profitable, and presumably serving the interests of conservation. In 1935, the Supreme Court overturned the entire NRA code, but one month later, Congress passed the Connolly Hot Oil Act, which essentially provided the same benefits for the oil industry as the NRA code. Meanwhile, the governors of the major oil-producing states sought a unified stand on prorationing, signing the Interstate Oil Compact toward that end. As Libecap (1989) argues, the result of this was a government-controlled interstate oil cartel that was to guide domestic petroleum output in the United States until 1972. Because it was government-controlled, however, the motivations of the regulators mattered as much or more than the goals of the producers. Texas, with by far the largest supply, took the lead management role through the Texas Railroad Commission.35 The commission exercised control over national output (excluding California) and prices and did so with a particular political slant. Because small independent producers had gained considerable political leverage, the commission would put the 35

Texas was the residual producer. That is, the state had excess oil production capacity; production could be increased or decreased as needed to stabilize prices and/or profits for the U.S. oil market as a whole.

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burden of output reductions on the high-output, low-cost well operations to keep the smaller independents profitable (Libecap 1989). It was particularly ironic that a government-controlled domestic oil cartel was established, because around the same time Congress and the Roosevelt administration were worrying about excessive market power by the oil companies. In 1935, Congress contemplated declaring the entire oil industry a public utility – a move that was passionately supported by Roosevelt’s secretary of the interior, Harold Ickes. No such bill passed Congress, but in 1938, a Temporary National Economic Committee began a study that was intended, according to President Roosevelt, to “rescue” the “free market system,” which especially in the oil industry was seen to be rife with market failures. The committee indeed found that the oil industry was like a public utility, and it was suggested that the industry might benefit from regulation along the lines that had been proposed. This did not happen even after World War II raised issues of supply once again. But despite a few moments of shortage panic in the war’s aftermath, the cartel administered enough control over oil that there was not a problem in meeting demand. And prices were low – in fact, they fell as imports of cheap foreign oil increased. The solution to the institutional problem of property rights in oil – prorationing – led to the creation of a cartel, and this produced effects quite different from those of a free market. First, and most important, because the cartel was government run, producers had stronger incentives than ever to engage in rent-seeking and to devote resources to influencing politicians rather than improving extraction technologies. Second, because the Texas Railroad Commission favored small producers over major companies, the latter, although possessing the largest capital resources, had the fewest incentives to use them for domestic production. That is, if they increased exploration in the United States substantially, and had success, the Railroad Commission was likely to reduce their quotas to keep prices high enough for the independent producers to compete successfully. As Adelman (1964) argued, the U.S. government–run system was most definitely inefficient. But then, any cartel is designed to underproduce and is not intended to be economically efficient. That is to say, the industry was said to be replete with market failures, yet it was supposed to be rescued by creating another one; a cartel, like a monopoly, is by definition an inefficient form of organization. It is entirely speculative (although a speculation some have made, for example, Bradley, 1996a) whether the U.S. oil industry would have been able to work out efficient contractual relations to the property rights problem in the absence of the cartel. But the government’s solution was another

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distortion that would have deleterious effects on American energy markets in the years ahead.

d. The “Solution” to Imports: The Mandatory Oil Import Program (MOIP) After World War II, there was said to be another problem in the U.S. oil market. Concern about supply waned because domestic production was being supplemented by imports – and that was the problem. The issue was not, as it became, dependence on foreign oil. Rather, imports were perceived to be a threat to the domestic U.S. oil industry, especially the independent producers, because imported oil could be sold profitably for a price small domestic producers could not match. The United States did not have to import oil; there was enough production capacity to have met domestic needs. But imports made economic sense for refiners who were able to buy cheaper oil from abroad.36 The rising import trend ran counter to advice from the Petroleum Industry War Council in 1945. The council envisioned damage to domestic producers and called for import restrictions. Import restrictions were nothing new either. Although the United States had typically imported crude oil as well as refined products, the government had imposed tariffs in 1932 and a quota system in 1933 (although this system was part of the National Industrial Recovery Act, which the courts invalidated in 1935).37 The United States signed various trade agreements separately with many exporting nations over the next decade, but with the signing of the General Agreement on Tariffs and Trade, the United States agreed to abolish the quotas and reduce the tariffs on imported oil from all signatory nations. The surge of imports was having important consequences. In Texas, the Railroad Commission had been reducing prorationed production quotas to keep prices up, but the small independent producers were alarmed when told that they as well as the major companies had to produce less. One 36

37

In fact, importing oil was nothing new. The United States had imported oil for most of the first half of the twentieth century. Of course, it is true that during many periods, the 1930s in particular, oil exports exceeded imports. But with cheap foreign oil so abundant in the postwar period, and domestic production slow to recover from the war, the balance shifted dramatically. Whereas in 1939, exports were triple imports, in 1949 imports now were twice as large as exports, and the balance of both crude and refined petroleum products amounted to net imports of more than 300,000 bbl/d (Bradley 1996a). Partly this was in response to the Truman administration’s requests for increased imports to overcome the politically damaging heating oil shortages in 1948, an election year. The initial overall quota set by Interior Secretary Harold Ickes was 98,000 bbl/d.

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independent claimed in a 1949 letter to Texas senator Lyndon Johnson that his group was being bankrupted by Arab princes and international oil giant Standard Oil of New Jersey (now Exxon). The politically influential trade organization of independent producers, the Independent Petroleum Association of America (IPAA) warned of national security consequences (noting that Middle East oil fields were close to Soviet bombers) if the United States became more dependent on foreign oil; the IPAA formed committees to lobby both Congress and the major oil companies, hoping to persuade the latter to voluntarily limit imports to 5 percent of U.S. demand (Vietor 1984). The IPAA did not, however, win either the support of the oil giants or the support of the Truman administration.38 Imports kept rising. By 1953, the United States was importing on average just over 1 MBD; now the IPAA sought relief from the Texas Railroad Commission. In response, the commission decided to require importers to file their anticipated import plans five months in advance. The clear implication was that the commission would exercise even greater control if the major producers did not restrain themselves. The large companies seemed at first to get the message; in 1954, imports rose by only a bit over 1 percent, but given the economic benefits that could be gained from imports, the quantity increased by a larger percentage the next year. Meanwhile, Congress took up the issue of foreign imports in connection with a renewal of the Reciprocal Trade Agreements Act of 1934. In that context, Representative Richard Simpson (R-PA) introduced an amendment that would have limited foreign imports to the equivalent of 10 percent of domestic production. The amendment, which lacked President Eisenhower’s support and faced intense oppositional lobbying from a variety of interests, failed, although Eisenhower did appoint yet another commission to study the question of oil imports. But in 1955 when the Reciprocal Trade Act again came up for renewal and an amendment for a mandatory quota, like the Simpson Amendment, was again introduced, it was again defeated. Still, Congress was mindful of the political pressure of the independent producers and did agree to have the Office of Defense Mobilization (ODM) keep tabs on the import situation. The problem was being framed as a dependence issue affecting security – as it had been during and after the war. The question, as the IPAA stressed, was whether large-scale imports put U.S. global strategic concerns at risk. If the ODM determined that there was a national security problem, it could ask the president simply to impose quotas on imported oil. 38

Ironically, over the next couple of decades, there would be increases in imports from independent producers, especially those operating in Libya and other parts of North Africa.

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The issue gained much greater prominence, however, after the Suez crisis in 1956. War had closed the canal, which in turn had disrupted the international oil market. The ODM suggested programs of voluntary restraints – a system of “voluntary quotas” to be developed by a new Oil Import Administration (OIA) in the Interior Department. Although this program did not have any enforcement mechanisms, there was at least an implicit threat that if the voluntary program failed, a mandatory regime would follow (Barber 1981a). The voluntary system was not in fact successful. Companies were displeased with their OIA allotments; many felt the system was unfair, and the lack of enforcement meant that there were those who simply ignored it. It was most importantly not able to stem the increase in imports, which had reached 1.7 MBD in 1958; domestic production meanwhile had fallen by 460,000 bbl/d. Eisenhower was finally persuaded that rising imports warranted intervention, and in March 1959, the administration introduced a mandatory quota system, called the Mandatory Oil Import Program or MOIP. Quota allowances were to be given to refiners based both on a firm’s importing history and its overall size. For program management, the MOIP also divided the country into districts based on an old World War II allocation plan (Bradley 1996a). The quota was intended to hold imports to 9 percent of demand in the designated districts – although the West Coast, where economic and demographic growth were rapid and spot shortages were prevalent, was exempt from the system; later imports were limited to an amount equal to 12 percent of domestic production. Notably absent in the initiation of MOIP was a market failure argument. Perhaps one might have been made with respect to national security as a nonappropriable public good. But in reality, the world market was not failing at all. The United States could buy as much oil as it needed at the lowest possible prices clearly benefitting the U.S. economy and American consumers. If anything, the MOIP was introducing a market distortion for the benefit of a group of U.S. producers that would raise costs and reduce national output. As Eisenhower said in his signing statement, “The new program is designed to insure a stable healthy industry in the United States.”39 There were complaints from the outset directed mainly to an Oil Import Appeals Board in the Department of the Interior but also to members of 39

Statement of the President upon Signing the Proclamation Governing Petroleum Imports, Mar. 10, 1959, at: http://www.presidency.ucsb.edu.

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Congress; many companies felt that their allotments were too low. Others, some wholesalers, users, and independent “jobbers,” were excluded from any import allotment and considered this unfair; some refiners complained that they were given too little imported oil simply because they were small producers. Of course, the most problematic aspect of the quota was . . . the quota. From an economic standpoint, quotas are a bad alternative. They direct resources to the wrong places; lead to large (and increasing) deadweight social welfare losses because domestic users pay too much and use too little of the product or resource; have no ability to change as market conditions change; encourage rent seeking over productive activity (as the cartel also did); and change patterns of production and use that will almost certainly lead to inefficient outcomes. Although the quota had substantial support both within government and among various producer interests, even in 1959, it was unclear what benefits it conveyed (Dam 1971). Did it even benefit national security, presumably its rationale in the first place? Not according to Clarence Randall, chairman of the Council on Foreign Economic Policy. Because the quota system put a greater burden on domestic supply, he observed, “Ostensibly the program is based upon national security, but if domestic petroleum reserves are required for our defense in war, or our recovery after war, I do not see how we advance toward that objective by using up our existing reserves” (quoted in Barber 1981a).40 An extensive analysis of the MOIP quotas showed that the system was continually subject to government manipulation that had nothing to do with any national security concern or even explicit domestic industry protectionism and that in the process of restricting crude imports, there was a clamor for extending quotas to benefit other groups besides domestic oil producers (Dam 1971). By 1960, if one assumes that intervention in the domestic energy market must be motivated by market failure, then U.S. oil policy had evolved to the point where the answer to market failures was an output-constraining domestic cartel and inefficient trade barriers in the form of a quota. Both of these forms of economic organization and exchange lead to inefficiencies – and are themselves failures. If there were alleged to be failures of a free market, because the market had been so disrupted by government intervention, it would now be essentially impossible to find them. 40

There would need to be a domestic oil infrastructure not just reserves, although arguably some oil would still be produced domestically at competitive prices even where imports were unrestricted, and imports were mostly being refined in the United States.

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4. Natural Gas Policy to 1960 One hundred years ago, natural gas was often considered more a nuisance than a valuable energy resource. Most gas was “associated,” that is, it was found along with oil and provided (along with water) the pressure to create a natural oil gusher. Sometimes, the gas was gathered and reinjected into the well to restore pressure. At other times, it provided an energy source on site. But often it was simply flared – that is, burned off. Of course, natural gas was recognized as a potential energy resource, one that was notably clean-burning. In fact in the nineteenth century, coal was heated to make a low-energy (low BTU) gas that was used for lighting before the widespread electrification of America’s cities. But natural gas (a high-energy, high BTU resource) suffered from transportation problems; how was one to get the gas from point A to point B economically? Pipelines made the most sense, but these were large financial, capital undertakings and by the early twentieth century could only work successfully over relatively short distances. If demand was greatest in East Coast cities like New York and the gas was found in rural Texas, there was no known way to make such transport cost-effective. Still, natural gas began to be transported by small-gauge pipelines from the field to nearby communities; by the early 1900s, pipelines reached cities such as Tulsa and Kansas City, and natural gas consumption began to grow. In 1900, total consumption was around 100 billion cubic feet. Twenty-three years later, U.S. annual consumption had increased more than tenfold (Clark 1987). Although there was little vertical integration in the natural gas business, gas operations began to attract the attention of state regulators because pipelines were assumed to have natural monopoly-public utility characteristics; state regulations became common by the early twentieth century. As was usually the case with public utility regulation, the justification was often market failure – monopoly control – but much of the impetus of state intervention came from the largest, best-placed firms in the industry, which sought to use regulation to solidify a protected monopoly status (Bradley 1996b, 2003). That is, some of the regulatory efforts (as with electric power) were intended to prevent competition rather than prevent monopolistic abuse. Early in the century, the federal government remained more concerned with oil and coal. Eventually, however, natural gas pipelines were extended across state lines (especially after 1925) and drew national attention. In 1928, Congress directed the Federal Power Commission (FPC) to study both the electric industry and the natural gas industry and report back to

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the legislature.41 The study was in fact delivered in 1935 and led to the most important federal energy-related legislation until the 1970s.42 Electric utilities were treated first under two statutes; the most famous, the Public Utility Holding Company Act of 1935 (PUHCA), set stringent rules on the makeup and behavior of electric companies that engaged in interstate commerce. The new rules included the requirement that electric companies divest themselves of businesses outside that of electricity. Because many were also gas companies, companies were forced to split into separate entities, and gas companies like their former electric partners became largely singleproduct enterprises. Gas pipeline operations that were created after 1935 were organized to avoid PUHCA complications (Bradley 1996b). At the same time that Congress passed PUHCA, it also passed the Federal Power Act (FPA), which gave the FPC (itself altered in composition by the act) direct regulatory authority over electric transmission across state lines; all electric power companies needed FPC sanction to conduct interstate business, and the FPC had rate-setting and service jurisdiction (Bradley 2003). Natural gas companies were not included in PUHCA or the FPA, but a separate statute was introduced to regulate that business as well. A Federal Trade Commission study showed that only four firms held dominant positions in the transport of gas, but the gas industry did not fit the caricature of a monopolistic vertically integrated energy concern; in other words, it was not like Standard Oil as of 1900. Whereas Standard in its heyday had major roles in production, transportation, refining, and distribution of oil, no 1930s gas company was similarly situated. In fact, the result of PUHCA requirements left the gas industry notably fragmented.43 But the increasing use of natural gas and the growing importance of the pipelines drew congressional action. The Natural Gas Act of 1938 (actually introduced in 1937, H.R. 12680) placed interstate pipelines under FPC jurisdiction. According to an analysis by Libert (1956), FPC regulatory jurisdiction covered only construction of pipelines and rate-of-return pricing regulation of the gas sold by the pipeline to the local distribution companies (which were separate and separately regulated by state public utility commissions). It did not, as some feared, mean that the FPC would have control over gas pricing at the wellhead even if that gas was destined for the 41 42 43

The FPC had been created by the 1920 Federal Water Power Act. It was amended and renamed the Federal Power Act in 1935, which greatly expanded the authority of the FPC. President Roosevelt also appointed a commission in 1934 to recommend legislation. There were many gas producers including (nonpipeline) major oil companies; some of the interstate pipeline companies integrated backward into production, but the pipeline companies never dominated the production end of the business.

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interstate market. The bill was said merely to fill in a regulatory gap: states regulated intrastate pipelines, distribution and often drilling practices, and now the Gas Act covered interstate transmission. In its final form, and after assurances that the bill did in fact only cover interstate pipelines, the bill passed both chambers of Congress unanimously. But once President Roosevelt signed the bill, natural gas was under the regulatory purview of the federal government – indeed, more directly under federal control than the oil business. That control would in fact grow. Over the next few decades the natural gas pipeline system, overseen by the FPC, expanded tremendously,44 but the Natural Gas Act did not settle regulatory issues with respect to gas pricing. In fact, it would take another sixteen years and several court rulings to clarify the FPC’s jurisdiction. Some ambiguity in the language of the Natural Gas Act left unclear whether the FPC would have any control over wellhead prices, even though at the time of passage there were statements in Congress to the effect that it would not. But in 1940, the FPC ruled that it could in fact regulate the prices a pipeline company paid when it also owned an affiliate production operation; that ruling was not challenged. The point was that if the company was to be allowed a fair rate of return on its investments,45 then the financial performance of its affiliates had to be taken into account. Potentially, at least, there was the danger of a transfer pricing problem, in which costs were imposed on the regulated division but profits could be booked on the unregulated side. At that time, production companies that did not also operate pipelines were excluded in the ruling. But a few years later, a problem arose when a company produced some of its own gas, mixed it with gas purchased from independents, and then transported it by its pipelines to interstate markets. The FPC decided it could determine the rate generally paid for the gas in those circumstances, too; this time, the ruling was challenged but upheld by the courts,46 bringing wellhead price regulation of all interstate gas that much closer (Bradley 1996b. The regulatory situation was muddled, and in 1947, Congress tried to settle it. A couple of efforts were made to exempt nonpipeline producers, especially independent producers, from FPC regulation, an effort the FPC preempted by issuing a ruling (Order 139) that said “arms-length” sales from independent producers to interstate pipelines would not be subject to 44 45 46

As of 2008, according to the Energy Information Administration, there were over 305,000 miles of gas pipelines in the lower 48 states. The rate of return was supposed to allow debt service as well as a return on equity that was set generally between 5.7 and 6.5 percent (Vietor 1984). Interstate Natural Gas Company v. FPC, 331 U.S. 682 (1947).

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FPC regulation (Gable 1956). This settled the matter for less than a year. The FPC finished its investigation in 1948 and produced two reports. The first by commissioners Nelson Lee Smith and Harrison Wimberly essentially endorsed what appeared to be the basic intent of Order 139: to limit the FPC at least with respect to regulation of producers that did not also operate interstate pipelines. The second report, however, by commissioners Leland Olds and Claude Draper, reached a very different conclusion. According to their report, the natural gas industry was under the sway of monopolistic firms. For evidence, they cited rising gas prices. Actually, rising prices were a symptom of booming demand (Vietor 1984; Gable 1956), but Olds and Draper attributed it to monopolistic practices. They concluded that as a matter of equity the FPC should regulate all prices of gas sold in interstate commerce. As Vietor (1984) points out, this discussion went on with essentially no input from economists and certainly little economic reasoning. Indeed, it was colored mainly by the perception that big business was inherently untrustworthy (a legacy of muckraking journalism and trust-busting politicians) and certain to engage in activities harmful to the public if given half a chance. According to this view, there had actually been two regulatory gaps. The first, regulation of pipeline sales to distribution companies, was plugged by the Natural Gas Act of 1938. But the second, the lack of regulation of gas purchases by pipeline companies, remained open, and to Olds and Draper this gap was apparently dangerous. The conflicting views were displayed in Congress as hearings and bills featured heated debate and testimony from Olds, among others. In the end, no new gas bill was passed and the FPC rescinded Order 139. In effect, for the time being, nothing had changed. The matter would be settled in 1954 by the Supreme Court. The crucial case involved Phillips Petroleum, the largest gas producer in the United States, against government and business interests in the Midwest. Phillips sold gas to interstate markets, but the company had no interstate pipeline. It did not transmit gas but gathered it and sold it to others that did. Under the language of the 1938 Natural Gas Act, it was not clear that Phillips should even be considered a “natural gas company.” But in 1946, the city of Detroit asked the FPC to assert regulatory jurisdiction over Phillips. It took the FPC until 1951 to decide it could not grant Detroit’s request. By the terms of the Natural Gas Act, the FPC said, Phillips was not a natural gas company. The state of Wisconsin appealed and the Court of Appeals in 1953 overturned the FPC ruling; Phillips was a natural gas company and was indeed subject to FPC jurisdiction, according to the court. Phillips appealed to the Supreme Court, which in 1954 upheld the ruling of the Appeals Court

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by a 5 to 3 vote (one justice did not participate).47 Although it has been persuasively argued (Libert 1956) that the court seriously misinterpreted the intention of Congress in passing the gas act in the first place, its holding changed the situation dramatically. Essentially, all gas sold to interstate pipelines was now subject to price regulation by the FPC, increasing the commission’s work load by a factor of four; in fact, it was not until 1960 that the FPC was ready to set the wellhead price on all gas sold interstate.48 Purely intrastate gas was exempt (although likely subject to state public utility commissions), but now just about every part of the natural gas business from production to transmission was under a federal regulatory regime. A month after the ruling, the FPC ordered all gas prices at the wellhead frozen, requiring that any company file a formal request for a rate increase. An attempt was made to get Congress to exempt independent producers. But the bill, H.R. 6645, passed only by narrow majorities and was vetoed by President Eisenhower. His veto message emphasized that the bill would “discourage . . . incentive to explore for and develop new sources of supply . . . contrary not only to the national interest but especially to the interest of consumers.”49 The logic of this assertion is hard to follow; if prices were allowed to follow the market, why would it reduce incentives for new sources of supply? Why would regulated prices encourage them? Still, as of 1956, the situation was resolved: the FPC would determine prices of all natural gas sold in interstate markets – which was most of the natural gas consumed in the United States As Chapter 1 makes clear, government pricing is usually a recipe for creating problems in the market. Although controlled prices were supposed to benefit consumers, no one explained why anyone would sell their gas at fixed government prices if the cost of producing it was rising. Or, why they would sell at fixed interstate federal government prices if they could do better selling in intrastate markets in which prices might be higher. Essentially, no one considered what would happen if (or really when) the FPC got the prices wrong.

5. Nuclear Power: Energy Policy as Public Contrition and National Honor On December 2, 1942, on a rackets court beneath the grandstands of Alonzo Stagg Field, the University of Chicago’s football stadium, physicist Enrico 47 48 49

Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954). This was also challenged in the courts as firms often tried to contract around the regulations, but the FPC’s authority was upheld in 1965 and 1968 by the Supreme Court. Veto Message, New York Times, Feb. 18, 1956, 6.

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Fermi induced a nuclear chain reaction – with considerable energy released from fissioning uranium atoms – that he was able to control so that the energy released did not destroy the apparatus. However, at that time, during World War II, atomic research was geared to an uncontrolled energy release, the atomic bomb. Both Fermi’s apparatus and the bomb worked. But many of the scientists who worked on the latter and some of the politicians who witnessed it were appalled by what they had done. Said the bomb project leader, J. Robert Oppenheimer (quoting from the Bhagavad Gita), “Now I am become Death, the destroyer of worlds.” But Fermi’s atomic “pile” demonstrated that atomic reactions could be controlled and utilized to produce heat, and that could be used to produce steam, to turn a turbine, to generate electricity or motive power. That is, nuclear energy could destroy a city, or it could be an exotic way to boil water (Cassedy and Grossman 1998).50 Almost immediately after the war ended, U.S. government officials contemplated how atomic power would be used. As Secretary of War Henry Stimson wrote to Truman in September 1945, the bomb showed how extraordinarily far the human race had come in the creation of destructive power, but now he felt the United States had a moral duty to demonstrate the ability and willingness to utilize nuclear energy for good. Stimson argued for the United States “so far as possible to direct and encourage the development of atomic power for peaceful and humanitarian purposes.”51 Stimson’s view prevailed not only with Truman but throughout the government. Consequently, over the next decade and a half, far more research funding would go to nuclear power development than to all other kinds of energy-related research. In fact, nuclear R&D was given the largest share of all federal R&D spending (Byrne and Rich 1986).52 None of this was undertaken to create an economically viable, technologically feasible alternative energy technology. There was, one observer noted, “no particular urgency” in the development of nuclear energy to meet the expected growth in electric power demand (Barber 1981a). Of course, it was not really an energy policy, as Stimson’s memo makes clear. It was a way to make the atomic bomb OK; a destructive force that the United States had unleashed would now be transformed into devices that would be for the good of all people throughout the world. 50 51 52

Even in the 1930s the potential of atomic energy for peaceful purposes was noted (by, among others, physicist Leo Szilard), although Fermi essentially proved its technical feasibility. Stimson letter to Truman Sept. 11, 1945, in Cantelon et al. (1991), 73–7. Nuclear research included spending on military and nonmilitary and on such projects as the yet-to-be-realized nuclear fusion reactor. Research funding of that concept began in 1953 (Bromberg 1982).

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At the outset, however, there was a fundamental problem with nuclear research: it was highly classified, and there was a gap between the desire to serve the human race and the perceived need to maintain a tight rein on atomic information for national security purposes. Nevertheless, shortly after Stimson’s memo, in December 1945, Senator Brien McMahon (D-CT) introduced legislation to manage nuclear energy development in the context of the dual demands of an act of public morality and a forbidden military secret. The Atomic Energy Act of 1946, as McMahon’s bill was to be called, is remembered mainly for the creation of the Atomic Energy Commission (AEC), which was henceforth to control all nuclear materials in the United States. Private entities could only utilize fissionable materials under license from the AEC, and production of such materials was the AEC’s “exclusive” domain. The bill also called for more research, both military and nonmilitary, in the development of atomic energy. In 1946, Leland Olds suggested that the FPC be in charge of all nonmilitary development of atomic energy, but Truman left everything in the hands of the AEC (Goodwin 1981). As observers began to contemplate the amazing city-destroying power of atomic energy, they imagined peaceful uses – imaginings that soon lurched into preposterous fantasy. One physicist argued that nuclear energy would eventually power everything. He envisioned airliners the size of ocean liners powered by a “small package” of atomic fuel that would also carry us to the moon and beyond (Gamow 1946). Energy would be so abundant it would “melt snow as it falls” (Hutchins quoted in Ford 1982). David Lilienthal, head of the Tennessee Valley Authority, noted the “almost limitless beneficial applications” (1946), which included, according to others, cures for cancer and sterilization of sewage. Some years later, Lewis Strauss, then chairman of the AEC, would famously declare that the electric power coming from nuclear plants would be “too cheap to meter.”53 No alternative energy idea ever received such mindboggling hype, and in fact, scientists and public officials would resist this kind of cartoonish exaggeration in the future when they touted an alternative energy idea. But actual research was slow to develop, in part because so much information was classified. What could be done if researchers had no access to what two economists referred to as the “nature and details of nuclear applications?” Just how much should the private sector know? What should the AEC undertake? It was not until 1949 that the AEC began to relent (much to 53

In a 1954 speech to the National Association of Science Writers. Although it has always been taken that Strauss referred to all nuclear power, he may actually have been referencing the then-secret nuclear fusion program, Project Sherwood.

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the consternation of some in the military). Military research was, of course, ongoing, mostly developing better and more varied atomic weapons. But the navy also began to look into military application of controlled fission. In 1946, naval planners wanted to begin work on a nuclear-powered submarine with a time horizon of two years. Admiral Hyman Rickover took charge of this project in 1948 and sought to build a land-based test reactor before scaling it for submarine utilization. Importantly, despite the AEC’s monopoly on nuclear information and materials, Rickover signed a contract with Westinghouse Electric Company to actually design and construct the reactor. The design, using high temperature pressurized water (a pressurized water reactor, or PWR), proved workable and became the basis of the most common power reactor.54 Of course, the United States lost its monopoly on atomic energy soon after the war, and subsequently the United States and USSR expanded their stockpiles of atomic weapons and tested a more powerful weapon still, the hydrogen bomb. In that environment, President Eisenhower provided a new impetus for civilian uses of atomic power in a speech to the United Nations in December 1953. The address was titled “Atoms for Peace” and spoke about international cooperation in nonmilitary atomic energy development. Eisenhower, after outlining the concept later to be called Mutually Assured Destruction (MAD) as a result of atomic warfare, declared, “[T]he United States pledges before you – and therefore before the world – . . . to devote its entire heart and mind to find the way by which the miraculous inventiveness of man shall not be dedicated to his death, but consecrated to his life.”55 Two months later Eisenhower asked Congress to pass a new Atomic Energy Act, with the purpose of ending the U.S. government monopoly over nuclear energy development. The act intended that it would be U.S. policy to engage in cooperation with respect to atomic energy with the U.S. private sector and with other noncommunist nations, while at the same time, for reasons of public safety and nuclear weapons nonproliferation, maintaining government regulatory control. Overall, the less-than-modest goal of the legislation was that “the development, use and control of atomic energy shall be directed to promote world peace, improve the general welfare, increase the standard of living and strengthen free competition in private enterprise.”56 There was, however, something of a contradiction in the 54

55 56

Although Rickover had moved quickly ahead, Congress did not authorize construction of the nuclear submarine until 1951, and the first nuclear-powered ship, the submarine Nautilus, did not become operational until 1955. Eisenhower speech in Cantelon et al. (1991), 96–104. Text of Public Law 83–703.

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AEC’s mandate. On the one hand, it was supposed to regulate and control all nuclear materials (and in fact was charged with actually producing all nuclear fuels); license and regulate nuclear power plants, which were by definition in state-regulated industries; and, at the same time, promote “competition” where little existed or was possible. Lewis Strauss, chairman of the AEC, was an intense promoter of the industry he was charged both to regulate and to advance. He found some in the AEC too timid and fearful about the potential dangers of nuclear energy, especially if left in the hands of private-sector players. But while the AEC maintained committees to review safety issues, it pressed forward with the Power Reactor Demonstration Program that grew out of the 1954 legislation (Ford 1982). With the help of direct government funding, government provision of fuel components, and later a cap on liability for utilities in the event of accidents,57 several electric utilities signed on to construct and operate nuclear power plants. The first, the Duquesne Electric Power Company’s plant at Shippingport, Pennsylvania, used a scaled up version of the submarine power system built by Westinghouse, and like the submarine, the project was overseen by Admiral Rickover.58 Strauss admitted that nuclear power was not yet cost-competitive with power derived from conventional resources but was certain it would eventually be the cheapest source of electric power.59 But that would not be any time soon. Nuclear power was both a fuel – fissioning uranium produced heat to boil water – and a technology for employing it safely. The submarine effort proved it could be done, but utilization in commercial electricity production required that it be produced cost-effectively. Early on, it was clear that cost was going to be a problem. But with government subsidies and promotional efforts that totaled $1.275 billion60 over the first few years of the program (about $10.5 billion 2011 dollars), plants soon came on line, beginning in 1957 with the Duquesne facility. More followed, but in 1962, an AEC report admitted that nuclear power was still not cost-competitive without subsidies. One 57 58

59 60

The Price-Anderson bill capping liabilities at $10 billion was passed in 1957. There was a second design by this time from General Electric, a boiling water reactor (BWR), and there were scientific critics of the PWR design. But it was the design used in most of the early power reactors (Ford 1982). Strauss made these assertions in a 1955 Reader’s Digest article, “My Faith in the Atomic Future,” reprinted in Cantelon et al. (1991), 104–8. The figure comes from the 1962 AEC report on the need for nuclear power. The report noted that private utilities had spent about $0.5 billion over the same time frame (Cantelon et al. 1991).

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physicist confessed that the idea of nuclear power being too cheap to meter was no longer viable, but he did argue that power would be produced eventually at “reasonable” prices.61 Strauss touted the idea that nuclear power investment would soon be entirely (or at least mostly) private. Yet, subsidies were the rule. Although AEC officials continued to argue that the overall costs of building and operating nuclear plants would soon be coming down (Glenn Seaborg who became AEC chair under President Kennedy forecast that costs would be dropping substantially), cost overruns bedeviled the program. Construction costs of the Shippingport plant were 50 percent over estimates, and other projects were also well off their estimates. Although Strauss claimed the utilities were eager to put up their own money, most wanted commitment of subsidies before they agreed to spend their own funds. As of 1959, the AEC said that its first priority was to find ways to reduce costs so that nuclear power competed with fossil fuel-generated power in regions of the country where electricity was already high cost. In other words, nuclear power had gone from too cheap to meter to too expensive to undertake, and the program was taking on the characteristics of failure from hasty implementation and rising budgets, a distinct category of government failure. The new goal was modest: maybe it could become cost-effective somewhere in the country (Barber 1981b). Meanwhile, there were also some concerns about reactor safety. Altogether this led to divisions within the AEC of just how to proceed with the program. Consequently, the AEC formed the Ad Hoc Advisory Committee on Reactor Policies and Programs to help make policy. Its recommendation showed that the rationale for pursuit of nuclear power was undergoing a shift from public contrition to Cold War political statement – a position that seemed aimed at getting more support from Congress. The Advisory Committee pushed for development to maintain U.S. technological leadership and deemphasized the idea that private industry needed to show greater commitment. By 1960, ten plants were on line and twenty-two more were in various stages of development. At that time, there was every expectation that nuclear power would play an ever-increasing role in the future of U.S. energy production, but it seemed that the main reason now was to prove to the Russians that Americans could build nuclear power plants better than they could. 61

There was also little consideration of later costs of nuclear materials disposal and plant decommissioning.

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So, by the 1960s, this was the overall shape of U.S. energy policy: r r r r

a protected cartelized oil industry; a government-controlled gas industry; an ever-troubled coal industry; and a nuclear power industry that utilized a technology that was brought to market before it was ready or needed and now was to be preserved and fostered primarily as a matter of national honor.

6. The Road to the Energy Crisis John Kennedy campaigned in 1960 on support for a United States “National Fuels Policy.” This was something of a code for “a policy to benefit coal” (Barber 1981b). The coal industry had been complaining about the oil industry’s push to replace coal with so-called “residual” fuel in industrial and commercial heating applications. Coal supporters claimed that oil companies were “‘dumping’ residual oil” to take one of the coal industry’s major markets. Senator Robert Byrd (D-WV) was especially receptive to a national energy policy if it would help coal by containing the “jungle warfare” of free markets, by which he meant competitive markets that led to low coal prices. Because Massachusetts was a leading user of residual oil, Kennedy needed to show his support for coal, and it paid off; he won the crucial West Virginia primary. There was also a larger administrative issue that Kennedy did not engage. Policies relating to various energy resources were administered by separate branches of the government, often with very different agendas from one another. The FPC was in charge of natural gas; the AEC, nuclear power; various state authorities, especially the Texas Railroad Commission and the Interstate Oil Compact, took charge of domestic oil; variously, the Interior Department, the State Department, and the Tariff Commission were in charge of imported oil. Kennedy’s advisor James Landis argued for some kind of rationalization of fuels policy. This idea ran afoul of the various interests from consumers to coal companies to state regulators. The different interests and their representatives in Congress treated proposals even to study a unified fuels policy – that is, an energy policy – as a potential threat. In the end, the effort to create a comprehensive fuels policy faltered because political leaders really did not see the need for one. Yes, the quota system and the cartel arrangement were costing consumers somewhere between $2 billion and $7 billion per year (Blair 1976; de Marchi 1981a; Vietor 1984). But the prices of gasoline and

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heating oil were still low. Indeed, the real price of gasoline fell throughout the 1960s; the average price was, inflation-adjusted, 33 percent lower in 1969 than it had been in 1939.62 Nor did energy security (the great concern during wartime) seem worth worrying about. True, there was a new world exporter organization, the Organization of Petroleum Exporting Countries (OPEC), which was founded in 1960 partly in response to the U.S. quota system but also to make a unified response to the leading world oil companies, which had just cut world oil prices (Yergin 1991).63 But in the 1960s, OPEC was not able to exercise much control over the market. In 1967, during the ArabIsraeli Six-Day War, Arab oil exporters contemplated cutting off supplies to countries seen to be aiding Israel. Although this included the United States, officials were unconcerned, arguing that the exporters lacked leverage to make any appreciable economic impact, and besides they needed the money (Cochrane 1981a). That assessment was largely correct and oil never became an issue in the conflict. By the late 1960s, there were signs that the government’s uncoordinated interventions in energy markets were not working well. The quota system contained numerous loopholes and underwent various adjustments (i.e., additional interventions) and changes to satisfy many constituencies: Canadian oil was exempted from the quota; foreign oil refined in Puerto Rico was exempted; petrochemical producers received extra allotments; there was a special category for low-sulphur oil; small inland refiners received quota allotments just so they could stay in business; New Englanders who depended more on foreign oil than any other part of the United States sought a refinery in Maine that would be exempted. In fact, policy seemed to be based on appeasement of rent-seeking interest groups. The system was costly to consumers, who began to complain; as the various quota exceptions grew, the system was increasingly opposed by the oil industry. The percentage of imported oil in U.S. consumption, supposedly capped by MOIP at 12 percent, kept growing, reaching 19 percent when Kennedy took office and almost 23 percent ten years later. 62

63

See Figure 1.2 in Chapter 1. Source Financial Trend Forecaster 2010; data source U.S. Energy Information Administration, at: http://www.inflationdata.com/inflation/images/ charts/Oil/Gasoline inflation chart.htm. This was part of a process that also included the complete or partial takeover of petroleum assets of international oil companies by national oil companies, which were controlled by the governments in question. Mexico had been the first to nationalize foreign oil assets in 1938. By the end of the twentieth century, national oil companies controlled oil in most exporting nations – whether in OPEC or not.

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At the same time, natural gas producers argued that FPC price setting was reducing the incentives to drill, and gas shortages were predicted; coal use was attacked for environmental degradation; consumers in some areas endured brownouts from inadequate electric supply; and nuclear power was opposed by those who thought it unsafe or uneconomic – or both. By the time of Richard Nixon’s election as president in 1968, the public perceived that there were problems over the whole range of fuels – a perception that they were part of the same problem, an energy problem. Soon after Nixon took office, as problems mounted, his administration began to consider seriously the idea of a comprehensive energy policy. That is not to say that Nixon ever set out to be America’s “energy president.” With the United States at war in Vietnam and facing rising inflation at home, there is little evidence that Nixon saw energy as a major national concern. Events (and the potential political problems they entailed), however, kept making energy an issue for him politically – continual minor problems until energy became the central policy focus in 1973. As Rogers Morton, Nixon’s second secretary of the interior, later wrote, “A serious energy situation awaited the incoming Nixon Administration in 1968 . . . a quiet crisis” (Morton 1973, 66). Above all, Morton noted, as of 1967, the United States had lost the capability of self-sufficiency in oil and was also using more natural gas than it produced. The problems began a few days after Nixon’s inauguration. An oil well off the coast of Santa Barbara, California, had ruptured and stayed in the news for weeks as the cleanup of pristine beaches, now covered black with oil, continued. Nixon at one point suggested that he would call out the army to help clear the beaches and Secretary of the Interior Walter Hickel temporarily halted offshore drilling activity. This event strengthened the growing movement in the United States for environmental protection; environmental concerns led to a popular view that America needed not only sufficient energy but clean energy as well. Soon after the spill, Senator Henry “Scoop” Jackson (D-WA) introduced the National Environmental Policy Act (NEPA), one of the more consequential pieces of environmental legislation in U.S. history. Ultimately, the bill passed both houses of Congress overwhelmingly, and Nixon signed it on New Year’s Day, 1970. Later that year, he created the Environmental Protection Agency to administer a growing list of environmental rules. Other than the oil spill, the most pressing energy question concerned what to do with the oil import quota program. But it was again not so much Nixon’s idea to scrutinize MOIP but rather a political response to Democrats in Congress who had begun an investigation of their own. In 1969, Nixon

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took over MOIP from the Department of the Interior and created a cabinetlevel task force (under the chairmanship of Secretary of Labor George Shultz) to review the program. The administration also considered two other energy issues: construction of a Trans-Alaska Pipeline from the oil fields in Prudhoe Bay to tanker ports in Alaska’s south, and development of the liquid metal fast breeder reactor (LMFBR), an exotic technology that created more nuclear fuel than it used. The program, actually begun under Nixon’s predecessor, Lyndon Johnson, was pushed relentlessly by AEC chairman Seaborg. Seaborg had a president ready to listen; Nixon often seemed in the thrall of advanced technology, and during the 1968 election campaign, he had spoken out in favor of breeder reactor development in a New York speech. The MOIP hearings in Congress revealed nothing so much as general confusion. Led by Senator Phillip Hart (D-MI), congressional Democrats sought to illustrate just how much consumers were sacrificing and how large were the benefits to big oil companies. That was partly borne out as the senators concluded that consumers were losing (although that was inevitable with a quota), and that oil companies were making a lot of money. But the hearings also showed that no one could tell how large were (or even if there were any) national security benefits; in fact, no one seemed to know for sure exactly what they were arguing about. Massachusetts Institute of Technology economist Morris Adelman said the data on the quota program were worthless and had been utilized for “the preservation of special interests” and not objective analysis.64 As of 1971, the hearings and a White House Task Force report notwithstanding, the quota issue remained unresolved. The Task Force would argue for a tariff to replace the quota system, a suggestion that outraged the oil industry, which claimed it would lose more than $1 billion in the event the tariff was adopted. Nixon decided for the time being to do nothing,65 yet the debate over the MOIP occurred at a time when suddenly there were a few notable problems to galvanize policy makers. First, there were problems with the electric system. During the summer of 1969, frequent electric power supply disruptions led to sporadic blackouts. The next winter, there were spot shortages of natural gas and oil, forcing businesses in some parts 64 65

Quoted in the New York Times, Mar. 12, 1969, 73. Although some members of Congress were for a change in the quota system, Nixon’s decision was finally supported in Congress; in late July 1970, the House Ways and Means Committee voted overwhelmingly (17–7) to support the quota and to (as the New York Times put it), “prevent any Presidential move to tariffs” (July 29, 1970, 78). A few weeks later, Nixon concurred with the House members’ vote.

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of the country to shut down temporarily.66 To make matters worse, the next May, the Trans-Arabian Pipeline was cut in Syria, and the Syrian government refused to repair it, rapidly increasing the demand for tankers (which were in short supply) and thereby increasing the cost of shipping oil and inevitably increasing the price of oil. Some suggested that the high prices were mainly an oil company plot – a suggestion the Department of the Interior rejected. Nixon had appointed a science advisor, S. David Freeman, who had the same views of energy policy as had Kennedy’s advisor James Landis. The crucial difference was that, unlike 1961–2 when there seemed no reason to worry about energy supply or price, in 1969 and 1970, energy problems seemed to be increasing. In the summer of 1970, the power supply problem if anything became worse than it had been the year before, and by fall, fears of shortages led the Public Power Association, the industry group of government-owned electric companies, to request that Nixon introduce mandatory rationing and price controls of fuel for the winter. He refused, but the next winter, there were again fuels shortages. Beginning in 1970, policy makers and analysts began to talk for the first time of an “energy crisis.” There were claims that the supply problems and price spikes of the previous few years would become the norm. As John Noble Wilford reported, some experts believed this state of affairs would persist, “perhaps for as long as the industrial-technological civilization that has made modern America a model for many other nations continues to proliferate in its present form.”67 The sense of crisis was not generally felt in the country, but it was shared by at least some in the Nixon administration, who wrote memos on “the impending energy crisis,” – a crisis that would see the United States grow increasingly dependent on Middle Eastern oil (U.S. Department of State 2011). A particularly vocal believer in a looming crisis was AEC chairman Seaborg, who saw disaster for the country absent the breeder reactor. In an environment of incipient crisis, Freeman made headway in persuading the administration to consider policies to cover fuels – that is, energy – as a unified whole. Freeman correctly saw energy policy as scattered, often pursued by officials and agencies with contradictory aims, and where the roles of industry and government were not clearly defined. Others in the administration noted his call for a comprehensive policy, but 66

67

In Nebraska, the city manager of Grand Island wrote to the White House asking for the government to determine the “validity . . . of the so-called shortage of natural gas in the Midwest” (NPL, letter David, Box 8, July 1970). New York Times, July 6, 1971, 1.

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in general, different agencies responded by trying separately to compose a comprehensive policy for everyone, only confusing matters further. An evidently frustrated Secretary of Commerce Peter G. Peterson wrote, “Who’s in charge?”68 Freeman thought the best way to approach policy would be to create a cabinet Department of Energy and Natural Resources, but in the meantime he had to settle for an energy committee69 of Nixon’s Domestic Council, which was put together in the summer of 1970. The chairman of the administration’s Council of Economic Advisors (CEA) Paul McCracken was chosen to lead it. As Neil de Marchi (1981a) put it, this was “the first effective energy policy body of the Nixon Administration.” In fact, arguably it was the first such body in U.S. history. But the committee ignored the most basic question: why exactly did the United States need an energy policy? Disparate fuel policies may have left the process of energy policy scattered about the government, but each fuel policy had some specific purpose: high oil prices for the oil industry; low natural gas prices for consumers. What was energy policy supposed to accomplish? Rather than address that question, the committee began looking at a long list of specific issues and options, including conservation and environmental protection. Why did we need to spend national resources on an LMFBR or synfuels or the strange program called “Project Gasbuggy”70 ? The energy policy originators of the Nixon administration had quickly gotten caught up in the details of what could be done and not the question of why it should be undertaken. A couple of officials did try to steer the discussion in that direction. Roy Ash, head of the federal budget office, newly renamed the Office of Management and Budget (OMB), was the first to pose the overriding question about energy policy: where was the market failure argument that justified intervention in energy markets, and how well could government correct such market imperfections if they were found? He tried to answer the first part of the question, arguing that prices did not reflect all social costs (externality problems) and claiming that prices also could not capture future scarcity. But then he asked: “Does government have available to it means, which will correct these [market] distortions without introducing other economic inefficiencies into the market?”71 Ash did not suggest that policy to date had managed on balance to enhance or detract from overall social welfare, nor 68 69 70 71

NPL, Memo Peterson to Ehrlichman, David, Box 8, Jun. 20, 1972. Called the Committee on the National Energy Situation. Project Gasbuggy was an effort to “stimulate” natural gas production using underground atomic explosions. NPL OMB Report, David, Box 7, Nov. 13, 1970.

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did he say plainly that new actions would detract from it. He did not have an answer, but then neither did anyone else in the administration. In fact, there is scant evidence that they considered the issue at all.72 But if Ash was cautious about government failure, Richard McLaren was not. McLaren, the head of the Department of Justice’s antitrust division, argued that energy problems were largely due to existing government policies. McLaren seems to have been the first official in the administration (and possibly the first in the federal government) to identify explicitly government failure with respect to energy policy. He identified at least two categories – what in Chapter 2 of this volume are referred to as “internalities” and “distributional inequities.” He wrote that fuel market inefficiencies were due, first, to the MOIP, with its rigid quota levels and methods of apportioning imports around the country that create “inequities and competitive distortions.” Second, state and federal production controls (i.e., prorationing), which were ostensibly intended to induce conservation, instead were being used for “market control.” Third, with respect to natural gas, the FPC was setting the price but the prices were based on some goal other than enhancing market efficiency. In fact, McLaren found the FPC confused. The goal seemed to have veered from keeping consumer prices low to keeping them high, presumably to induce supply, but they mainly appeared to have been imposed arbitrarily. What should the price be? Better let the market decide, McLaren concluded.73 But with energy policy now gaining some traction within the Nixon administration and some attention with the general public, the likely result would be more intervention, more “corrections” liable to create problems like the ones McLaren identified. Or, as Secretary of the Interior Rogers Morton would later put it, the government would try regulating “our way out of something we’ve regulated our way into” (Wilson Quarterly 198174 ). There were often squabbles over turf, and efforts by one department to get more funding at the expense of another. The AEC, for example, battled with the Department of the Interior, after the latter produced a proposal for accelerated research, development, and demonstration (RD&D) of synthetic gas from coal, using the argument that synfuels research would be more 72

73 74

Ash also pointed out that policies in the past were often undertaken because of panic due to actual or feared shortages, but these were always short-lived, and forecasts of depletion were always wrong. This observation was also ignored. NPL, letter McLaren to McCracken, David, Box 7 (undated) 1970. In the Spring 1981 issue of the Wilson Quarterly, the editors summarized (and in instances augmented) several chapters from Craufurd Goodwin’s book, Energy Policy in Perspective (1981, Brookings).

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efficiently utilized than nuclear research. Seaborg called this comparison “immoderate and invidious.” He did not mention that the Department of the Interior’s program was impossibly optimistic, claiming that coal-derived syngas would be cheaper than natural gas. It was, however, quickly apparent that there was administration consensus for one component of energy policy: expanded energy R&D. Before 1970, energy R&D funding went overwhelmingly to nuclear energy research (including fusion). In fiscal 1970, for example, $363.2 million was budgeted for energy research but of that over $250 million was for nuclear fission research (more than half of that for the LMFBR) and another $37.5 million was designated for fusion. The enthusiasm was at least partly that the administration shared a general optimism about America’s technological prowess. It was not important to conceive of a comprehensive (or even a rational) policy because we could always just create any technological wonder we put our minds to. Indeed, to some in the administration, it was puzzling that there was a focus on research at all. As Christopher DeMuth, staff assistant to the president, wrote to science advisor Lee Dubridge, the government should not be funding research on energy problems but rather solutions to energy problems. Although Dubridge tried to explain why research was a necessary prelude to knowing whether a solution was possible, DeMuth’s implicit optimism about what government incentives could accomplish was to be repeated not only in discussions but also in the kind of energy programs that would emerge. The main focus for Nixon seemed to be the development of the breeder. In April 1971, Seaborg gave a passionate defense of the breeder reactor at a cabinet meeting. He advocated a speed-up of breeder development, which he assured Nixon he was “completely confident” would work as advertised and would provide 1,000 years of fuel from existing U.S. uranium reserves. The total cost would, Seaborg estimated, be $2 billion to $3 billion, which meant it would cost less and provide far more benefit than Project Apollo. “We’re headed for a crisis,” Seaborg told Nixon. The breeder, he concluded, is “an absolute necessity.”75 The internal debate over energy proposals, which began in the summer of 1970, continued through another winter of tenuous energy supplies (1970–1). In March 1971, the Texas Railroad Commission set allowable (prorationed) production at 100 percent because in fact demand had caught up with capacity; there was no slack U.S. oil-producing capacity, no one was a residual producer, and U.S. imports were now around 75

NPL, Tape, Cabinet Conversation 53–1, Apr. 13, 1971.

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20 percent of consumption (Yergin 1991). Still, the cartel arrangement held on for another year, when finally it was quietly abandoned; prorationing had become meaningless in a world where we could not have met demand with domestic production alone. In the future, increases in demand would have to either be met by some new sources of domestic supply or by imports. In June 1971, the administration policy development process ended and for “the first time . . . a message on energy of a comprehensive nature has been sent to Congress by a President of the United States.” In it, Nixon argued that his program would ensure the United States with “an adequate supply of clean energy in the years ahead.”76 The message offered a variety of programs, in addition to a stepped up breeder program, a synfuels RD&D effort (especially with respect to oil shale), the creation of a cabinet Department of Natural Resources (later referred to as the Department of Energy and Natural Resources), and expanded domestic oil and gas production, through sale of oil and gas leases offshore including the Outer Continental Shelf. But more than anything else, Nixon’s energy message meant one thing: an overall national energy policy was now a political issue. Although Nixon seemed to be attempting to create a national energy policy, it was not exactly clear what his proposals were supposed to accomplish beyond the vague promise of “adequate” energy supplies. The wide-ranging ideas seemed strung together and presumably were to work simply because the government would be spending more. Why did we need a breeder reactor? It seemed the answer was because electricity demand had increased at 7 percent per year, and if the trend continued, demand would double every decade, meaning that by 2010, electricity demand would have increased sixteen-fold. As noted earlier, this kind of forecasting was, of course, ridiculous. It would have meant an additional 9,000 gigawatts of electric capacity, requiring the energy input equivalent of more than 300 MBD of oil.77 The projection was not only absurd on its face, it also ignored the fact that the real price of electricity had continually fallen for the previous decade. Seaborg’s hyperoptimism notwithstanding, it made little sense to rush an extremely expensive, untested and (as Seaborg admitted) highly complex technology that used as a coolant liquid sodium, which had the unfortunate characteristics of exploding on contact with water and bursting into flames on contact with the air (Cassedy and Grossman 1998). As for synfuels, although the Interior Department was highly optimistic that the price of oil 76 77

Nixon, “Special Message to Congress on Energy Resources,” Jun. 4, 1971 at: http://www .presidency.ucsb.edu. Actual doubling over 1970 took place in the 1990s, and as of 2011, electric capacity had increased by 116 percent.

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shale and synthetic natural gas from coal would soon be competitive with natural gas and with oil, the evidence from sixty years of development was not encouraging. Nixon did acknowledge that “part of the answer” to America’s energy problems required correct “pricing” of energy resources, although this comment was aimed mainly at getting prices that internalized the external – mainly environmental – costs of energy. But the mention of pricing illustrated what was being ignored in his 1971 message. There was nothing in the program to remove the biggest price distortions such as the FPC’s control of natural gas prices. Getting the prices “right” would have meant freeing them. But in fact Nixon was about to do the opposite. The pricing issue was not actually considered a matter of energy policy at all. Inflation, which by 1970 reached 6 percent, ranked as the most important economic issue for most Americans. Unemployment at 5 percent was also unacceptably high; the year before Nixon took office, they were 4.4 percent and 3.75 percent, respectively. Many experts believed this inflationary burst was of the cost-push variety: high wage settlements leading to higher prices leading to higher wage settlements and so on. By 1970, Nixon was under pressure, especially by a Democratic Congress, to do something about inflation. In June, he called for voluntary wage-price restraint, without clear guidelines on what that meant, which as one Democratic congressman put it was like telling drivers to go slow without telling them what the speed limit was.78 Nixon promised to issue “inflation alerts” when there were excessive increases in wages or prices, a tepid idea that did not appeal to Congress. But whether he wanted them or not, Congress handed Nixon potentially enormous powers to regulate the economy as a whole – powers that he mightily protested he would not use. The Economic Stabilization Act (1970) gave him the discretion to impose controls on wages, prices, home rents, dividends, and to allocate supplies specifically of oil and petroleum products. The bill reached his desk in mid-August, and while saying he still had no intention of using those powers, he signed the bill anyway.79 Over the next several months, as the unemployment rate climbed and fourth quarter GDP growth was negative, the pressure intensified. Democratic leaders called for a wage-price freeze; several economists argued for some form of “incomes” policy – for example, a surtax on businesses that 78 79

In “Nixon Asks for Restraint on Wage-Price Demands; Bars Mandatory Controls,” New York Times, Jun. 18, 1970, 1. The bill included an extension of the Defense Production Act, which he supported. The bill passed the House of Representatives with only eleven votes in opposition, meaning a veto would have likely been overridden in any case.

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permitted above-average wage increases.80 The New York Times editorialized on “The Economic Crisis” and called for a “change in direction in the economic policies of the Nixon Administration.” One inflation culprit was, at least in the minds of many policy makers, the price of oil and gasoline; the former rose in November from $3.10 to $3.35 per barrel. The Nixon administration sent George Lincoln, director of the Office of Emergency Preparedness and member of the energy committee, to investigate. Although it was unclear exactly what the administration intended to do if officials found the price increase excessive, Nixon did have the authority already to impose price controls on oil under the rules governing import quotas. And in fact, to ease prices, a month later, quotas on Canadian oil were relaxed. It soon became apparent that this step was to have little impact on prices. But the pressure toward some more direct controls continued. By March 1971, a Gallup poll showed almost half the people in the United States urged the adoption of a wage-price freeze. Although Nixon had made his famous announcement that “I am a Keynesian now” in January, he continued to resist wage-price controls. He did, however, become receptive to a wageprice review board of some kind, one that presumably would, as Federal Reserve Chairman Arthur Burns suggested, by compiling data on wage settlements and price increases in various industries, develop guidelines as to when wage-price changes were excessive. Burns believed inflation was of the cost-push variety, and he hoped ultimately for some sort of incomes policy. As he told Congress, the United States would need legislation to “deal with abuses of private power in our labor and product markets.”81 By July, it seemed clear where the administration was headed. Large-scale labor strikes, along with what were deemed excessively large price increases, created a clamor for some kind of freeze. In August, Nixon relented, proclaiming “The New Economic Policy” in a television address. While there were very old sorts of stimulative policies – tax cuts, for example – Nixon’s NEP had two new major components: first, the United States was ending redemption of the dollar into gold at $35 per ounce, the rate that had been in effect since the Bretton Woods agreement of 1944; second, under authority of the 1970 Stabilization Act, wages and prices were to be frozen for ninety days (which under the act set as the base, prices that existed on May 25, 1970). The administration also established the Cost of Living Council (CLC) 80 81

Op-ed by economist Sidney Weintraub, “A Proposal to Halt the Spiral of Wages and Prices,” New York Times, Nov. 29, 1970, 178. Quoted in “Burns Hits Nixon Decision on Wage and Price Review,” New York Times, July 1, 1971, 71.

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and then tried to figure out what to do next. These controls were in fact to be Phase I of a project of government economic management that would extend for the next three years over the economy as a whole and over oil prices for the remainder of the decade. This was the most fateful and disastrous policy step Nixon ever took with respect to energy – even though energy was not its main focus at the time. But in principle, a central authority could not set prices so that energy production and consumption would be managed efficiently. Government simply could not know what price was correct (Hayek 1945). As CEA chairman McCracken admitted, “It would be hard to think of a more effective way of creating a fuel crisis . . . than to decree U.S. price ceilings” (quoted in Wilson Quarterly 1981, 78). By adding price controls to an already distorted energy market, government made consumers potentially part of any problem as well. Consumers rely on price signals to determine consumption, but if the signals are blocked and distorted, then quantities demanded will not change even if there are constraints on supply. There would be no incentive to cut back, making a shortage predictable. The ninety-day freeze, which went into effect in August, was criticized by some congressional Democrats not as a recipe for disaster but rather as too little too late; George McGovern (D-SD), soon to be Nixon’s opponent in the 1972 presidential election, deemed the freeze “four years overdue.” But the control process did not expire after ninety days. Phase I was followed three months later by Phase II controls, which were to last until January 1973.82 Phase II controls approached the problem of pricing by looking at cost. Producers were allowed to petition the CLC for the right to increase prices if their cost had risen as long as the price increases did not increase profit margins (at least not to a greater extent than they had in two of the three fiscal years before August 1971, a complicated formula to be sure). There were additional complications because procedures differed with the annual sales of firms, and there were special rules for multiproduct firms. Moreover, a price hike by one industry could be challenged before the CLC by another. A request for a price increase the next February by a major oil company was opposed by the refining industry and was in fact denied (Bradley 1996a). Polls showed that a majority of Americans supported controls, and there were many leading economists who supported them as well. John Kenneth 82

The authorization for Phase II was given by Congress in December (after an executive order in October continued the basic process). Authority was given through Public Law 92–210, initially Senate bill S. 2891, which passed both houses of Congress with little discussion and no recorded vote (according to the New York Times report) on Dec. 14, 1971 and was signed by the president the following week.

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Galbraith of Harvard was especially vocal in support, but the move also won cautious approval from other prominent economists such as Gardiner Ackley and Walter Heller. A few, like Milton Friedman, doubted controls would be effective in curbing prices and considered the government’s intrusion into wage and price setting to be “immoral.” Whether it would really curb inflation in the long run was questioned at the time especially by monetarists such as Friedman, who argued that a larger inflationary problem was the rapid increase in the money supply. But Burns did not believe that monetary policy had had any impact on inflation and that wage and price controls were “to be used occasionally – but nevertheless vigorously – when needed,” which he thought was now. Subsequent research has shown that the entire idea was wrongheaded (Hetzel 1998; Nelson 2005; Fisher and Marshall 2006), and especially so when applied to oil prices. Fisher and Marshall (2006, 1), argue flatly that “an oil price shock . . . cannot [in itself] be considered inflationary.” Even in recent studies that give price spikes some role in subsequent increases in inflation, the impacts have appeared relatively small (Kilian 2008). By attributing inflation to nonmonetary factors such as wages and oil prices, the Federal Reserve under Burns had let the U.S. money supply soar. As Hetzel (1998) has noted, if oil prices were the cause of inflation, then the United States should have experienced a significant drop in inflation in 1974 when oil prices fell. Relative prices may change; if oil prices rise, the prices of energy-intensive goods may also rise, but less intensive goods should, relatively, decline. However, unless the money stock increases, the price level should not. Not surprisingly, studies of the Nixon controls have shown them to be ineffective in curbing inflation (Feige and Pearce 1973), and pernicious in almost every other respect (Hall 2003). In fact, if the only goal of wage-price controls was to manage inflation, they probably should never have been continued after Phase I; by October, when Phase II rules were first announced, the inflation rate was 3.8 percent, well above the goal of 2 to 3 percent Nixon had set for them. Inflation continued to be a problem virtually the entire time that oil price controls of any sort were in effect. In 1972, Paul McCracken left government service, and Peter Flanigan was put in charge of energy matters. Of course, 1972 was an election year, and although there was considerable discussion within the administration on energy policy, there was also an effort to play down its urgency.83 83

Flanigan suggested possible preelection energy initiatives most notably the deregulation of “new gas,” arguing that if there was any area of crisis it was natural gas supplies, but these suggestions did not lead anywhere. Flanigan guessed that the market price of new gas would be about 65 cents per thousand cubic feet, ($3.50 in 2011 dollars), but at the

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Or, as John Ehrlichman put it, “Energy crisis . . . [is] a popular term,” but it was, he argued, inaccurate because it “connotes a decisive moment.” Rather what the United States was experiencing was “a major transition” from a period of energy abundance to one of increasing scarcity and rising costs.84 Senator George McGovern (D-SD), Nixon’s Democratic opponent, did not emphasize energy in his campaign – which focused more on Vietnam as well as general economic issues – although in a speech in October, he called for a program emphasizing new technologies and “strict regulation” of energy industries, accusing Nixon of favoring the major energy companies.85 Meanwhile, the administration, Nixon’s energy message from the year before notwithstanding, was still trying to come to grips with just who was making energy policy and what it should actually entail. A later listing by the Carter administration showed that five people were in charge of energy policy from 1969 to 1973, and the list did not include S. David Freeman, who arguably was the first Nixon administration energy policy director. It did include Domestic Policy chief and key Nixon aide John Ehrlichman, McCracken, and Lincoln, as well as Flanigan and Charles DiBona (beginning in early 1973), but with various people in charge and various agencies like the EPA with their own energy committees, the question of who was actually in charge of policy lingered. Representative Hastings Keith (R-MA) pleaded with Ehrlichman to create a Council on Energy Policy that would “formulate energy policy for the nation. . . . We can no longer afford to wait until the crisis is upon us” [emphasis in the original].86 The administration sought guidance from a conference of “administrators, executives and energy specialists” in April 1972, who were adamant that a comprehensive energy policy was necessary, giving fifteen “conditions” that required solutions. A few problems were labeled “critically in need of at least . . . ‘Bandaid’ remedies.”87 This included “massively increased efforts” in [new] energy technology, and “fuel pricing inducements,” notably a different approach to natural gas pricing. The idea was to allow “new” gas to find a free-market price (an idea Flanigan in particular supported), while “old” gas would be controlled by the FPC in accordance with the Phase II guidelines.

84 85 86 87

time the price of gas as set by the FPC was 26 cents. NPL, memo Flanigan to Ehrlichman, Schaefer, Box 43, July 7, 1972. NPL, Ehrlichman speech, Schaefer, Box 43, Sept. 20, 1972. NPL, report of McGovern speech, Schaefer, Box 56, Oct. 9, 1972. NPL, Letter, David, Box 7, Jun. 26, 1972. NPL, “Conference Highlights,” David, Box 8, Apr. 19–20, 1972.

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Yet little was accomplished and the winter of 1972–3 brought new shortages of oil and gas especially in the South, Midwest, and Great Plains – shortages that closed businesses, putting thousands of workers temporarily out of work. The administration lifted quotas on oil to increase available heating oil stocks. But many saw this as far too little. Energy state legislators called for increased coal, oil, and gas prices to provide incentives for increased supply, and S. David Freeman, now out of the administration and head of the Energy Policy Project of the Ford Foundation,88 argued that the quota system was to blame for the shortages – recalling the study in 1969– 70 that called for replacing the MOIP with a tariff. “This winter’s so-called energy crisis was manufactured right here in Washington,” Freeman was quoted as saying in January 1973.89 Democrats in Congress, still the majority despite Nixon’s reelection, under the leadership of Senator Henry Jackson (D-WA), turned increasingly toward their own energy ideas in early 1973. Jackson had set the stage with a December 1972 speech to the Coal Mining Institute in Pittsburgh, in which he criticized the LMFBR and called for greater R&D on other technologies to overcome the lack of, as he saw it, administration answers for the near and middle term. He wanted funding for coal gasification, fuel cell development, fusion, and solar – all of which were being underfunded, he argued, because of the focus on the breeder. Between January and April 1973, administration officials noted more than a dozen energy bills that had been introduced in Congress, including Jackson’s National Energy Research and Development Policy Act, the Surface Mining Reclamation Act, and ultimately the most important, the Emergency Fuels and Energy Allocation Act, which gave the president the standby authority for mandatory allocations of petroleum products for the “purpose of minimizing adverse impacts of such shortages.” Inevitably, the Permanent Subcommittee on Investigations of the Senate decided to investigate whether the shortages were contrivances of the major oil companies “to destroy independent refiners and marketers, to capture new markets, to increase gasoline prices and to obtain repeal of environmental legislation” (cited in Mancke 1974). The senators asked the Federal Trade Commission to investigate. The Nixon administration recognized that it would have to get back to the issue of energy. After first imposing another round of price controls in January, Phase III, which was intended to be a phase-out period for 88

89

The project would issue an influential 500-page book titled A Time to Choose: America’s Energy Future in 1974, which called for a radical conservation effort in the United States to reduce domestic demand (“zero energy growth”) and dependence on foreign oil. “Pollution Waiver Asked for Fuel Oil,” Washington Post, Jan. 26, 1973, A1.

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most controls, Nixon responded to the Democratic energy legislation with proposals of his own – and by executive order the unilateral creation for the first time of a National Energy Office, headed by Charles DiBona. He also established a Special Committee on Energy, comprising Secretary of State Henry Kissinger, Secretary of the Treasury Shultz, and Ehrlichman. Nixon also prepared to send a new energy message to Congress in which he argued (as had Shultz in a cabinet meeting) that a “crisis” did not yet exist, but to forestall one, he argued for new oil and gas supply incentives: wellhead price deregulation of natural gas;90 more tax credits for exploration; deepwater, offshore tanker terminals; increased sale of offshore exploration and drilling leases; construction of the Trans-Alaska Pipeline; new strip-mining standards; and the end of MOIP, to be replaced by a “license-fee quota,” which the New York Times correctly called a “euphemism for a protective tariff.”91 Of course, the MOIP had always been a bad economic idea and as Freeman, McLaren, and others argued, it had distorted market signals, raised the price of oil in the United States by more than 30 percent, and contributed significantly to the spot shortages that had developed every year since 1970.92 Although there was some mention in his message about new technologies (especially nuclear technologies such as the breeder and fusion) and for conservation, the gist of the message was more incentives for more drilling and higher energy prices. The program drew intense criticism from diverse interests, some of whom simply objected to the “lack of urgency.” Democrats worried that this would mean massive consumer costs and windfall profits for the industry. But the removal of the quota, when it finally came, had little effect. It was no longer effective in maintaining a domestic price above the world price. As Bohi and Russell (1978) noted, the quota system had reduced incentives to imports, and price controls reduced incentives for consumers to use less and provided little incentive for increased domestic production. There was, in other words, clear evidence of policy failure. And so the solution was for more government intervention. According to some experts, 90

91

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Total deregulation was gaining some support in the administration but not enough to change policy. DiBona and Rogers Morton were among those who argued for “a legislative proposal for total deregulation of natural gas pricing at the wellhead.” NPL, memo, Morton to Flanigan, EPO (DiBona), Box 24, Jan. 31, 1973. According to de Marchi (1981a), the license-fee name was necessary to “avoid possible challenges to the constitutionality of a ‘tariff.’” (424) The license fee was $0.21/bbl for crude oil. Tariffs on refined products were to be higher than those on crude oil, encouraging imports of crude over products and encouraging expansion of domestic refining. Indeed, by 1973, inadequate refining capacity was becoming yet another energy problem.

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the United States could not successfully implement price controls on oil without a formal mandatory allocation system as well.93 That was coming. With the Watergate scandal now reaching the front pages of the country’s newspapers, Nixon was losing his ability to influence the debate over energy. Prices of oil and refined products had continued to rise, Phase III controls notwithstanding, and in June, he froze prices for sixty days to give the CLC a chance to devise a set of controls that would specifically deal with the price of oil. But he also offered yet another energy message and program. He called for a conservation drive, for Americans to voluntarily cut energy consumption by 5 percent while the government was to cut its consumption by 7 percent. Countering Jackson’s call for stepped up R&D, Nixon advocated a $10 billion effort over the next five years and renewed his plan for a cabinet-level energy department along with a separate, independent research agency, the Energy Research and Development Corporation (later Agency, or ERDA).94 He also upgraded the White House energy office, creating the Energy Policy Office (EPO), and named John Love, who resigned as governor of Colorado to become its head; Love became popularly known as America’s “energy czar.”95 In the meantime, the shortages of winter fuels gave way to spot shortages of gasoline that spring. As complaints mounted, there was a growing sense of urgency in Congress. In April, both houses extended the allocation authority of the Economic Stabilization Act, which already gave the president the authority to allocate crude oil to refineries. Also, the Senate took up Jackson’s standby rationing bill, which would have given the president authority over allocations at the retail as well as the wholesale level. In late April, William Simon, Deputy Treasury Secretary and head of another interagency energy-related committee, the Oil Policy Committee, told senators emphatically, “We will not see formal rationing this year.” Undeterred, the Senate continued to work on Jackson’s rationing bill. In early May, under the extension of the stabilization act, the administration called for a nonmandatory, voluntary allocation system, with the implicit threat that if ignored by the oil industry, mandatory allocations would follow. Simon defended this approach, noting that a mandatory system would require a “bureaucratic morass” of rules. The goal as he defined it was to be sure the small independent refiners were not cut off by the 93 94 95

“Bracing for Phase IV,” New York Times, Jun. 24, 1973, 137. Introduced by Representative Philip E. Ruppe (R-MI) on July 24, 1973. DiBona, whom Love was replacing, advised him that the first task of the EPO was to hire a good PR person.

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major oil companies and that fuel went to “priority” users: farmers, public safety organizations, and public transportation systems. Simon argued that people just needed to be more conservation conscious. As he told the Senate Banking Committee, “If Americans will respond to some simple conservation measures, most Americans will be able to get the gas[oline] they need.” The voluntary plan required various market participants to pledge in writing to maintain the same percentage allocations to customers that they served in 1971–2, minus 10 percent to be set aside for priority users. Still, Jackson pushed the mandatory controls bill. It came to the floor in early June and passed overwhelmingly (85–10) amid angry denunciations of the major oil companies and went on to the House for more denunciations – although no concrete legislative action. But said Congressman Les Aspin (D-WI), “[T]he so-called gasoline shortage . . . is just a big lousy gimmick foisted on consumers.”96 One of the first acts for the new energy czar was to recommend that Nixon publish the outline of a mandatory control plan, which was in fact disseminated in August amid repeated protestations that it was not likely to be used. In fact, during the summer of 1973, government energy policy was totally chaotic. Arguably, the state of government as a whole was chaos; it was the first Watergate summer with revelations from Senate investigations of a White House taping system and sensational testimony about White House and Nixon reelection campaign activities. As a consequence, John Ehrlichman, who was the aide most closely involved in energy issues, had resigned. Overall, energy policy was being made everywhere and nowhere. In addition to Jackson’s multifaceted effort in the Senate, his fellow Washington Democrat Representative Mike McCormack (who was the only nonmedical scientist in Congress) offered several bills, mainly RD&D programs for solar, geothermal, advanced power systems, and his own version of a national R&D policy act to compete both with Jackson’s own and that of the Nixon administration. The FTC announced its findings in July and accused the major oil companies of anticompetitive behavior, of using their position to undermine independent refiners and marketers confirming the biases of Senate Democrats and leading to a conflict between the FTC and the White House. In a meeting, Love understatedly called energy policy “diffuse,” and he sought to rationalize policy making and define the process through which it would be implemented. 96

Quoted in “The Gasoline Shortage: Real or Contrived?” New York Times, Jun. 8, 1973, 51.

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On top of this, Phase IV controls were due in August, and Love wrote a memo to John Dunlop (head of the CLC), noting that (a) there should be an automatic pass through of cost increases to retail prices; (b) the profitmargin test was flawed given rising prices of inputs; and (c) setting the new base price at January 10, 1973, was a mistake because that period did not reflect the price trends of the year as a whole. Love recommended a base of sometime between April and June and that price controls on propane be dropped entirely because it was expected to be in short supply that winter. He also opposed a new two-tier pricing system that freed the price of “new” crude oil from controls.97 Virtually nothing in Love’s memo was accepted. The new Phase IV controls came into effect in mid-August, along with fifteen pages of rules on oil pricing. The rules laid out a maximum price rule that did not exceed   Cpr Pmax = Pe + − 1 (Pm − Pc ). Cbpcl It was as complicated as it looked.98 To quote Time, Phase IV was “mindbendingly complicated . . . [p]iling confusion on top of complexity.”99 Phase IV inevitably imposed costs, and it depended on arbitrary assumptions about how an authority was supposed to arrive at a maximum price, as opposed to the one set by the market. It was particularly difficult given that the market price (Pm ) was in the equation. Because market conditions changed constantly and with the demand that all possible price increases be delayed until they passed through the CLC for analysis, the likelihood that the controlled price would be rational was nearly zero. Contrary to Love’s wishes, Phase IV did include separate rules for “new” oil; it would be freed from a ceiling price that was arbitrarily set as of May 15, 1973 – the date was about the only concession made to Love. But the whole exercise of stopping inflation by imposing price controls on a few commodities (initially the cost of food was included in Phase IV controls) seemed wrongheaded even then. It only suppressed price hikes – or worse, substituted shortages for price hikes. As Nixon himself said just before Phase IV controls were imposed, “The freeze is holding down 97 98

99

NPL, memo Love to Dunlop, EPO (Love), Box 1, Aug. 16, 1973. Where Pmax was the maximum price that could be charged for (old) crude oil; Pc was the ceiling price: Cpr , the total amount of crude produced from a property during the month; Cbpcl was the base production control; Pm was the current market price. As long as Pm was greater than Pmax , then the main incentive for oil companies was to get their old oil declared new oil. “This Season’s Game Plan: Semi-Tough,” Time, July 30, 1973, 32–3.

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production and creating shortages that threaten to get worse.” But there was no reason to expect these complicated scattered controls to work any better. Certainly not with respect to the price of oil, which was already heavily influenced by various government controls. But Phase IV made it certain that sudden price spikes, steadily creeping prices, or just about any other unforeseen market process would produce shortages. As it was, with September approaching, the administration was in a panic about the political effect of shortages of heating oil. The Department of Interior predicted a shortfall of 100,000 bbl/d. But the administration was deeply divided in September on what to do with respect to allocation controls. EPA head Russell Train and William Simon agreed with Love that some selective controls might be necessary and that the administration should be leading the process instead of waiting for Congress. Shultz and aides Fred Dent and Claude Brinegar were opposed to any mandatory system on principle, whereas Melvin Laird, Flanigan, Rogers Morton, and several others wanted Congress to take the lead because they expected mandatory controls to fail and wanted Congress to at least share the blame.100 Still, the administration was moving closer to mandatory allocations at least on some products. With Love’s backing, propane was put at the top of the list. Despite expressions of great urgency by both administration officials and members of Congress, there was little movement on the numerous energy bills that had been introduced during 1973. In fact, although its importance was growing as a public policy issue, energy still had low visibility compared with Watergate, which had become the number one governmental issue as well as a riveting public spectacle. The urgent sense to “do something” on energy was lacking. In early September, Libya seized all oil assets of foreign firms; the United States unsuccessfully suggested to other leading consuming nations that they should all boycott Libyan oil. Many assumed that this would raise oil prices. Soon after, it became clear that OPEC had this in mind in any case. The next meeting of OPEC scheduled for October seemed certain to lead to a significant hike in international oil prices. Among oil producers, there were already discussions of a boycott of consuming nations to influence Western policy toward Israel. In April, Saudi Arabian leaders had suggested that there just might be a cutoff, or at least a squeeze on oil consumers unless they showed a more evenhanded approach in the region (noted in Akins 1973). 100

NPL, memo Love and Ash to Nixon, EPO (Love), Box 1, Sept. 15, 1973.

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Many consumers – including large utilities – as well as dealers and independent refiners began to call for mandatory allocation rules. Senator Jackson reiterated his call to implement his mandatory allocation bill after Love admitted that the winter heating oil shortfall might be on the order of 10 to 15 percent below demand. But Jackson could not persuade the House of Representatives to pass his bill quickly. With the situation seemingly dire, the administration, it was reported, was considering restricting how much consumers could use. In other words, Love acknowledged that heating oil might be the next oil product to fall to a mandatory allocation system. The step was finally announced on October 2. It would not, Rogers Morton admitted, increase supply. The goal was “to spread discomfort out.” Four days later, on the Jewish holy day of Yom Kippur, Egypt and Syria invaded Israel.

FOUR

EIA

A friend of mine worked in the Ford administration on energy policy. When he started, he and his group were told that they needed to come up with a plan to make the U.S. energy independent in ten years. After studying the problem for a while, they decided that their first job would be to redefine “independent.” Their second job would be to redefine “ten years.” – Party anecdote

1. Introduction Gerald Ford was sworn into office in August 1974, the first person to take office after a president’s resignation, and the first president never to have run for either the presidency or the vice presidency. In the ensuing months, Ford had to grapple with a number of issues of vital interest to the American people. Energy was one of them, and it was no longer foremost; according to a Gallup Poll in July, inflation was again overwhelmingly the number one concern. When Ford addressed Congress shortly after taking office, energy rated only a brief mention. Of course, people had not forgotten the crisis of the previous winter but there was plenty of oil available – so much so, it was reported in September 1974, that in some cities, there were competitive gasoline “price wars.” Several major producers announced retail price cuts. Although there were worries about natural gas and propane shortages for the coming winter, the immediacy of a crisis had passed. Nevertheless, the energy issue and the new energy narrative had insinuated themselves into the larger government policy agenda. There had been an eye-opening national energy crisis, and it produced an underlying belief 125

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that, as Vice President Nelson Rockefeller said in a speech to automotive engineers, “The age of cheap fuel is over.”1 Although the crisis had not led to passage of comprehensive energy legislation, it had produced a major policy proposal. Ford had inherited Nixon’s energy policy – a policy with the compelling name “Project Independence.” This program, with a goal of national energy self-sufficiency by 1980, still had momentum; a project study that had begun in the spring engaged five hundred people and was due to report on the prospects for self-sufficiency in November. In Congress, too, although much of the winter’s urgency was gone, literally hundreds of bills that had been introduced before and during the crisis were still winding their way through (or more often getting lost in) the committee process. But for Congress, the same basic narrative remained: the problem was energy dependence; the goal had to be independence. This idea was quickly becoming a given, one that would grow more definite over time. Anyone opposing self-sufficiency had to explain himself. However, the character of the debate had changed from the winter. By fall 1974, partisanship became far more evident. Although measures had won lopsided bipartisan votes during the winter crisis and everyone had agreed that something had to be done quickly, there was now far more in the way of political calculation. Policy entrepreneurs, lobbyists, and coalitions of advocates were swarming around Congress determined to direct the energy agenda. Whereas in January 1974, there were general pleas to “do something,” in December of the same year, there were hundreds of lobbyists and advocates of every ideological persuasion with plans on how millions of dollars directed to them would move the United States toward energy self-sufficiency. Government also had an increasing stake in perpetuation of the energy narrative and the expansion of policy. Agencies and Congress competed to acquire authority over energy and the resources that government would devote to it. There was a rapidly growing new energy bureaucracy, the Federal Energy Administration (FEA),2 and in Congress, the proliferation of energy-related activities was likened to the Oklahoma land rush (Jones and Strahan 1985). The 92nd Congress had had only two energy committees 1

2

FPL, text of speech to the Society of Automotive Engineers, Duval, Box 14, Feb. 26, 1975. The point was also made by commentators and some scholars. For example, Walter Laqueur made the same basic statement in an article, “The Idea of Europe Runs Out of Gas,” New York Times, Jan. 20, 1974, 13. It quickly had more than 3,000 staffers. By 1976, Representative George Mahon (D-TX) called the FEA in a letter to Ford a “potential monster” saying it needed measures to keep “this bureaucracy [from getting] completely out of hand.” FPL, “FEA Correspondence,” Schleede, Box 18, Apr. 3, 1976.

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and subcommittees; the 93rd Congress had more than thirty that looked into “nearly every aspect of energy policy” and altogether held more than a thousand days of hearings (Gulick 1975, 346). Along with the radical rhetoric of self-sufficiency, there was the cold practicality of legislators (and their allied interest groups) fighting to seize control over an agenda and the funds it would eventually entail. Of course, not everyone thought self-sufficiency was either feasible or wise, and a few said that the pursuit of it would be wasteful, but these were mostly people outside of government. A Massachusetts Institute of Technology study in May 1974 argued that the price tag would be too high and the task daunting,3 and the president of the New York City Club told FEA administrators that Project Independence was nothing more than “a public relations gimmick.”4 Inside government, the only disagreement was over what “independence” actually meant. Even though Nixon (in March) reiterated that energy independence meant “completely independent of any foreign sources,” many government officials disagreed.5 They argued that “self-sufficiency” really did not mean self-sufficiency, although what they thought it meant differed from one individual to the next, and there were consequently disagreements over how to achieve it. The means depended on what “it” was. Policy debates were clearly confused, and realistically, it might have been a time to step back, to deliberate on what energy policy could actually accomplish.6 Instead, Ford pushed ahead with Project Independence. It was now ongoing policy, its premise adopted rhetorically by both parties, agencies in Washington, and most of the press. After the Project Independence Report was issued in November, Ford proposed the Energy Independence Act of 1975, the attempt at legislative realization of some concept of energy selfsufficiency. There were differences between the Nixon and Ford versions. For example, Ford wanted an acceleration of price and allocation decontrol for both oil and natural gas (the latter, a stand quickly abandoned). The Ford administration also changed the target date for independence to 1985; the effort would take ten years instead of seven. (In fact, for the next 30 years, legislative targets for energy independence would be set at a standard energy-independence-decade in the future.) But Ford’s package was 3 4 5 6

Reported in “U.S. Energy Plan Found Too Costly,” New York Times, May 11, 1974, 39. FPL, “Statement of Donald E. Weeden before the FEA, August 22, 1974,” in CEA (Greenspan), Box 41. See Chapter 1. Weeden also argued that “wisdom lies in stepping back and re-examining what the Federal Energy Administration can reasonably do”; see note 4.

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like Nixon’s in two respects: the ostensible goal remained the same, and if it had passed intact, the package had no prospect of producing actual American energy self-sufficiency. Many in the administration admitted as much. The head of the FEA told Congress in February that if the act were passed in full by 1985, the United States would still be importing 3 to 5 million barrels per day (MBD); this was supposed to make America independent in some sense because it would be “invulnerable” to an embargo.7 Congress also continued on the path it had taken during the crisis, with the Democratic majority seeking both legislated self-sufficiency and low energy prices. Congress and the Ford administration were divided over the latter. The conflict illustrated what was called in Chapter 1 the “energy policy conundrum.” The Energy Independence Act sought to reduce dependence at least partly through higher energy prices. The price hikes Ford contemplated would have been too little to have gotten the result the administration sought, but from a practical standpoint, this did not matter. Congressional Democrats adamantly opposed any policy that seemed likely to impose costs on voters. They intended to keep prices low, forcibly rolling them back if necessary and imposing conservation by mandate alone. The congressional alternatives to the Energy Independence Act stressed the retention of price controls, with a variety of price benchmarks, price ceilings, and rules for allowable increases. In the end, the two sides, the administration and Congress, took almost a full year to work out an agreement; it did not produce near-term decontrol – or much of anything useful, for that matter. The bill that Ford signed seemed mainly wasted effort, a compilation of measures based mostly on bad economic analysis and political calculation and nothing remotely able to get the United States close to the reputed goal of energy self-sufficiency. But even before the 1975 legislation was passed, Ford readied a new energy-independence proposal, this time one that was intended to get the United States close to actual self-sufficiency. The central idea was the creation of a huge government energy finance corporation, the Energy Independence Authority or EIA.8 The EIA would solve the implicit claim of failure in the 7

8

Statement of Frank Zarb, Presidential Energy Program Hearings before the Committee on Energy and Power of the Committee on Interstate and Foreign Commerce, House of Representatives, 94th Congress, Feb. 17, 1975, 13. Actually, an embargo would still have led to higher oil prices, which was probable no matter what policy was adopted. This should not be confused with the Energy Information Administration, which was originally included in a 1976 bill to amend the Federal Energy Administration Act, H.R. 12169. The new division was called the Office of Energy Information and Analysis and was renamed the Energy Information Administration (EIA) in 1977. In this chapter only, EIA will refer to the proposed Energy Independence Authority. Later references to EIA will be for the Energy Information Administration.

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capital market (that the market refused to lend to what the government considered to be economically viable alternative energy projects) by providing up to $100 billion in available financing for the development of new domestic energy resources and technology.9 It was bold, it was big, but it would also be costly; in this respect, Ford was still caught in the policy conundrum. Consequently, the EIA was opposed by nearly everyone, including many of Ford’s aides. Nevertheless, this proposal made something clear that had not been really addressed before by political leaders: it put a price tag on energy selfsufficiency. As Anthony Downs (1972, 39) had pointed out a few years earlier, when there is a major shock like the oil embargo, there is an “issue-attention cycle” during which the public tends to go from “alarmed discovery” at the impact of the problem, to “euphoric enthusiasm” over the ability of society to “solve” it, until the “realization of the cost of significant progress” dampens zeal. Moreover, even if this massive new bureaucracy had come into being, administration officials admitted that it would not have actually made the country self-sufficient until 2000, if then. By 1985, it would only, as the idea’s main proponent, Vice-President Nelson Rockefeller, put it, limit America’s “vulnerability.” Not surprisingly, the EIA was rejected. It never even came to a vote in Congress. Yet the infeasibility of an actual energy-independence policy seemed lost on everyone in government. Nixon had set the course, Ford followed, and most presidents through Obama and congresses from the 93rd to the 112th have followed as well. To the time of this writing, few politicians would disavow this goal, even though it has remained, in essence, politically, economically, and technically infeasible. In reality, true energy autarky is possible only with the most drastic, even oppressive steps. That reality is seldom noted; rather, energy independence is presented as an attainable goal if Americans only have sufficient will. Such thinking leads to policies that cannot succeed, but the rhetoric remains, and failed policies are repeated. But why bother to change when the narrative of independence is so politically appealing?

2. Policy Inheritance and Path Dependence The Ford administration inherited Project Independence and its goal of self-sufficiency, but it had become increasingly unclear what self-sufficiency 9

Over $400 billion in 2011 dollars. In February 1975, Secretary of State Kissinger advocated a multinational effort costing $500 billion (about $2 trillion in 2011 dollars). The proposal was rejected, according to Time, because the effort was seen as a way to get “the rest of the industrial world to safeguard a big U.S. investment in costlier sources of energy,” Feb. 17, 1975, 45.

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actually meant. Even Nixon had given conflicting statements about what he meant. Nevertheless, Ford decided to embrace the idea. It may have seemed to him that he had little choice. Nixon had been personally unpopular, but his call for energy self-sufficiency was not. As the Congressional Quarterly (1975, 7) noted, Nixon’s “call for self-sufficiency has generated little debate.” Project Independence had become the rhetorical standard, and there was unmistakable force behind it. Republican legislators referred to it; Democrats offered alternatives to it, although couched in the same selfsufficiency terms.10 By the summer of 1974, energy self-sufficiency was the starting point for policy discussions, not a controversial end point. Where Democrats took issue was with the means, not the ends. So, when Senator Alan Cranston (D-CA), for example, testified at Project Independence hearings, he argued mainly that conservation, and not Republican ideas such as price decontrol, must be the “bedrock” of an energy independence policy. The goal was clear; the only question was how to get there. In January 1974, the Federal Energy Office (FEO) began what would become a comprehensive study of energy issues under the banner of Project Independence. William Simon, the head of the FEO, assembled a group under the leadership of Deputy FEO Administrator Eric Zausner to undertake the study, notwithstanding Simon’s growing conviction that self-sufficiency by 1980 was not attainable and that the best the United States could achieve by then was to limit exports from any one country likely to cut off supply. In any event, the study led to a report of hundreds of pages, buttressed by a sophisticated computer modeling program called the Project Independence Evaluation System (PIES), which would be used for most government energy analyses during the Ford presidency (Hogan 1975; de Marchi 1981a). In May 1974, the FEO was supplanted by the FEA, which assumed overall responsibility for Project Independence and the report (initially termed the Project Independence Blueprint). But there was no change in the unanimous endorsement of the concept. William Simon was named Secretary of the Treasury also in May, but he still remained involved in energy policy and continued to support Project Independence; John C. Sawhill, designated to be the first administrator of the FEA, also endorsed it. As for Gerald Ford, when he became president, he made clear that he, too, believed in Project Independence, saying at his first news conference that the United States needed “to accelerate every aspect of Project Independence.” But then his 10

In 1975, Representative Carl D. Perkins (D-KY), for example, introduced the Energy Self-Sufficiency Act. Senator Mike Gravel (D-AK) introduced a bill to make energy independence by 1985 a “basic goal” of American policy.

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position was notably weak as a president who had never been elected, and he probably felt he had to embrace a notion that was becoming obvious and uncontroversial to other government officials. In August 1974, the idea had more credibility than he did. Even if Ford had reached office in more normal fashion, he would have been constrained by the goal of Project Independence. As Rose (1990) argues, policy inheritance necessarily precedes choice. Before a policy maker can “introduce changes,” he or she must initially accept as given “the legacy of past administrations” (p. 263). Rose was referring to existing laws on the books, not policy proposals still hovering uncertainly in congressional committees and federal agency reports. But still the argument would seem to apply, especially because it was popular with voters. Also, literally hundreds of people in the Ford administration had been working on energy independence even before Ford took office – meaning that there was a large and important constituency within his administration with an interest in preserving and enhancing their authority. Energy policy had become path-dependent. Path dependence is often used in economics and political theory simply to indicate the uncontroversial point that the past “matters” in the content and formation of present policy. But a more precise understanding (David 2007, 92) is a “dynamical process whose evolution is governed by its own history.” Path-dependent policy seems to depend on momentum. It is not always clear exactly why some “contingent events” such as the energy shock can result in “particular courses of action once introduced [that may be] virtually impossible to reverse” (Pierson 2000, 251) – that is, become path dependent – and others do not. But such a course will typically show a dynamic of “increasing returns” or “self-reinforcing or positive feedback processes” (p. 252).11 As Pierson argues, often path dependency is determined by the sequence of events as much as by the events themselves. “Early events [i.e., the 1973–4 energy crisis and Nixon’s response to it] matter much more than later ones” (p. 253). Path-dependent choices, determining courses of action, get that way because processes become increasingly inflexible as more and more is invested in them, and as more and more interests become attached to them. As Jones and Baumgartner (2005, 49) have noted, “Once a path is chosen, it tends to be chosen. Moving off the path can be difficult.” There is often a reluctance to deviate fundamentally from a path even where there may be more efficient alternatives. Two reasons stand out. First, 11

Margaret Levi (1997, 28) argues that although there may be alternatives, “entrenchments of certain institutional arrangements obstruct an easy reversal of the initial choice.”

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there is a high degree of uncertainty about the ultimate benefits from a policy choice. Uncertainty exists not only over the eventual outcome but also over the political consequences. Those facing popular elections are likely to persist in a course of action if politicians have made a political investment in it, it appears to be popular, or politicians are protected personally from its failure. As noted in Chapter 1, politicians are faced with a “do something” decision problem in the immediacy of a shock. They will choose somewhat cautiously in the hope that the shock dissipates but will eventually have to commit to policies that appear to be popular. Advocacy of some small changes to put a personal stamp on policy might be useful politically, but offering a radical deviation from the course once a path has been determined seems a much riskier tactic – potentially more costly politically – than more or less going along (Pierson 2000). Second, there are potential winners from every government policy. Any course of action offers policy entrepreneurs both in and out of government the chance to gain by influencing the way the process unfolds. But over time, these entrepreneurs and their organizations will have invested increasing amounts of time and effort toward achieving their goals, and they will be extremely reluctant to pursue alternatives so long as they can see gains from maintaining the present course (North 1990). There are also likely to be an ever-increasing number of such organizations that will be seeking to benefit within the rules of the game as they are established both by the existing structure of law and by the nature of the policy in question. These can be self-reinforcing. As Pierson (1993, 608) argues, “Policies may create incentives that encourage the emergence of elaborate social and economic networks, greatly increasing the cost of adopting once-possible alternatives and inhibiting exit from a current policy path.” The fact that the outcome might be suboptimal for society generally is irrelevant. As North (1990, 2005) has pointed out, these processes can in fact lead to long-run suboptimal results that may persist for generations for entire economies. Although the energy crisis had ended by the spring of 1974, there were many who had a vested interest in the expansion and the direction of energy policy, gathered under the heading of energy independence. The energy industries were playing according to the new rules. Nuclear power advocates hoped to see realized Nixon’s plan for breeder reactors to provide fuel for (they hoped) hundreds of new conventional nuclear power plants. The oil industry sought to influence the new regulatory environment and to figure out how to benefit from the two-tiered oil price system. Electric power companies sought assurance of environmental waivers if they converted oil and gas-fired electric power plants to coal – as both Nixon and Ford wanted.

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The focus on energy self-sufficiency meant that any policy proposal had to fit into (or be made to fit into) that framework. Ford’s 1975 Energy Independence legislation, which emphasized oil and gas price and allocation decontrol, was pitched precisely as a step toward energy self-sufficiency (de Marchi 1981b). Even when a proposal appeared likely to impede selfsufficiency, the ultimate goal remained. When, for example, the House Ways and Means Committee approved a bill to tax oil companies and phase out the depletion allowance, a committee staffer told administration officials that the committee remained “primarily interested in self-sufficiency . . . [and not simply in] punishing oil companies” (de Marchi 1981a, 469). How were higher taxes on energy producers supposed to make the U.S. energy independent? Such taxes would create a disincentive to produce. But the key point was the acceptance of self-sufficiency as the inevitable purpose of U.S. energy policy. As one energy expert put it in the last year of Ford’s administration, “The United States continues to hold to Energy Independence as a primary objective of our policy and strategy . . . it provides the key to understanding the direction of many of our energy programs as well as the new proposals being put forward” (Murray 1976, 3).

3. The Energy Independence Act of 1975 With the energy crisis past, William Simon, head of the FEO, sought to establish a distinct schedule for the Project Independence Report (the P.I. Blueprint); Eric Zausner, who was in charge of data analysis for the FEO, in turn assembled a group of statistically minded analysts in March 1974 with the goal of finishing in time for President Nixon to be able to use it in fashioning legislative goals that he would announce in his next State of the Union speech. Simon, for his part, seemed determined to direct the energy policy debate, even after he left the FEO to become secretary of the treasury. He was succeeded at the FEO by his deputy, John Sawhill, but Simon wanted to put his own stamp on whatever policy proposals emerged from the P.I. Blueprint. Simon was known as a man who believed in free enterprise, or as outgoing Treasury Secretary George Shultz put it, he was “a free market man like me.” This was also the basic characterization of Simon’s energy policy goals. De Marchi (1981b) continually emphasizes that Simon was for a “free market in energy” (p. 486), highlighted by the decontrol of prices and end of the allocation system Simon had himself put in place the previous December. Although it was true that Simon’s orientation was probably more “free market” than most administration officials and certainly more

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than most members of Congress, his plans contained many interventionist elements. Among other policy ideas, he aimed for tariffs on imported oil, higher gasoline taxes, a natural gas excise tax, and windfall profits taxes on oil companies. To call these “free market” oriented policies would be a stretch, to say the least. Although he was for ending government-imposed prices, his ideas still depended on government-determined prices. Windfall profits, for example, could only have been judged as such (that is, a “windfall”) by a governmental determination of what the price “should” have been and thus the profit that was “correct,” presumably taxing the excess over that. But even apart from the windfall tax, the other taxes and tariffs were themselves the antithesis of a free market approach. This contradiction seemed not to trouble Simon or mollify his critics, especially those in Congress, who thought his “free market” ideas were going too far. In fairness, Simon had a coherent economic point even if it was not exactly “free market.” In his view, high energy prices would provide incentives both for conservation by consumers and increased production. This coherence stood in sharp contrast to most of the members of Congress, who wanted to enforce conservation even while providing a key reason (lower energy prices) for consumers not to do it. Although the idea of higher prices inducing conservation was based on simple economic principles – the law of demand, the direction of a change in quantity demanded of a good is inversely related to changes in price – when applied to energy, this bedrock of economic thinking was not universally embraced even by some economists. There were arguments that the price elasticity of demand in the short to medium term was nearly zero, so unless prices rose to ruinous levels, people would continue to use essentially the same amount of energy.12 This view was basically wrong. Later analyses of elasticities for products such as gasoline showed them low in the short run, but even in the short run, large price increases induced noticeable reductions in quantities demanded.13 In any case, Simon was undoubtedly correct in one sense: government policy could more clearly and efficiently provide conservation incentives through 12

13

As Charles Owens, former deputy assistant for policy analysis at the FEA, said in testimony to Senator Jackson’s Interior Committee in February 1975, “[T]he assumption that demand elasticity is significantly negative . . . is highly dubious. . . . [There is] the contrary evidence over the entire post–World War II period. Even the past eighteen months, while admittedly exceptional, indicate almost zero elasticity.” At zero, of course, consumers do not change the quantity they demand, no matter what happens to the price. This is discussed further in Chapter 5. A New York Times article, “Experts Dispute Administration, Doubt World Oil Shortage in ’80s” (Jan. 18, 1978), referenced several experts in the field who had noted a significant demand response to high oil prices. See also, generally, Adelman (1993).

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taxes than it could in setting prices according to Phase IV formulae or through the late 1973 system for government allocations of quantities. The allocation system proved if anything more problematic in practice than it had been in principle. The system had, for example, led to imbalances in the kinds of products that were being produced (because these were subject to official diktats), inducing, to give one example, shortages of gasoline on the East Coast and surpluses elsewhere. But the strangest result of the allocation system, given that part of the reason for it was to protect small producers from predatory major oil companies, was that some major producers were compelled by the allocation rules to sell oil at low prices to other major companies (Wagner 1975). Taxes, on the other hand, could be imposed directly and straightforwardly with a much less distortionary effect on energy markets; a tax of thirty-seven cents per thousand cubic feet of natural gas coupled with price decontrol (as was proposed) signaled a one-time change in the price of natural gas not contingent on the ruling of any bureaucrats, and any further changes would be the result of market activity. The price of natural gas would at least initially rise, and people could either pay it or change their behavior or choice of fuel. That new energy taxes would also be unpopular was obvious,14 but at least everyone would understand the system. In any event, Congress was clearly not interested in this sort of change. In May 1974 when Congress established the FEA, it also reiterated support for price and allocation controls as established in the emergency act of November 1973.15 John Sawhill, only thirty-eight years old, moved from the FEO (now superceded by the FEA) and became the first administrator of the agency, the new energy czar. He shared Simon’s belief in decontrol, and as a first step, he hoped to have the allocation system expire as called for in the original act (stipulated date: February 1975), arguing that there really was no need for this sort of market intervention with supplies plentiful (Regens and Rycroft 1981). But because those rules were in place partly to curb the behavior of the major oil companies, still the focus of congressional ire, there was little momentum for changing the system.16 According to the rules as they then existed, for allocation controls to be lifted, there had, 14 15 16

The cost was to be offset by cuts in income taxes to keep tax burdens more or less the same. Price controls on other things ended in April 1974, and the Cost of Living Council was abolished in June. The FEA was then charged with regulating energy prices. In fact, around the time the FEA was coming into existence, the House Ways and Means Committee approved a bill that would have ended the depletion allowance and increased taxes on and oversight of oil companies. There were also continuing efforts to pass a version of Jackson’s price rollback bill (de Marchi 1981a).

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first, to be a “finding” by the president that no energy shortages existed, and second, Congress needed to agree formally, making it next to impossible for either price or allocation controls to end as long as they were in force. The prevailing sentiment in Congress was to extend them. Because he knew that decontrol was a lost cause in Congress, Sawhill soon deemphasized it, which put him at odds with his former boss, Simon. But then that conflict was probably inevitable. Although the FEA was supposed to be the hub of administration energy policy, Simon argued for a second policy-making group made up of senior officials across several cabinet departments. Nixon agreed to Simon’s Committee on Energy in June, and Simon and his staff at the Treasury Department began putting together a program for price decontrol of oil and gas. A proposed windfall profits tax was included to make decontrol more palatable to Congress. But what was most evident was that Simon was directly undercutting Sawhill’s authority.17 Sawhill, for his part, felt that what Simon wanted had no chance of being adopted – not by a Congress where there was the bizarre but pervasive belief that incentives from higher energy prices were “mythical”18 In the late summer of 1974, Sawhill decided to play by the rules Congress would allow. Because energy controls did not work well but could not be removed, Sawhill tried to improve them. One persistent problem was in the method of calculating prices for refined oil products. Prices were based in part on the cost of oil, which was calculated by the government using a weighted average of the prices of new oil (that is, crude oil that had been decontrolled as well as oil that was imported) and old oil (controlled and much cheaper). It turned out that this worked to the disadvantage of the smaller independent companies, especially those refiners on the East Coast, because they tended to rely disproportionately on (uncontrolled, higher-priced) imported crude oil and had less access to cheap “old” oil. The prices they were allowed to charge for their output were set by the FEA, but their costs were higher than an industry-wide weighted average. Some firms reportedly were closing at least temporarily because they were being compelled to sell at a loss.19 This problem bothered many officials because 17 18

19

Sawhill tried to play at the same game and wrote a memo to persuade Ford to abolish the Committee on Energy. FPL, memo, Sawhill to Ford, Duval, Box 6, Sept. 26, 1974. Representative Toby Moffett (D-CT), CR, 94th, 25863, July 30, 1975. Members of Congress argued that history had proved this. As Representative Ed Roybal (D-CA) put it, “the truth belied the administration’s rhetoric” that higher prices acted as a spur to conservation. CR 94th, 23983, July 23, 1975. Sawhill reported this to a meeting of the Energy Resources Council (formation of which is described later in the text) on October 14, 1974. FPL, ERC transcript, CEA (Greenspan), Box 43.

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the allocation system was intended to aid the smaller firms and instead brought some of them close to insolvency. Sawhill’s proposed answer was called the “entitlement system,” in which refiners would be entitled to allotments of old oil so that the mix of old and new oil would be roughly equal across firms, and therefore the weighted average cost for individual refiners would be more or less equal. The entitlement program was vigorously opposed by many members of the administration, especially those who, like Simon and Council of Economic Advisors Chairman Alan Greenspan, wanted to more directly address this problem through complete price and allocation decontrol. Sawhill argued that the entitlement system was a step toward decontrol because it meant that costs would be the same for everyone, and so decontrol, when it came, would have fewer dislocations (de Marchi 1981b). Greenspan, on the other hand, believed that this plan would create a group of producers that would be entitlement beneficiaries and would consequently be “a constituency against decontrol.”20 Transportation Secretary Claude Brinegar was particularly vociferous in his opposition to the entitlement system. He pointed out that he had worked in the oil business through the 1950s and 1960s and said, “I spent 10 years trying to find loopholes in the oil import program. I found hundreds of them. . . . I don’t know what dislocations you would cause to happen [with the entitlement program], but you will cause some.”21 The idea did have support from many in Congress, however, especially the New England Congressional Caucus. In an effort to get along with Congress, Sawhill said he would agree to an extension of the controls until the summer of 1975. A month after Nixon had left office, Sawhill told Congress of his intention to put the entitlement system in place, and in November it was in fact established.22 But the entitlement program was also to be “plagued with problems” (Regens and Rycroft 1981), which as Brinegar predicted was inevitable with any effort of authorities to centralize control over a market with a large number of players and a vast number of transactions. Before it was implemented, however, the FEA underwent a change: in late October 1974, Sawhill was compelled to resign.23 20 21 22 23

This was especially likely because small producers were to get extra entitlements, which they could sell or use to lower their costs. All of the quotes are from the transcript cited in n. 19. The program was announced on November 29, to take effect in January 1975. Perhaps more accurately, he agreed to resign, reputedly because he was “not a good soldier,” as Rogers Morton put it. Alternatively, it was his visible and vocal advocacy of higher gasoline taxes. In fact, from the time he became FEA head to the time he resigned (a little more than six months), he made fifty-five public speeches on energy issues (noted in the New York Times, Oct. 31, 1974). An undated memo to Donald Rumsfeld, Ford’s chief

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Before he left, almost exactly a year after President Nixon had announced Project Independence, Sawhill presented President Ford with the draft of the Project Independence Report, a look into the likely future of energy production and consumption in America through 1985. It was a massive effort, 442 pages in the main report, along with 339 pages of appendices plus thirty volumes of supporting material. Simon’s Treasury group had not been particularly impressed with all of this from the outset because so much of it was based on the complex statistical modeling of the PIES program, in which a high degree of simplification was inevitable. In fact, Zausner’s team had reduced the almost infinite number of possible scenarios down to four: a “business-as-usual” case, an “accelerated supply” strategy, a “conservation” approach, and an “emergency preparedness” approach (U.S. Federal Energy Administration 1974). There was considerable criticism of the report within the administration. The report was said to have embodied odd assumptions at times – the relationship of electricity pricing to oil was too strong, for example, and there was no discussion of the effect of an international oil cartel24 – and left out key factors. Outside critics noticed something else that was missing: as the New York Times put it, what was missing was “an energy policy.”25 The study, dubbed by some “The Sawhill Report,” was intended by Zausner and Sawhill to inform future energy policy, not determine it. Indeed, Sawhill seemed to regard the most important accomplishment of the study the creation of a vast database and the “policy analysis tools” (presumably PIES) “to evaluate alternative policy actions” (U.S. Federal Energy Administration 1974). Sawhill ruled out one possibility: complete self-sufficiency, that whatever else the massive report offered, it was not “alternative ways to eliminate imports” – even though many in the administration and in Congress still interpreted Project Independence in precisely those terms. His public insistence on the difficulty of achieving self-sufficiency might in fact have been one reason for his forced resignation.26 Even as Sawhill was dismissing talk

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25 26

of staff, from William Walker called the FEA “a mess” from an administrative standpoint. FPL, “Energy Personnel,” Cheney, Box 5. Some of these points were raised by MIT economist Paul MacAvoy, who met with a White House staff member on November 15, 1974. FPL, memo Fogelgren to Duval, Schleede, Box 33, Nov. 20, 1974. “Missing: Energy Policy; Project Independence Outlines Options But Avoids Crucial Issue of Shortages.” New York Times, Nov. 13, 1974. An unsigned memo to Ford, Oct. 25, 1974, “Talking points for Meeting with John C. Sawhill,” advised Ford to avoid making it seem like “punishment for having been outspoken about difficult issues such as the need for conservation [presumably off-message comments] and the difficulty in achieving energy self-sufficiency.” FPL, Cheney, Box 5. Although Sawhill was more vocal about the difficulty of achieving self-sufficiency, as

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of self-sufficiency, Zausner still adhered to it telling Congress in October that development of oil and gas on the Outer Continental Shelf might in fact lead to actual self-sufficiency by the mid-1980s. Later, however, the FEA, even after Sawhill’s departure, would argue for a minimalist interpretation of “independence,” declaring that it meant “substantially minimal effect of a future cut off” of oil supplies, not actually a definition of self-sufficiency. In fact, by the time Ford announced the Energy Independence Act in January 1975, it was hard to know what anyone in government meant when he or she called for energy independence. There were also still multiple voices on energy matters. Secretary of State Henry Kissinger, for example, was sounding like a medieval Scholastic27 in demanding that OPEC endorse a “just price” for oil as he and Ford sought to organize consuming nations to form a united front in the apparent struggle – the world’s first “energy war,” according to New York Times reporter Leonard Silk28 – with OPEC. Kissinger and Ford both warned producer nations of unspecified actions (as well as serious repercussions in the world economy) if they did not cut prices soon to more “just” levels.29 Kissinger in fact expressed the desire to “break the cartel” but believed it required united efforts on the part of the major industrialized nations (U.S. Department of State 2012, 12). The new worldwide effort to organize consuming nations, dubbed Project Interdependence, was strangely presented as a complement to America’s stated wish to withdraw from the world’s energy problems through Project Independence. Kissinger did, in fact, succeed in getting an agreement of twelve major importing nations to share energy resources in the event of another embargo, but the kind of unified action to destroy OPEC floundered as countries unsurprisingly looked after their own interests at the expense of collective action. In any case, the agreement quickly came under attack in the United States as it implicitly obligated the country to export domestic resources to Europe if the latter were an embargo target.

27

28 29

discussed in Chapter 1, he was hardly alone in his belief it was impossible or at least impractical. See de Roover (1958) for a discussion of medieval concepts of a “just price.” The idea has been advocated at various times since, including in recent decades in the concept of “fair” wages. “Energy War Rumblings,” Sept. 25, 1974, 51. “It looks as though the battle in what could be a long energy war – the first in history – has now been joined.” Kissinger created a stir when in a Business Week interview (Dec. 23, 1974), he refused to rule out the use of force with respect to oil. This kind of action would only be taken, Kissinger noted and reiterated, if OPEC actions were an attempt at “strangulation of the industrialized world,” not merely because prices were high.

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Some readers of the PI Report did discern a policy leaning in the enormous reams of data. The report seemed implicitly to advocate a “strong conservation effort,” which included mandatory energy efficiency standards and increases in the federal gasoline tax. The latter was not going to be part of the policy package; whatever its logic, the political cost was deemed too high. The policy proposals would, in any event, have to wait as Ford reorganized energy policy making in his administration. First, he abolished the William Simon–led Committee on Energy and constituted a new interagency policy-making body, the Energy Resources Council (ERC). Secretary of the Interior Rogers Morton was named the head and the apparent energy czar; Simon was named to the council, but his diminished role seemed also related to advocacy of higher gas taxes. Morton was not deemed an especially inspired or inspiring choice. Morale at the Department of the Interior was said to be low, especially since some of the offices previously assigned to Interior had been transferred to the FEA (Carter 1975). But Morton was seen as a likable “good soldier” for Ford’s policy team. The creation of the ERC and the elevation of Morton did undercut the FEA (although the FEA administrator was to be an ERC member), but the FEA still had an important role to play in carrying out policy, if not in making it. As of November 1974, however, there was no administrator. Sawhill was gone, and the first person Ford named to replace him, Andrew Gibson, was withdrawn when it appeared he had a conflict of interest. Not until the end of the month did the FEA have a new chief, and by then Morton had also been rebuked by Ford for suggesting that the administration might endorse a gas tax. The man finally chosen to head the FEA was Frank G. Zarb, who was well placed to take over this role. As associate director of the Office of Management and Budget (OMB) for Energy, Natural Resources and Science, Zarb was already appointed as executive director and coordinator of the ERC. Zarb actually had a bit of background in energy: his first job had been as a management trainee at Cities Service Oil Co. in the late 1950s. Thereafter, he worked on Wall Street, joining the Nixon administration as an assistant secretary of Labor, and then as associate director at the OMB. He was seen as a pragmatist, unlikely to get into the kind of conflicts that had marked Sawhill’s tenure. He was also thought of as competent and efficient – unlike Morton. Many in Washington thought this appointment meant that Morton, who appeared increasingly ineffectual, was already on his way out as czar. As one official anonymously put it, “[Zarb] will be the

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one to see on energy.”30 Zarb quickly became the leading figure in energy policy making, a role he would retain until Gerald Ford left office. Ford decided on policy at the end of the year, and revealed his goals in a televised speech on January 13, 1975; he expanded on them a couple of days later in his State of the Union address. The program focused largely on four goals: 1. to raise the price of energy through oil price decontrol and taxes on both oil and domestic natural gas – no gasoline tax but instead a $3 per barrel tariff on imported oil and a similar tax on domestic crude;31 2. to encourage more use of coal through relaxation of environmental standards; 3. to establish an emergency oil reserve; and 4. To create efficiency standards for cars, appliances, and buildings. Ford argued that his plan would reduce imports by 1 MBD in 1976 and 2 MBD in 1977 and would make the United States “invulnerable” (an undefined but frequently referenced term during the Ford administration) to foreign supply disruptions by 1985. In his State of the Union speech, he also pointed to far more ambitious long-term goals including “200 major nuclear powerplants,” “20 major new synthetic fuel plants” producing 1 MBD by 1985, and thousands of new oil wells, millions of more efficient cars and trucks, and millions of insulated homes. “I happen to believe we can do [all of those things]. In another crisis – the one in 1942 – President Franklin D. Roosevelt said the country would build 60,000 military aircraft. . . . They did it then. We can do it now.” Shortly thereafter, many of these elements were incorporated into legislation called the Energy Independence Act of 1975. Senator Hugh Scott (R-PA), the Senate Minority Leader, introduced the bill as S. 594 on February 5. The day before, it had been introduced in the House. The bill, which had thirteen different titles, was sent to several committees. Most of the ideas in S. 594 had been advanced before; Nixon had sought relaxation of environmental rules during the height of the energy crisis of 1973–4. But an overall impression of the 162-page Energy Independence Act was just how limited the effort was. The intent appeared to be to reduce imports modestly. Had it all been put into effect, it is not clear that much 30 31

Quoted in “Nominee as Federal Energy Chief,” New York Times, Nov. 26, 1974, 20. Ford had already proposed the new tax measures in the speech of January 13. He had, however, presented the taxes largely as measures to raise revenue, not provide conservation incentives.

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energy would have been saved. The focus of public attention was on the higher prices that decontrol and taxes would have induced at least initially and the fear that these steps would have greatly increased overall inflation. If anything, the administration and Congress were under public pressure to bring prices down. Consumer groups, for example, were demanding “guaranteed” low electricity prices. But the main element for the administration was still price and allocation decontrol. The benefit of decontrol was that it was expected to raise prices and thereby induce conservation. There was, however, a fundamental flaw in the administration’s argument: as was often the case, the flaw was in the forecasts. The benefits of decontrol, in fact of all the elements of S. 594, were based on highly pessimistic forecasts. Oil supply was going to shrink worldwide (except maybe in OPEC countries), and demand would rise, seemingly without regard to actual market prices. As Zarb informed Congress, decontrol along with the taxes and tariffs on oil and natural gas would induce a $4 per barrel (bbl) increase in oil prices, which in turn would lead to a savings of 335,000 bbl/d the first year, 900,000 bbl/d the next, and 2.1 MBD by 1985.32 The FEA also projected primary energy consumption in the United States at somewhere between 93 and 125 quads by 1985, and 125 and 225 quads by 2000, based on an inevitable (it seemed) annual growth rate of 3 percent in energy demand. The latter projection showed more than anything else just how large was the uncertainty about future demand. Just the range itself was enormous: 100 quads. That is, the range of uncertainty was 140 percent of then-total energy consumption. The projection assumed total growth of between 70 and 200 percent over 25 years because it also assumed trends would continue as they always had or would at most change modestly either up or down. The FEA also gave a thirty-year window before domestic oil was exhausted.33 Zarb, unlike some members of Congress, thought initially that higher prices would (slightly) curb oil demand, but he seemed not to consider the possibility in any of these calculations that initially higher prices would induce a surge of supply and substitution of scarcer fuels by more abundant ones. How could they if gas and oil were simply running out? If those neo-Malthusian projections of resource depletion were incorrect, the result 32

33

These projections are from Hearings on S. 622, February 1975, 162, based, according to Zarb, on econometric studies. Conservation measures were expected to cut consumption by another million or so barrels per day. Zarb testimony Senate Hearings of S. 2532, the Energy Independence Authority Act of 1975, Senate Committee on Banking Housing and Urban Affairs, April 1976, 13. Estimates provided by the FEA in tables, 216–7.

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would be quite different from what Zarb believed. That is, incentives for production would send prices lower, thus raising quantity demanded, and so in the end, U.S. consumers would use more oil, not less. In any case, Ford’s taxes were unlikely to have a dramatic effect on consumption – the claim of large savings notwithstanding. The taxes would have increased the price of gasoline by an estimated ten cents per gallon, hardly enough to have had a major impact on consumer behavior. But the question of whether his plan was a way toward achieving greater energy self-sufficiency was moot. To Democrats in Congress, most of the provisions of the bill were not acceptable. It was labeled “madness,” which put “the survival of western civilization at stake,” and was “guaranteed [to create] more inflation, colder houses, and windfall profits.”34 Ford was in a weak position and within a couple of weeks of the introduction of the bill told Congress he was ready to compromise. The Democrats had less reason to accommodate him. Not only was Ford in office under peculiar circumstances, but recent midterm elections – the post-Watergate election – had made Congress even more heavily Democratic; as Senator Robert Dole (R-KS) noted, the election meant that Ford’s authority would be “sharply curtailed.” It did not help that Ford’s poll numbers were falling, and the Democrats would gain little by following him. But there were two problems for the Democrats: (1) they disagreed on which provisions of the Ford proposal were acceptable, and (2) they could not agree on an alternative. As the New York Times was to comment that March, Democrats’ energy proposals were “hopelessly fragmented.” Probably the two points most Democrats agreed on were opposition to price decontrol and opposition to oil tariffs – both of which Ford threatened to impose by executive order, which led to rapid passage of bills meant to forestall him.35 Price decontrol was not so novel an idea, and in fact controls had been due to expire (after a recent extension) in August 1975, but it was clear that many in Congress were fundamentally opposed to decontrol at any time, and certainly not in 1975. The “madness” of Ford’s proposal was that it seemingly intended to fight rising oil prices by raising them more (although low prices were not Ford’s aim). Democrats appeared far more interested in mandatory rationing than in price decontrol. Senator Robert Byrd (D-WV) said in a television interview that rationing was inevitable; Representative John McFall (D-CA) quoted an article that he also included 34

35

CR, 94th, various dates 1975: “Madness,” Senator Adlai Stevenson III (D-IL), 930; “survival” article cited by Representative John J. McFall (D-CA), 4; “guaranteed,” Representative Charles A. Vanik (D-OH), 474. The tariff was to start at $1/bbl and rise to $3 in subsequent months.

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in the Congressional Record in which quotas and rationing were called the “sensible way to deal with energy.”36 Ford, for his part, raised the ire of many Democrats when he declared that there would be rationing only “over my dead body.”37 Democrats were largely for increasing government control of energy resources. Senator Jackson, the initiator of and leader for Senate Democratic energy proposals, wanted a National Energy Production Board “to mobilize on an urgent basis the material, the manpower and the monetary resources to reduce our energy dependence on foreign nations,” protect small independent producers, “remove bottlenecks,” and essentially manage energy policy through Congress, and most certainly outside of White House direction. Some Democrats wanted even more centralized control, advocating nationalization of all oil and gas companies. Others offered proposals for forced price decreases or in some other fashion to protect consumers from higher energy prices, while at the same time limiting imports. Thus, the tariff was called unacceptable as well as inflationary, and members of Congress scoffed at FEA claims that the cost of the administration’s plan (including all of the various taxes) to the average American family would be only $235 per year. Senator Jackson’s staff put the number at almost four times that amount, and claimed it would increase inflation by as much as 2 percent.38 His view appeared to have the support of at least one leading economist, Charles L. Schultze. The former head of the Bureau of the Budget wrote that decontrol plus energy taxes would raise inflation and probably lead to another recession by 1976 or 1977 (Schultze 1975). But then again, where economics was involved, Congress was mainly confused. Legislators were against a tariff and instead wanted a quota, because, according to Representative Charles Vanik (D-OH), only a quota would allow the United States to “meet the goals of Project Independence without adding inflationary burdens [as decontrol and tariffs would].”39 This was simply wrong. The world price of oil was falling; extracting more oil in the 36

37

38 39

Byrd, comment made on ABC TV, Issues and Answers, Jan. 12, 1975; John McFall, CR, 94th, 154, Jan. 14, 1975. It is notable that a mandatory rationing bill was introduced not by a Democrat but rather by “maverick” Republican Senator Lowell Weicker (R-CT), S. 328, CR, 94th, 988, Jan. 23, 1975; he pointed out that a Newsweek poll showed more Americans (55 percent) preferred rationing to higher gas prices. This became a source of friction between Jackson and the administration given that the Energy Independence Act called for standby rationing authority. Zarb explained it was over his dead body – except in case of a national emergency. The FEA felt that Jackson’s arguments were based on “a number of fallacious and irresponsible analyses.” FPL, memo, Zausner to Zarb, Zarb, Box 4, Jan. 18, 1975. CR, 94th, 5136, Mar. 4, 1975.

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United States was increasingly expensive. If foreign oil is cheaper than domestic oil but is limited by quota, then any increase in demand can be met only by increased (and increasingly expensive) domestic production. The quota system known as the Mandatory Oil Import Program, for example, raised domestic prices 30 percent over world prices but that was not easily discernible to the average consumer. In general, the long-run welfare losses from a quota exceed those from a tariff equivalent and prices are typically higher as a consequence.40 The one political advantage of a quota is its lack of transparency. The immediate impact of a tariff – in the case of Ford’s proposal, a specific $1 to $3 per barrel tariff – is far more obvious than the impact of a quota. Thus, politicians have often preferred quotas to tariffs. Only William Simon, the free market force in the Ford administration, clearly opposed a quota, although his objection was that a quota implied some kind of government quantity regulation, which he knew from experience did not work well. The quota option was contained in a proposal, only barely sketched out, that Democratic Congressman Al Ullman (D-OR), chairman of the House Ways and Means Committee, offered as an alternative to the Ford program. Because the proposal also contained a gas tax,41 Ford considered it the possible basis of a compromise. Ullman was enthusiastic and predicted a major energy bill by the end of April. But many Republicans in Congress were dismissive of the Democrats’ “so-called energy proposals,”42 and even as Ullman was working to create a clear alternative to the Energy Independence Act, others in Congress were going off in different directions. By spring 1975, there were, by the administration’s count, eighteen major energy bills competing for committee attention. It seemed highly doubtful that Ullman’s prediction that some energy bill, a compromise between his bill and the administration’s, would come to pass. One reason for pessimism was the attitude of the Democratic Senate. Among the bills in process was Senator Jackson’s S. 622, originally titled the Standby Energy Authorities Act but to emerge later as the Energy Policy and Conservation Act (EPCA). Jackson introduced S. 622 on February 7, 1975, along with a flurry of other Jackson-sponsored energy bills, numbers S. 617 to S. 623. The intent of S. 622 was to “assure that essential energy needs of 40

41 42

The pernicious effects of U.S. sugar quotas offer an example. At times, domestic sugar prices have been many times greater than world market prices and costly to sugar-using industries. See U.S. General Accounting Office (1993). A rather convoluted tax at that. Consumers would have been rationed a certain number of tax-free gallons per month, with taxes rising the more one consumed thereafter. CR, 94th, 5085, Mar. 4, 1975.

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the United States are met to reduce reliance on oil imported from insecure sources at high prices.” The bill was envisioned as a clear contrast to the “grave danger” posed by the administration’s “ruinous and inequitable” proposal, which would, according to Jackson, “impose draconian Federal intervention in the marketplace”43 and likely sink the country into a depression. Given that Jackson had no intention of relying on the marketplace – energy was to be government managed – this phrase was ironic, albeit apparently unintentionally. S. 622 was reported out of committee in early March and was to be an important part of the ensuing negotiation between Congress and the Ford administration. S. 622 originally had three main threads: standby rationing and other emergency measures, a strict rejection of price decontrol, and the imposition of mandatory energy-efficiency requirements. But Jackson’s presentation of his bill to the upper chamber in early March was quite separated from reality. To Jackson, the United States would save upward of 2.5 MBD by 1985 simply by “focusing the attention of the American people on energy conservation.” There is a sense that such a focus, which included mandatory efficiency rules for homes, appliances, autos, and industrial processes, would be costless, in fact that it would “cut our use of oil and create jobs at the same time,”44 overall helping rather than damaging the economy as Jackson repeatedly charged Ford’s plan would do. In both respects, the amount of energy that could be saved and the cost of doing so, he was either disingenuous or ill-informed. S. 622 was supposed to be a free lunch, a solution without any pain. It was on its face unbelievable, but it clearly had political appeal – as free-lunch arguments often do. In fact, it is fair to say that the main difference between Ford’s plan and Jackson’s was the former was consistent but politically impossible, whereas the latter was absurd but politically desirable, so it would win out in a contest among legislators. Admittedly, some of the expected benefits Jackson cited were based on conservation projections from the FEA, but then the Nixon administration as well as the Ford administration were consistently overly optimistic (or confused as noted in Chapter 1) about how much oil would be saved by such steps as reducing speed limits to 55 miles per hour and by restricting decorative lighting – two elements of S. 622. But in fact, given that prices were still to be controlled and in such a way as not to increase inflation (that is, to keep energy prices artificially low) or cause any economic hardship to the American people, there would be no incentive for people to cut use at all, much less by a projected 15 percent over ten years. 43 44

CR, 94th, 6300-3 Mar. 12, 1975. Ibid., 6298.

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The inflation argument in itself often took strange turns in Senate debates. For example, it was suggested that if there was decontrol, oil prices would skyrocket – which at least seemed to make some sense given that prices had quadrupled the previous winter – but also that OPEC would use that occasion to ratchet up prices even more, sending inflation much higher still. But by that logic, OPEC was depriving itself of billions of dollars that it could get by setting the price at two or even ten times its current level. The argument seemed actually to be that Congress alone, through its tenacious adherence to price controls, prevented OPEC from destroying Western civilization. But the basic congressional argument about inflation was generally wrong in any case. Most senators argued that higher oil prices meant higher inflation, which, as discussed in Chapter 3, was widely believed but largely incorrect. Of course, senators had economists to cite – such as Charles Schultze – to support the view that energy prices could lead to protracted cost-push inflation. But economists were far from unanimous on this even at the time. Senator Robert Packwood (R-OR) introduced an article by economist Barry N. Siegel, who argued that inflation was the result of loose monetary and fiscal policy.45 This view clearly was rejected by senators generally, who seemed to agree more with retired diplomat George C. McGhee, who argued in a piece also read into the Congressional Record, that “the price of oil must come down . . . to avert disaster for all.”46 Although mandatory conservation measures were presented as jobcreating and cost-free, they would clearly have imposed costs on businesses and by extension on consumer prices. Binding efficiency rules would also have required an administrative and enforcement system to monitor compliance and promulgate administrative rules – rules to be based on such vague legislative stipulations as “standards . . . to increase industrial efficiency in the use of energy” and “standards for reasonable controls and restrictions on discretionary transportation activities.” That people would be provided with low-interest loans for home energy repairs to save the cost of artificially low energy prices seemed an inducement without an incentive. Jackson seemed to believe that the country would save huge amounts of energy simply by making people think it was a good idea and by promoting carpooling – another idea borrowed from energy crisis legislation. For all of the manifest shortcomings of S. 622, the Republicans objected mainly to two elements, neither of which were S.622’s complete implausibility. Foremost, Republican senators objected to the provisions that would 45 46

CR, 94th, “A Brief Essay on Inflation,” 424, Jan. 15, 1975. Quoted by Senator Charles McCurdy Mathias, Jr. (R-MD), 426, Jan. 15, 1975.

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have allowed Congress to micromanage all of energy policy. Although Jackson’s proposal gave the FEA and the Ford administration the task of preparing numerous contingency plans, conservation directives, and so on, virtually every plan was to be subject to mandatory transmission “to the Congress for review and right of disapproval.” As Senator Paul J. Fannin (R-AZ) argued, “[S. 622] essentially tells the executive branch to provide overall policy but subjects any proposed policy to piecemeal veto by the Congress and consequently prevents any assurance of workability of any administrative proposal.”47 Fannin foresaw a long-running battle between the two branches of government, leading to high transaction costs with little action actually taking place. Democrats seemed to be incensed that the Ford administration was contemplating the imposition of the tariff and oil price decontrol without congressional approval, and the demand for the right of disapproval over virtually everything appeared to be the result. Fannin also objected to sections in S. 622 that, as he saw it, left firms “exposed” to potential antitrust action even as they appeared to comply with other provisions in the bill. Senator Clifford Hansen (R-WY) said that if by any chance it passed, he would urge President Ford to veto it – which seemed inevitable. But Fannin, like Ullman, offered an upbeat conclusion to his floor remarks, suggesting that he would be willing to vote for some provisions and that compromise might in fact be possible. By March, there were three basic constructions of national energy policy: Ford’s, Ullman’s, and Jackson’s. Some disagreements between the three were clearly unbridgeable, and the Democrats were still at odds with one another as well as with the Ford administration. In fact, although Jackson was able to keep Senate Democrats in line with regard to his version of energy policy (it passed the Senate 60–25 in April), it was much slower going in the House. Some of what Jackson wanted was not part of the House version. For example, Ullman did not rule out relaxation of clean air standards to switch from oil-fired electricity to coal; the Senate was much less inclined to do this. Ullman also did not rule out tariffs (although he only seemed ready to accept the first $1 increment). However, it was not clear whether that was representative of attitudes among Democrats in the House much less both chambers. Ullman’s bill also had a provision for a Federal Petroleum Purchasing Agency, which would buy or at least “administer” the purchase of all of the imports from OPEC in particular and then allocate them through a licensing system to refiners and middlemen. This idea was positioned as an 47

CR, 94th, 6301, Mar. 12, 1975.

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alternative to Jackson’s National Energy Production Board concept.48 The goal of the House bill with respect to import reductions was more modest than Jackson’s: Ullman sought a near-term reduction of 1 MBD; Jackson believed a 1.6 MBD reduction in imports was possible within two years and a 5 MBD reduction could be achieved by 1980. There was, however, some confusion as to just what was being reduced. The Ford administration talked about a reduction of 2 MBD in two years, but reading the fine print, this was really a reduction only in the rate of import growth, so that by 1977, imports would still be 500,000 bbl/d higher than they were in 1975. Of course, the main area of disagreement generally was over decontrol of oil and gas pricing. The administration believed that decontrol of old oil was essential and that it was time to decontrol natural gas as well – although for the time being, Ford was proposing the two-tiered (old, new) system for gas. There was also an administration proposal, pushed especially by Henry Kissinger, for a floor price for oil – to provide in essence a minimum price guarantee for those seeking new sources of oil. To Kissinger, the floor price required worldwide acceptance; he was unable, however, to get acceptance even in the United States. In fact, both two-tiered gas pricing and the oil floor concept were generally rejected by the Democrats in both houses – many of whom wanted both the retention of price controls and a rollback in the price of oil as Jackson had called for the year before. Still, there were areas of agreement: a strategic petroleum reserve of somewhere between 500 million and 1 billion barrels of oil; conservation measures including auto efficiency standards, and taxes of some kind on inefficient cars, so-called gas guzzler taxes; incentives for home weatherizing; no rationing but standby rationing authority. Both the administration and Congress deemed a windfall profits tax on oil companies absolutely necessary, although the administration seemed to feel this was a political necessity, whereas Congress saw it as a moral issue.49 Nevertheless, there seemed to be enough areas of agreement that an energy bill of some kind was entirely possible. Early on, Ford tried to be conciliatory. In January, after he announced his intention to impose oil tariffs, Congress passed a resolution suspending the president’s right to do so for ninety days. Ford vetoed the bill and imposed the first $1/bbl tariff, but he postponed further increases (to the 48

49

At the same time, Representative Donald Fraser (D-MN) sought through his import bill, the Purchase Authority Act, to make FEA directly “responsible” for all oil imports after October 1, 1975. Although admittedly moral fervor and political fervor were sometimes hard to clearly separate.

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planned $3/bbl), and he promised to take no immediate unilateral action on oil decontrol. He announced an intention to give Congress a plan for phased decontrol by May – inviting Congress in turn to offer an alternative at that time. Even though Democrats were clearly wary of decontrol, Ford pushed ahead and had the FEA develop a two-year phaseout plan. This became public knowledge on April 30, and House Democrats quickly expressed their disapproval. Still, the House Commerce Committee came up with a new energy bill, H.R. 7014 (the Energy Conservation and Oil Policy Act), that responded positively. It included a four-year control phaseout and a windfall profits tax – both ideas in Ford’s program as well. Because it was endorsed by some of the committee’s Democratic majority, H.R. 7014 appeared to leave House Democrats and the administration within reasonable bargaining distance of each other, except for one detail: although the committee voted in favor, many Democrats were staunchly opposed. Freshmen such as Andrew Maguire (D-NJ) were adamant. “We’re going to fight this all the way,” he said. To Democrats, price controls had been functionally transformed. Originally, controls had been intended as a temporary measure to fight inflation but were now depicted by supporters as the only thing standing between consumers and rapacious, potentially monopolistic oil companies in cahoots with OPEC.50 Exactly what theory had invested controls with such sweeping beneficial power was never made clear. Although it was true that world oil prices had been manipulated by OPEC, it was also true that one of the most important market manipulations was price control itself, because the policy kept prices low, discouraging both investment in new production and conservation. In fact, the Democrats’ narrative about controls was even then obviously incorrect. As Henry Kissinger noted in a speech, the high OPEC price was stimulating considerable oil exploration outside of OPEC where “vast reserves” were now being discovered, potentially lowering prices and reducing OPEC’s market power. The United States was a laggard in this process. It was true that the United States had freed the price of “new” oil as an inducement to join the world oil rush, but as explained in Chapter 1, the two-tiered control system had perverse incentives built into it. Moreover, Congress seemed determined to create more disincentives for new production by ending the depletion allowance and imposing windfall taxes, meaning the tax burden would be much higher for domestic producers. 50

Indeed, many of Maguire’s fellow freshmen, the Watergate “class,” seemed more concerned with breaking up the oil companies than with (at least as they saw it) boosting their profits.

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Still, Ford tried for decontrol again in July, suggesting a thirty-month decontrol process and offering to set a near-term ceiling price of $13.50/bbl for “new” oil as a way to keep a lid on inflationary pressures. This effort at conciliation was denounced by Democrats and led to two House “disapproval” resolutions. Ford responded with a second compromise proposal, this time to extend the decontrol process to thirty-nine months, along with a ceiling price of only $11.50, a nod toward a rollback of oil prices that Democrats had sought for eighteen months. The price for “new” domestic oil at the time was $12.75, in line with world market prices, so Ford was essentially agreeing to a 10 percent rollback as a way to begin decontrol of old oil. Congress responded by passing H.R. 4035 that called for extending all controls through the end of the year and contained a price rollback for new oil to $11.28/bbl, the level on January 1, 1975. The bill passed 239 to 172 in the House and passed the Senate as well. Ford vetoed it, and it was clear from the numbers that it would not be overridden. There was clearly an impasse. Representative John Anderson (R-IL) put the blame on his colleagues, claiming that Ford had offered compromises “once, twice, three and four times” – only to be rebuffed by Congress.51 But many Democrats could not see compromising on decontrol, a step that would “raise domestic fuel prices higher than world prices to show just how ‘independent’ we can be.”52 House Democrats voted to disapprove of Ford’s latest decontrol plan, but only by a vote of 228 to 189. The debate over decontrol continued to reflect the ignorance combined with hubris that was a feature of legislative energy policy debates throughout the 1970s. Notably, legislators spent considerable time and effort arguing over the question of just what the price of oil should be, and presumably to demand that it be set there. There was continual discussion over ceiling prices and possible floors, and if the price of old oil was gradually decontrolled up to the ceiling, should the ceiling for new oil be brought down so they could meet somewhere in the middle. There were some claims about there being a true price of oil – based on the marginal cost of production – and whether prices should be forced to those levels. Implicitly, this was a market failure argument, and because there were apparent monopolists – OPEC countries – reducing production to hold prices high, it could have been sensibly argued that world market prices were above a competitive equilibrium. 51 52

CR, 94th, 25871, July 30, 1975. Representative Herbert Eugene Harris II (D-VA), CR, 94th, 25870, July 30, 1975.

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But did that mean that government-mandated prices actually solved the market failure problem, or were they likely to make things worse? That is, unless Congress or the FEA knew where a market clearing price was supposed to be, they could never be sure that any floors and ceilings would not have negative consequences like those in 1973–4. Presumably, if new exploration would be substantial enough and prices were decontrolled, there would eventually be a competitive equilibrium – unless OPEC really did have all remaining supply and exporting countries never cheated on their agreed-to output limitations. As Kissinger had noted, the first assumption was already being disproven. In time, it would be shown that the second condition was incorrect as well. While Democrats continued to denounce Ford’s decontrol plan, their alternatives (Ullman’s and Jackson’s) languished in committees. Most of what Ullman had called for initially was dropped from House consideration; H.R. 7014 (sponsored by John Dingell D-MI) became the basis of House energy policy, but it too was worked over in various committees, leading to removal of some of its provisions including any windfall profits tax. To get something done, Ford, according to de Marchi (1981b), lost his “resolve” and began to give way on numerous issues; he agreed to drop import duties and to work out legislation to protect independent producers and farmers, the latter through standby propane allocation controls.53 By fall, the House and Senate had begun tying together pieces of Jackson’s S. 622 and H.R. 7014. On August 31, price controls lapsed, but in the spirit of compromise, Ford extended them, and he would do so again as an agreement neared. A version of 7014 passed the House in September, but in conference with the Senate, the final bill was given Jackson’s number (S. 622) and a new title, the Energy Policy and Conservation Act (EPCA). Debates over the right ceiling prices made up much of the discussion with many complicated formulae suggested along the way. Jackson wanted adjustments so that the result would be a composite price of all oil (that is, a weighted price of old and new oil) of only $7.55/bbl; he would allow upward annual adjustments for inflation (limited to 6 percent) plus another 3 percent (maximum) to encourage development of high-cost production such as that in Alaska’s Prudhoe Bay. The administration was not far behind, starting at $7.96 but settling for $7.66; there would also be allowable adjustments each year. This elaborate haggling over prices may have conveyed an impression that careful thought was accorded the issue of oil prices, but had that been 53

In fact, archival records show that he was seeking a compromise about a month after he submitted his plan to Congress.

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the case, they would have admitted that there were only artificial bases for choosing any one number over another, especially when the deal hinged on eleven cents. The effort thus appeared entirely political. On what basis does a political body decide on what price is correct? What looks best to the average voter, or perhaps what key interest groups are willing to accept. Admittedly there was a concern in Congress about sudden price movements, and it could be argued that the damage had already been done years before, simply because price controls had been imposed and had been maintained for so long. Now, the goal should have been to unwind them just as quickly but with as little chaos as possible. Yet, the only virtue in the final bill was that it did appear to lead to the end of most price and allocation controls. The bill directed the president to begin the process of price decontrol piecemeal, with Congress given a fifteen-day disapproval window before such steps would be made permanent. The bill extended the decontrol process to forty months. The EPCA was much more flexible on allocation decontrol (except as concerned crude oil). Those controls could be dismantled without congressional review and disapproval processes. The bill also contained various types of standby authority in case of another embargo or other crisis, and it provided authority for the conversion of oil and natural gas burning electric power plants to coal. The pricing issues and decontrol were viewed by both Ford and Congress as the essential elements of the EPCA, but there were two other features of the legislation worth noting, because they are among the few measures from the 1970s to have lasted into the next century. The EPCA created the Strategic Petroleum Reserve (SPR) and rules about automobile gasoline mileage efficiency, Corporate Average Fuel Economy (CAFE) standards. The former was intended as an insurance policy against another embargo, the latter a visible effort at a modest amount of conservation. Both of these provisions were, and have remained, popular; CAFE standards, in particular, are an apparent conservation success story. In 2007, for example, when gasoline prices spiked, 86 percent of respondents favored higher gasoline mileage standards embodied in CAFE. But CAFE standards are popular in part because they are a way for politicians to pass off the responsibility for conservation to the auto manufacturers without apparently burdening consumers. The standards have required that the manufacturer’s entire line of cars (its fleet) have a given mileage on average so that carmakers can produce a mix of high- and lowmileage vehicles; consumers can (and do) buy the high-mileage cars when gas prices are high and the low-mileage cars when prices are low. But then

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what really motivates conservation are high prices of gasoline.54 In fact, higher CAFE standards seem to induce more driving, especially when gas prices are low, suggesting that it has had a more limited impact on conservation than is often thought. Indeed, efficiency standards may even lead to no real reduction in total energy consumption, because of the so-called rebound effect in which efficient usage lowers the implicit price of energy so that people have an incentive to use more of it – conceivably even more than they would have with less efficient technology55 (Greening et al. 2000; Herring 2006; Sorrell 2009). Price effects appear more potent than standards in lowering consumption (Kliet 2004; Austin and Dinan 2005). A memo to Greenspan from the FEA noted that Italy, which had a gasoline price triple that of the United States, had double the fleet average (suggesting a long run price elasticity of demand for gasoline around 0.5).56 A Congressional Budget Office (CBO) study in 2004 found standards (i.e., CAFE) far less efficient than prices in creating incentives for lower consumption. This should not be a surprise: it is clear that in countries with high gasoline taxes (and so consistently high prices), the average fuel economy of the auto fleet is much higher than in the United States. Moreover, the CAFE fleet requirement probably put American car makers at a market disadvantage, forcing them to produce cars at times that they could not sell at a profit. The CBO study also argued that CAFE standards probably reduce social welfare in other ways – for example, because of added driving, worsening traffic congestion, and an increasing number of accidents. The Strategic Reserve has also had its critics (Taylor and Van Doren 2005). There is no question that it has been an economic drain. The government has tended to buy oil at high prices and then just store it, presumably to release in the event of another embargo. The rationale in the SPR rested in large measure on the belief that the Arab embargo caused the gas lines 54

55

56

According to Crabb and Johnson (2010), CAFE standards are also ineffective in encouraging innovation in automotive technology. High prices, on the other hand, appear to provide incentives for technological development. This is sometimes called the Jevons Paradox, after the economist William Stanley Jevons who proposed it in 1865. Where consumption is greater as a result of efficiency (a rebound of more than 100 percent), it is termed a “backfire” effect. There does seem to be some evidence of backfire with respect to certain kinds of use. Overall, estimates of economywide rebound are between 30 and 50 percent, but these studies are inconclusive. See Sorrell 2009. FPL, memo Roger Sant to Greenspan, Schleede, Box 19, Nov. 14, 1974. (Sant was assistant FEA administrator.)

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and that a future embargo would threaten U.S. ability to conduct foreign policy and be catastrophic for the U.S. economy. That has not been tested since the SPR was created. Still, the oil sits in storage. There have been a few drawdowns, but the emergencies have typically appeared to involve the election prospects of incumbent presidents and legislators and not a national energy crisis. It may be argued that the SPR, whatever its cost, has been useful as an insurance policy; that is, the existence of the SPR has made people less concerned about exporters wielding the oil weapon. Indeed, there are some scenarios, such as internal strife in Saudi Arabia or war disrupting the flow of oil in the Persian Gulf, in which the SPR might need to be extensively utilized.57 Still, like most insurance policies, it has come at a cost, arguably one that is disproportionate to its value. President Ford was at most lukewarm to the EPCA when it crossed his desk for his signature, and many of his aides were adamantly opposed. Treasury Secretary Simon wrote an eight-page memo to Ford begging for a veto. More than anything else, he disliked the interim $7.66 composite pricing provision. Greenspan forecast that at the end of the forty-month phaseout of controls – which was still in the bill – Congress would vote to reinstate controls anyway. The CEA chairman complained that “this Bill reverses, and will be seen to reverse, the administration’s fundamental policy of decontrol to achieve vital national goals.”58 Mail to the White House was “overwhelmingly against the bill . . . 3650 for veto and 50 for signing.”59 Syndicated columnists Jack Anderson and Les Whitten reported that the oil industry was vehemently opposed to S. 622, and thought that Zarb should be fired for not putting up a bigger fight. Some Republicans in Congress also urged a veto. Wrote Senator Pete Domenici (R-NM), “[S. 622] is, in my opinion, worse than the two-tier regulations that we have had in the past.”60 But Ford was persuaded to sign; Zarb argued that what EPCA did have – notably, eventual oil decontrol – was better than simply continuing 57

58 59 60

The prolonged disruption of Saudi oil is discussed in a paper from the Heritage Foundation, Apr. 9, 2012, “Thinking the Unthinkable: Modeling a Collapse of Saudi Oil Production.” It should be noted that although the SPR holds sufficient oil to meet the entire demand of the U.S. economy for about two months, the rate at which oil could be removed is a little more than 4 MBD and so would supplement domestic and other local (e.g., Canadian, Mexican) supplies – and could do so for six months. FPL, memos Greenspan to Zarb and John Hill, Nov. 25, 1975; Simon to Ford, Dec. 8, 1975. Both CEA (Greenspan), Box 44. FPL, memo Schleede to Jim Cannon, CEA (Greenspan), Box 44, Nov. 26, 1975. FPL, letter, Schleede, Box 31, Nov. 20, 1975.

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with the present system. But what had all the bill writing and haggling actually produced? A White House “Fact Sheet” issued at the signing touted the bill for allowing decontrol of some products (although not crude oil) quickly and eventual oil decontrol. The sheet projected a reduction of 1 MBD after decontrol took effect – that is, unless Greenspan was right and Congress would rescind it.61 But in reality, a bill that started as the Energy Independence Act ended up being an assortment of politically palatable bland half-measures with little that would increase supply or reduce demand. The forty-month decontrol plan was indeed a step that should have made energy pricing and allocation more sensible, but the administration continued to have excessive expectations over what it would accomplish. In a memo to Ford while the Energy Independence Act was being drafted, Zarb argued that decontrol would lead to much more production and much more conservation, enough in fact so that by 1985, we could be “self-sufficient and thereafter do even better than that.”62 The scenario Zarb envisioned was contradictory. Decontrol would mean oil prices would go up; consumers would conserve; oil companies would produce; the United States would mostly exit the world oil market; OPEC would lose pricing power . . . but then, of course, world prices would go down. The only way for the United States to have prevented that scenario would have been to impose high permanent taxes on gasoline and other fuels. Ford’s original proposal for tariffs and excise taxes would have been insufficient, but then they were rejected out of hand by Congress anyway. Many legislators rejected the notion that higher prices would induce anything other than higher oil company profits. Representative Christopher Dodd (D-CT) argued that supply would be unaffected. “There is no meaningful evidence to show that complete decontrol of oil prices will necessarily spur oil exploration and production.”63 Jackson meanwhile debunked the notion that demand would fall. Some in Congress, like Al Ullman, did believe in a price response and favored high gasoline taxes, but Ullman’s position was also rejected; most of his colleagues considered any talk of gas taxes as political suicide. By keeping prices low, by encouraging modest conservation, EPCA added up to a bill that would at best achieve little but might lead instead to the opposite of what was intended. Put another way, most of Congress believed that you could impose conservation at a time you forced 61 62 63

FPL, Duval, Box 6. FPL, memo Zarb to Ford, Schleede, Box 31, Dec. 27, 1974. CR 94th, 25879, July 30, 1975. There were also restrictions in the bill on Outer Continental Shelf drilling, which meant that, to some extent, new exploration and production would be kept down by Congress, not by the effect of decontrol.

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prices to be low, whereas the administration believed that free prices were identical to soaring prices and that this would induce all sorts of positive effects. Either way, the EPCA was a recipe for failure. As Senator Robert Packwood (R-OR) would later say, “The energy bill [EPCA] . . . was worse than no bill.”64 As problematic as the EPCA was as a whole, perhaps the most perverse aspect of the bill was its assistance – as was typical in energy legislation – for small producers and refiners. Although the bill was intended to protect small businesses, it instead created incentives for operations to be small. That is, new refineries were built below a minimum efficient scale to take advantage of preferences in the EPCA, which in turn led to higher costs per unit of output than they would have been if refineries had been larger. According to an article in Fortune, during 1976–7, of thirty-six refineries built in the United States, nineteen were “small.” Apparently this contributed to the shortage of unleaded gasoline in the summer of 1977, because many of these refineries were not equipped to produce it (de Marchi 1981b, 513). It should be noted that the administration also pushed decontrol of “new” natural gas. But that effort failed in the House of Representatives; House Democrats were only willing to release prices for, as always, small producers. But even compromise measures that might have led over the long term to more market-oriented pricing were defeated. The FPC did raise the price ceiling for new gas in 1976, both to provide incentives for new production and so that natural gas pricing would be similar on a per-unitof-energy basis to the price for heating oil. Because these were considered substitutes, the FPC attempted to make sure that pricing policy was not distorting the market (even though the FPC price setting inherently distorted the market). But then all the talk of pricing with respect to natural gas was overwhelmed by a much greater concern. The reserves of natural gas, which had been falling, continued to do so. To many forecasters, the U.S. supply of natural gas was due to disappear and soon. Thus, 1975 came to a close with lots of talk but little accomplished on energy. Ahead was a presidential election year. Energy was certain to be an issue. Although in general it was thought that not much could be done in an election year, Ford decided to test that. Even before the new year began, Ford offered another plan, and it was one that was far more dramatic and more far-reaching than anything that had been on the table in 1975. 64

Senate Hearings of S. 2532, The Energy Independence Authority Act of 1975, Senate Committee on Banking, Housing, and Urban Affairs, April 1976, 15.

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4. The Energy Independence Authority The Energy Independence Act was ironically named because in no sense was it a way to achieve energy independence, nor could the final EPCA have managed it either. Nevertheless, the Ford administration still contemplated that goal. An impressive scheme was in the works well before the EPCA was passed, a scheme that in fact could possibly have reduced consumption of foreign oil significantly. Vice President Nelson Rockefeller headed a task force that put together the basic package, although the scope had been suggested by a study in 1974 by the National Academy of Engineering. That study argued that an effort at self-sufficiency would be monumental, requiring the doubling of coal production and a thirteen-fold increase in the number of electric power stations. Total capital spending would be on the order of $490 billion to $610 billion (about $2 trillion to $3 trillion 2011 dollars). The study group, led by Robert Seamans, Jr., head of the National Academy (and later director of ERDA), and Bechtel Corp. Vice President W. Kenneth Davis, made it clear that it was not recommending this but merely suggesting just how great an undertaking a real Project Independence would be. In late 1974, Congress passed S. 1283, Henry Jackson’s $20-billion-overten-years RD&D legislation. But as discussed in Chapter 1, exactly what it was supposed to accomplish was left vague. Although the “Congressional statement of findings” noted the “urgency of the Nation’s energy challenge” requiring something like the “Manhattan and Apollo projects,” the legislation was completely nonspecific as to what the money would be used for. Unlike the unambiguous Manhattan and Apollo programs, S. 1283 called merely for “a comprehensive national program” – to be determined at another date. Actually, the bill seemed to follow the logic expressed by Henry Kissinger that spending $20 billion over a decade on research was “certain” to lead to breakthroughs of some sort “sooner or later.”65 The National Academy study focused on development, not research, but in light of it, the $20 billion seemed too meager. There were, it should be noted, some flaws in the engineers’ analysis. For example, they argued that after 1985, the demand for energy would be even greater and “everrising,” apparently regardless of its price.66 But the gist of the report – that 65

66

Kissinger speech to the National Press Club, Feb. 3, 1975, U.S. Department of State, Bureau of Public Affairs, release. This was a view apparently shared by most of the American public. A Harris Poll, found that Americans, by a 2-to-1 majority, believed a technological breakthrough would obviate the need for a large-scale conservation effort. Op-ed, Denis Hayes, “The Case for Conservation,” New York Times, April 19, 1977 , F14. “US Energy Aims Called High Cost,” New York Times, May 17, 1974, 53.

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any program that actually attempted energy self-sufficiency would cost hundreds of billions of dollars – was clearly and persuasively argued. Rockefeller seemed to take this as a challenge, and his task force considered how to make a program for self-sufficiency a reality. It was to be called the Energy Independence Authority or EIA. Most histories of energy of this period treat the Ford administration proposal for the EIA only in passing. After all, it never went far in Congress and was widely criticized even by most of Ford’s fellow Republicans. If Ford felt unable to get the elements of the Energy Independence Act passed by Congress, it would be next to impossible for the legislators to take seriously an act that was really intended to produce something like energy independence. Yet, the EIA and its reception seems in retrospect an important moment in the history of U.S. energy policy – the moment when people in and out of government realized briefly and with dismay just how difficult and expensive the task would actually be. That it was rejected out of hand, could not even engender some sort of legislative compromise, illustrated its essential impossibility. Ford’s charge to Rockefeller in the spring of 1975 was to “put together a program that . . . [could] shape the nation’s energy policies for the rest of the century.”67 Rockefeller asked the Domestic Council, which he headed, to analyze various major energy proposals and identify five that were unable to advance because of financial market failure. The premise itself was disputed by the staff energy economist for the CEA, who argued that the problem was not capital market failure, but rather government failures: bad regulation, uncertainty about the future, projects undertaken prematurely, and so on. He suggested also that a massive inflow of government lending (if this was to substitute for the capital market) would only induce greater inefficiency (de Marchi 1981b). But Rockefeller pressed ahead, hiring his own advisor, Wall Street investment banker William Donaldson, cofounder of the firm of Donaldson, Lufkin, Jenrette. Then, Rockefeller transferred the planning authority to the Energy Resources Council, with the intention to not let White House aides “cut [me] off” from access to Ford.68 The goal as it evolved among Rockefeller’s team was to create a federal corporation to provide financing that major energy projects lacked (that at the same time would reduce 67 68

Quote is a paraphrase in “Rockefeller Making an Impact on Policy,” New York Times, Sept. 27, 1975, 1. The ERC included Treasury Secretary William Simon, who became a vocal foe of Rockefeller’s plan – notwithstanding the fact that much of the business of the EIA was to have been conducted through the Treasury Department.

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unemployment, which stood at around 8 percent). The corporation, originally named the Energy Resource Finance Corporation (ERFCO), would have at its discretion $100 billion, $25 billion in government-owned equity and $75 billion in government-backed borrowing authority, to be utilized over the ensuing decade on major energy projects.69 Actually, the funds would be dispensed over the first seven years; the corporation would expire after ten, presumably with its work done. ERFCO was to work like the Depression-era Reconstruction Finance Corporation (RFC) or like Rockefeller’s New York project, the Urban Development Corporation (UDC). It would mainly loan the money to private interests ready to undertake risky energy projects such as synfuels plants or nuclear power operations; alternatively, the corporation could undertake projects on its own and then find private buyers or leasees once the business was up and running. Yet, the magnitude of the effort was daunting; at a time when the entire annual federal budget was around $400 billion this was, even spread over several years, a staggering sum.70 Rockefeller made his pitch to the White House in August, initially suggesting a $120 billion plan that Zarb tried to knock down to $75 billion. Later, they settled at the $100 billion mark. Ford was at first skeptical and in August 1975 was quoted as calling the plan “vague.” Moreover, many of his key aides were hostile to the idea. Treasury Secretary Simon, after some initial enthusiasm when he heard about the project in May (it “could greatly strengthen the President’s plans for moving toward self-sufficiency”), expressed “grave reservations” by July.71 CEA chair Greenspan and OMB head James Lynn were against it. A leaked memo from Greenspan warned that such a “virtually unconstrained” organization would have a “large potential for real or perceived corrupt practices.” White House Chief of Staff Donald Rumsfeld called the proposal “seriously deficient.”72 On several occasions in the late summer and fall 1975, opponents thought they had persuaded Ford to resist Rockefeller’s scheme.73 Instead, in September, Ford endorsed 69 70

71

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Rockefeller originally thought ERFCO would need $200 billion. It should be noted that energy industries expected to invest at least $600 billion of their own funds in that time, but all of those were projects – such as conventional coal-fired power plants – for which the capital markets were prepared to provide the funds. Rockefeller’s scheme was to finance highly risky, uncertain ventures in new technologies that would not be able to find financing in the markets. WSP memos: “Greatly strengthen,” Simon to Rockefeller, May 7, 1975; “grave reservations,” Simon to L. William Seidman (Assistant to the President for Economic Affairs), Drawer 13, July 1, 1975. FPL, memo Rumsfeld to Cheney, Cheney, Box 5, May 24, 1975. “Mr. Ford’s $100 Billion Elephant,” Wall Street Journal, Sept. 30, 1975, 24.

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it, calling it a “dramatic crash program,” likening it to the Manhattan Project and the Apollo program. It would, Ford asserted, make the U.S. energy independent in ten years “or less,” and like all dubious energy projects was touted as a way to generate “American jobs.” To the apparent dismay of his aides, the corporation, now renamed the Energy Independence Authority (EIA), had Ford’s full backing. Then again, something like the EIA was the only apparent way out of the policy conundrum: how to get to independence and, by calling costs “investments,” without apparently imposing a great financial burden on the American people. There was, of course, reason for skepticism about the EIA in principle, but mostly the skepticism focused on Rockefeller’s specific proposal. The comparison to the UDC was one. The New York agency had in fact recently declared itself effectively bankrupt. Officials also had questions about EIA oversight, auditing, decision making, and so on. Still, Ford had some reason to hope that he might have some Democrats on his side. The program was likened to Henry Jackson’s idea for a National Energy Production Board to direct energy development, albeit somewhat less intrusive in the market than the organization Jackson had envisioned; as of the end of 1975, with the EPCA now law, Ford believed that he could again achieve some kind of compromise. In fact, Jackson was just at that time also backing a plan to provide $6 billion in loan guarantees specifically for synfuels – a start toward EIA, perhaps. But the bill, which was introduced in the Senate in November, came under attack from just about everyone. Western governors meeting at a governors’ conference thought the EIA was too heavily oriented to production, not conservation. Members of Congress weighed in. Representative Henry Reuss (D-WI) called it “Fiscally irresponsible and susceptible to political manipulation.” Senator Edward Kennedy (D-MA) not only attacked what he considered the subsidies to big business but also decried the lack of a congressional veto once the EIA was running. In the House, members from both parties attacked it. Representative Joe Evins (D-TN) saw it as a measure to “expand the already significant control over energy sources” by big business and especially big oil.74 Representative Jack Kemp, a Republican from Rockefeller’s home state of New York, said it should “never see the light of day” because “the rhetoric about what is intended . . . is so transparently at odds with the realities of what will happen.”75 The impression overall was highly negative. As an unnamed Democratic staff member put it: “[T]he 74 75

CR., 94th, 2461, Feb. 4, 1976. CR, 94th, 33790, Oct. 23, 1975.

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authority does not stand a chance” of passage. The New York Times reported that there was so much opposition people on Capitol Hill wondered what possessed Ford to recommend it. It seemed especially puzzling in light of Ford’s generally noninterventionist stance on other matters – including the bailout of New York City, which prompted the famous New York Daily News headline, “Ford to City: Drop Dead.”76 But Ford persevered because he appeared committed to the idea of energy independence, his political inheritance.77 As Title I of the bill put it: “The achievement of energy independence for the United States by 1985 and the long-term security of energy sources and supplies are essential to the health of the national economy, the well being of our citizens and the maintenance of national security.” With the money, the government would be able to fulfill the plans outlined by Ford in his 1975 State of the Union address. “Within the next 10 years, my program envisions: 200 major nuclear powerplants; 250 major new coal mines; 150 major coal-fired powerplants; 30 major new [oil] refineries; 20 major new synthetic fuel plants; the drilling of many thousands of new oil wells; the insulation of 18 million homes; and the manufacturing and the sale of millions of new automobiles, trucks, and buses that use much less fuel.” Synfuels would be clearly a big part of that because, according to an interagency task force study in June 1975, synfuel demand during the 1985–95 decade would be in the range of 1 to 9 MBD (dependent on the price of conventional oil). Other high-tech projects, such as floating nuclear power plants, were also envisioned to be recipients of these loans.78 But after the fifty-four-page EIA bill was submitted, despite lobbying by Rockefeller, which included an op-ed in the New York Times in February, the EIA proposal never got out of committee. Faced with the real cost of even approaching the holy grail of energy independence at a time when energy was a less urgent issue, Congress was having no part of it. EIA was also a poorly presented piece of legislation and had the distinction of having both consumerist Ralph Nader and economist Murray Weidenbaum (who had been assistant secretary of the treasury under Nixon) testify against it at Senate hearings the following spring. (As Weidenbaum said, “I am almost uncomfortable agreeing with [Nader] so much on this subject and no doubt vice versa.”) The former called the bill “The Energy Cartel Subsidy Act . . . a 76 77

78

In fairness, that was headline copy; Ford never said it. In fact, even the EIA was not expected to bring true self-sufficiency by 1985. It would only fulfill the narrow idea of “limited vulnerability” by 1985 with self-sufficiency (perhaps) by 2000. This was considered a way for nuclear plants to avoid land siting and environmental problems (Selfridge 1976).

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massive boondoggle” for the benefit of the nuclear power industry and the oil companies. Weidenbaum was almost as harsh, although he focused mainly on the shortcomings of the proposal. He pointed out that there was “no indication that [the EIA] will result in any increase in domestic production” and seemed mainly to bypass the one kind of incentive that might induce conservation: higher energy prices through taxes. Weidenbaum suggested a sixty-centper-gallon gasoline tax, with some of this rebated through reductions in income taxes. Weidenbaum reminded the Senate committee that, yes, this was like the Reconstruction Finance Corporation, which by its end had become mired in scandal, as Greenspan feared this would be. Although Weidenbaum was for R&D funding, the EIA would go far beyond that, and, given the nature of its proposed charter, the agency might well end up owning many of the projects it would finance. That is, by 1985, when the program was finished, the federal government would find itself in the commercial energy business, operating who knew what, not the kind of activity government typically did with any success. Perhaps Weidenbaum’s most potent argument, however, was that the program was really quite amorphous. There was no particular result anticipated except “energy independence,” which was becoming essentially meaningless, and there was no reason for the amount Rockefeller had asked for. The number $100 billion, an apparent compromise between numbers Rockefeller and Zarb first named, seemed to come from nowhere. “Why $100 billion? Why not $50 billion?” Weidenbaum asked. “The only reason I can see for $100 billion is that it’s a nice round number.” He noted that former Commerce Secretary Peter G. Peterson in earlier testimony had suggested lopping off the last zero, making it $10 billion. Weidenbaum suggested that Congress should “knock off the first integer” instead.79 Even the capital market failure argument seemed weak. As energy policy expert William Johnson (1976) noted, an EIA bond issue of $75 billion might itself distort the capital markets. This was answered by Zausner, who suggested that perhaps the Treasury would itself buy up all the bonds. His suggestion made matters worse because it seemed to contradict the basic concept of the EIA, which would sell bonds for difficult projects to the private sector – but with government guarantees.80 Johnson, who had worked in the government, also doubted that officials would be capable of judging the value or feasibility of the projects they were asked to finance. 79 80

Testimony, Senate Hearings of S. 2532, The Energy Independence Authority Act of 1975, Senate Committee on Banking, Housing, and Urban Affairs, April 1976, 388–91. Chapter 1 in Murray (1976, 6).

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He noted that the FEA had readied a plan to make service stations post the lead content of diesel fuel as it did regular gasoline. But before it was to go into effect, the FEA learned that in fact diesel fuel did not contain any lead. Officials had not understood what went into a basic fuel; how could they be expected to judge a new technology? In the end, Johnson claimed that the only reason for the FEA itself was that the government really did not have any idea of what to do on energy, and “when politicians do not have solutions, they create organizations to find solutions.”81 The EIA did have its supporters. John W. Simpson, head of the Atomic Industrial Forum, expressed somewhat qualified support as did several others, who testified before the Senate Committee on Banking, Housing, and Urban Affairs. But it was clear that the committee was itself quite unenthusiastic about this idea. As the committee chairman, William Proxmire (D-WI), put it to Vice President Rockefeller, “Mr. Vice President, I hope you can explain to us why this isn’t just another Albany Mall on a $100 billion scale.”82 Not only did the bill never go anywhere, it also seemed to sour the prospects for any bill that dealt with loan guarantees for demonstration projects. The $6 billion synfuel loan package that Jackson had supported did pass the Senate and reach the House floor but only after it was trimmed to $4 billion. There it was cut again to $3 billion, but it failed anyway. It was seen by some as just a ruse in any case. As one congressman put it, the program was “the camel’s nose under the $100 billion tent,” a stealth way to the EIA. The synfuels loan bill was defeated in the House by a single vote. There was little likelihood that by the summer of 1976, there would be any chance of passing energy legislation. The presidential campaign had begun, and a Democratic Congress was not interested in accommodating a Republican president. In the meantime, the FEA’s existence was in doubt because its statute called originally for its dissolution in August 1976, and in fact, it temporarily went out of existence; Ford had to reconstitute the FEO for a couple weeks until Congress agreed to an extension through July 1977. The Democrats’ choice for president, Jimmy Carter, criticized the array of energy offices – the FEA, the FPC, ERDA – and promised if elected to abolish all of them and fold their responsibilities into a cabinet level energy department, an idea that Nixon had proposed even before the energy crisis of 1973–4. 81 82

Ibid., 18. Hearing Apr. 12, 1976, 2.

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During the campaign, the energy issue that worried the Ford administration most was a report that OPEC planned a 10-15 percent price hike— an event that would have been ill-timed for Ford’s reelection. Secretary Kissinger, in fact, erupted in a rage over this issue at a staff meeting where he rumbled that the only thing Arabs understand are “threats and promises” (U.S. Department of State 2012, 377). Energy, however, played a role – albeit a less than central role – in the campaign. Ford blamed Democrats in Congress for failure to pass most of his energy initiatives; Carter blamed Ford for the fact that the United States did not have “a comprehensive, long-range, understandable energy policy.” Carter called for more conservation, more use of coal (in an environmentally responsible way), and development of new sources, especially solar energy. Ford backed decontrol (which Carter largely opposed) and still seemed to want something like the EIA. But the general consensus was that energy issues “failed to capture the interest of the electorate” (Cochrane 1981, 547–8). Ford had accomplished little with respect to energy policy. The EPCA, as noted, had a few elements that have endured, although that endurance has not necessarily been to the country’s benefit. But the failed effort at the EIA was actually the most notable energy policy story of Ford’s presidency. Although de Marchi (1981b, 545), for example, dismissed the EIA as just a “flamboyant gesture” like Project Independence, and not a serious energy policy proposal, it was different from Nixon’s idea in a crucial way: Nixon had assumed, much as Henry Kissinger later suggested, that if the United States spent $10 billion on new technology research, breakthroughs would happen sooner or later. Project Independence was indeed the politics of gesture based as it was on an assumption that future achievement would occur on no grounds other than the fact that the United States had managed wondrous engineering feats in the recent past. But the EIA was a more honest reckoning about the magnitude of the resources that would be needed to make the explicit goal of policy anywhere close to reality. Ten billion would not be enough, nor would twenty or fifty, and probably not even 100. There were no quick fixes, no cheap routes (although, as noted, loans could allow politicians to claim costs as investments), actually no ways to solve the conundrum to make energy cheap and the U.S. self-sufficient at the same time. Yet, that fact, like the EIA itself, often appears to be forgotten. Consequently, other presidents have proposed much the same sort of thing as the EIA and, in times of perceived crisis, have even gotten something like it passed.

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Neither the Ford administration nor Congress addressed the more fundamental question: was the goal of self-sufficiency worthwhile? It had just been assumed since 1973 that the goal was correct, because of the embargo. But the embargo was over, and a realistic assessment would have been that the worst effects were the result of U.S. price and allocation controls. But the mystique of an energy “independence” policy became the legacy that all successors had to follow. Jimmy Carter, president of the United States as of January 1977, would craft what he considered a complete energy policy, one more expansive and expensive than the EIA. Carter succeeded in seeing his plan become law because it was advanced in a crisis atmosphere where the demand to “do something” had reached a high point. The Carter experience, detailed in the next chapter, should have served finally as the historical episode that led to a new appreciation of the potential and limits of energy policy. Of course, it did nothing of the kind.

FIVE

Morality

If my people, which are called by my name, shall humble themselves and pray, and seek my face, and turn from their wicked ways; then I will hear from heaven, and will forgive their sin, and will heal their land. – 2 Chron. 7:14

1. Introduction Jimmy Carter originally intended to begin his inaugural address with a passage from Second Chronicles (7:14) about the need for people to humble themselves and turn from their wicked ways (Morris 1996), but he was talked out of it, replacing it with Micah 6:8.1 The first passage would have been more appropriate – especially with respect to Carter’s number one domestic policy priority: energy. To confront the energy problem, Carter often said, at least implicitly, Americans would have to become better people. Energy was to be “the immediate test of our ability to unite this nation. . . . On the battlefield of energy we can win for our nation a new confidence,” taking “the path of common purpose and the restoration of American values.” People needed to turn from their (wicked) profligate use of energy resources, resources that were rapidly running out; profligacy was mortgaging the country to hostile oil producers, threatening “our free institutions.” Only through humility and shared sacrifice – a “national ethic” of sacrifice – could the nation be healed, and the “American spirit” reborn.2 1 2

“ . . . what does the LORD require of you? To act justly and to love mercy and to walk humbly with your God.” The quotes in this paragraph are taken from two of Carter’s most famous speeches to the nation. The first is often referred to as the “moral equivalent of war” speech of Apr. 18, 1977; the second, often called the “malaise” speech (or more accurately, the “crisis of confidence” speech), was given on July 15, 1979. A transcript of the former can

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Carter did adopt the prevailing energy narrative; he referred to the “intolerable dependence on foreign oil”3 and advocated energy self-sufficiency as the solution. Yet Carter’s message was an austere sermon and the solution not a statement of technological optimism as it had been for Nixon, but rather a necessary corrective to the moral failings of the nation. In fact, before, during, and after his presidency, Jimmy Carter was primarily a moralist. This has been noted by others (notably Morris 1996) – sometimes approvingly, sometimes not – even though he never did as president articulate “his moral ideas” in any systematic fashion (Morris 1996, 7).4 Still his energy policy was driven by “moral fervor” (Hargrove 1988, 48), by a “conviction that we should be provident with our use of the resources that have been placed by the Almighty on this earth.”5 His energy policy initiatives were thus not simply designed to increase supply or lower demand, they were also intended to change the way Americans lived and thought. Those initiatives could be regarded as exercises in social engineering as much as in energy policy. Of course, the history of the world and especially of the twentieth century is scarred by efforts to perfect the human race. But Carter had no totalitarian impulse; he was more the Sunday school teacher (which he prided himself as being) or the country preacher, who had some “unpleasant truths” about the country’s sinful ways, especially America’s “self-indulgence and consumption” (U.S. Executive Office of the President 1977, 103). His most famous speech (referred to as his “malaise” speech), delivered in July 1979, was a sermon on how Americans had to change their mind-set to complement the changes he sought in energy policies, even though his vice president, Walter Mondale, warned that he would not make headway by castigating people. Carter’s tendency to blame people for energy profligacy missed the most basic economic point about energy consumption. In what sense had America been “wasting” energy? During the postwar era, energy resources were abundant and cheap, and they were put to use raising the standard of living for just about all Americans, indeed for all of the developed and much of the developing world. As the economist Armen Alchian (1975, 11, italics in the original) wrote, “[T]o use less energy in the past would have been wasteful;

3 4 5

be found at http://www.pbs.org/wgbh/americanexperience/features/primary-resources/ carter-energy/. The latter is at http://www.presidency.ucsb.edu. Speech, July 15, 1979. And he became something of a laughingstock for lecturing staffers about “living in sin.” James D. Schlesinger, from the interview transcript, James Schlesinger, Carter History Project, Miller Center of Public Affairs, Charlottesville, VA, July 19–20, 1984, 5 (hereafter “Schlesinger interview”).

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it would have meant sacrificing more of other useful and desirable things than the energy was worth.” By 1976, arguably Americans were wasting energy, but only because price controls made oil and natural gas artificially cheap.6 The solution was not spiritual conversion; it was presumably price decontrol. But Carter also believed the United States had to be converted to a strict conservation ethic from a standpoint of rational necessity. He thought the world was entering an age of limits. Consequently, political leaders had to show the way to think and to act, and policy had to be all-inclusive, addressing all of the social as well as the technological issues that a limited world entailed. But from this viewpoint, there were really two ways to think of policy. It was true that energy did have a central place in a modern society, a role that was both all-encompassing and multifaceted. But Carter seemed to be saying that because of the importance of energy to a modern society, government must have a comprehensive national energy policy. Yet, the same perspective on the role of energy could have yielded the opposite policy conclusion. That is, because of its all-encompassing scope and its great technical complexity, government energy policy was destined to fail. Instead of the nation must, the message could have been, the nation cannot create a coherent, comprehensive national energy program because the issues are far too numerous, interwoven, and technical for anything consistent and effective to be written into law – especially because any government largesse would be immediately targeted by rent seekers. Policies to correct energy market failures were all too likely to have unforeseen, negative outcomes that would only lead to worse failures. Beyond protection of contract, prevention of antitrust violations and fraud, there was nothing to be gained by trying to manage energy production and consumption from the legislature, the executive, or the federal bureaucracy. But in Jimmy Carter’s presidency the former view – must – prevailed. Energy policy became the driving focus of all domestic policy; as the Congressional Quarterly put it, there were two domestic policy agendas: “energy and everything else.” The two major energy initiatives 1977–8 and 1979–80 were intended to give the United States what it seemed to lack, an identifiable energy policy. But the initiatives, lengthy and complicated as they were, added up to a set of policies that reflected Carter’s view of the world, but that did not actually reflect the world. These policies were not only complicated, they were also implausible and self-contradictory, containing the same sorts 6

In fact, if anything, pre-1970 energy prices had been too high (and so the United States should have consumed more energy) because of the domestic cartel and the import quota.

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of opposed incentives that had been present in earlier bills; even if they had been carried out fully, they were unlikely to have come close to fulfilling the intention behind them.7 Then again, what exactly was the intention? The goals of policy were stated either so broadly that there was no way to judge what policy could achieve them or so specifically that it was perplexing why Carter thought his proposed policy means could lead to those ends. At least one critic at the time believed that means and ends of Carter policy were muddled.8 Carter seemed to advocate different things at different times. Often he argued that America needed an energy policy primarily to prevent a foreign embargo from threatening the ability of the U.S. government to conduct foreign policy. That specific goal seemed even to critics to be achievable. But Carter articulated other ends of policy as well. The country also needed an energy policy to protect the U.S. economy, in fact even to protect the American way of life. It was supposed to boost employment, protect the dollar, and wipe out the trade deficit. Indeed, it would also solve a national moral crisis, a “crisis of confidence,” if only the government could get the policy bits into place. But a policy intended to cure everything is almost certain to end up curing nothing. For a man who was a truly devout Christian, who considered humility a great virtue, his energy proposals were extraordinary for their hubris. While Carter talked about being humble, he believed that if Congress would just pass the legislation he asked for, he would solve America’s economic, political, technological, and moral dilemmas at once. In the end, his major energy achievement, the passage of what he considered a fairly complete energy package in 1980, came about in exactly the way he said in 1977 it should not. Speaking of his 1977 bill in a November 8 speech, he said, “If we fail to act boldly today, then we surely face a greater series of crises tomorrow – energy shortages, environmental damage, ever more massive government bureaucracy and regulations, and ill-considered last-minute crash programs.” The 1980 energy program was the epitome of just that. Developed in the midst of another energy crisis, this one lasting longer and seemingly more damaging than the one in 1973–4, the energy legislation of 1980 was replete with crash programs – programmatic technological endeavors based not only on inaccurate forecasts but also on ignorance as to how innovation occurs and translates into commercial application. 7 8

This is not to say that every program Carter initiated was a failure but that the whole was a complex mess that added up to a good deal less than the sum of the parts. Op-ed by Richard L. Gordon, “Energy-Policy Flaws,” New York Times, Nov. 1, 1977, 35.

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Americans resisted Carter’s message at first because in 1977 there was no visible crisis. Congress was reluctant to accommodate him, especially because he seemed to grow increasingly unpopular with each passing month, and his doleful message seemed out of place. But the second major energy crisis that began in 1979 and lasted into the next year changed that. The “do something” dilemma was again the driving force behind congressional behavior; constituents wanted action and relief from gas lines, where violence was breaking out again. Finally, most of Carter’s energy program passed. But the neat architecture of it was built on fantasy, hope, and error. He made a reality of a government energy policy, but almost none of it lasted for more than a couple of years. But then by its nature, almost all of it was destined to fail.

2. Policy Means and Ends from a Neo-Malthusian Perspective After 1973, most agencies of the U.S. government and most officials had become pessimistic about the future availability of energy resources in the United States. Indeed, even before the first energy crisis, Atomic Energy Commission Chairman Glenn Seaborg, as noted in an earlier chapter, gave U.S. oil resources only fifty years before they ran out entirely. It is not completely clear how pessimistic Nixon and Ford were personally. The FEA under Ford offered a grim picture; the agency argued that there were only thirty years of domestic oil resources left. Ford himself lamented that energy policy discussions had a tendency to devolve unhelpfully toward concerns over “doomsday.”9 At the same time within the administration there was some optimism that with the right incentives, more oil and gas could be found. Ford himself looked forward to “thousands of new oil wells,” which presumably would not have been dry holes; officials offered some hope for major discoveries of oil and gas resources on the Outer Continental Shelf (OCS) and in Alaska. But others in the federal government thought even OCS oil would not be enough. In fact, in early 1975, the U.S. Geological Survey (USGS) cut its estimate of likely OCS resources by more than 50 percent. From Project Independence through the Energy Independence Act, the Energy Policy and Conservation Act , to the Energy Independence Authority proposal, there was a definite tinge of pessimism. Indeed, it can fairly be conjectured that the reliance on the ill-defined but upbeat trope of “energy 9

Ford: “Remarks to the Ninth World Energy Conference,” Detroit, Michigan, Sept. 3, 1974. Available at www.presidency.ucsb.edu.

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independence” masked a belief that the future was bleak and officials really did not know what to do about it. Nixon had provided a slogan that carried a positive promise, without offering a way actually to achieve it. The fact that everyone seemed to think the idea meant something different was not really a functional problem if its purpose was just boosting morale. It made people optimistic in principle, and they could fill in the blanks with their own imagined versions of the means to that end – even if energy independence could never be realized in practice. Jimmy Carter and his administration did not represent a departure from the pessimism of previous administrations, but rather the culmination of it. Although Carter seemed to believe that energy policy should have a moral purpose, he and James Schlesinger, who became the first secretary of energy in Carter’s administration, based most of their energy proposals on a conviction about the physical, not the spiritual, world. They were both neo-Malthusians, firmly convinced of a deeply pessimistic view of the future of energy. The goals that the Carter administration set, and the means undertaken to achieve them, cannot be understood apart from this perspective, and the laws that were passed in 1980 taken together represent an actual rendering of that perspective as policy. Carter and Schlesinger believed that the world – not just the United States, but the entire world – was running out of oil and gas. As Schlesinger declared in a 1977 speech, during the 1970s, the human race would consume 10 percent “of all the oil that the geologists in their wildest dreams ever expected to exist worldwide.” He told a congressional committee in early 1978, world production of oil would never exceed 70 MBD, and in mid1979 put the limit at around 65 MBD.10 Schlesinger was quite explicit that the administration had a Malthusian perspective. As he explained to Time in 1977, “We have a classic Malthusian case of exponential growth against a finite resource.” According to Carter and his chief energy aide, not only would America very soon run out of oil, but the Soviet Union also would begin to see steeply declining output. Only Saudi Arabia and a few sheikdoms might escape the end of abundance, but otherwise everyone else was stuck. And natural gas was dwindling even faster; as Carter’s pick to head the FEA said in early 1977, “I think [natural gas] has had it.”11 Coal was the only fossil fuel we could count on, and it was especially bad for the environment. 10

11

Seventy million barrels per day from CPL, Schirmer/Ward, Box 4, undated. The world reached this level of production in the mid-1990s and has exceeded it every year since. 65 MBD: from Hearings Before the Committee on Finance, United States Senate, 96th Congress, July 31, 1979, 819. John O’Leary, news conference, Feb. 3, 1977.

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The word “catastrophe” recurs in Carter-era documents, often conflating temporary disruption with “catastrophe” for the nation and the economy. Energy policy was also filled with war metaphors; Schlesinger called the 1973–4 Arab oil embargo an “undiscerned Pearl Harbor,” and Carter exhorted community groups to “win the energy war,”12 metaphors that, in themselves, according to Ostrom (2008, 110), tend to “exacerbate rather than alleviate” problems.13 Many officials in the rest of world (not just the United States) shared this gloomy outlook. A conference of Western oil ministers left reporters with the impression that “the world must learn to live on less [oil] or face the consequences: still higher prices as consumers cut each other’s throats for the remaining drops.”14 Consumers could expect no respite from high prices in any case. No matter what Americans did, they had to face the fact that, as the New York Times editorialized in late 1979, “[T]hey cannot again have cheap energy.”15 There were also studies that seemed to back up a Malthusian position. Carter relied on a CIA report that was extremely pessimistic16 ; he would, however, not really listen to more optimistic scenarios.17 And thus from a policy standpoint Carter and Schlesinger believed there was no choice: America needed radical conservation and mass substitution of alternative energy resources.18 The administration’s extravagant catastrophe scenario, however, made no sense. What exactly was the looming catastrophe? A sudden, abrupt end of oil, consumers fighting over those last few drops? Although he never put matters in these terms, Carter seemed to have accepted the picture of the oil market in which there was zero elasticity of both demand and supply of oil, of a “gap” between these two inelastic curves moving in divergent directions, and of an omnipotent cartel – the elements of analysis that led to muddled 12 13

14 15 16

17 18

CPL, Schlesinger speech to the American Legion Convention Aug. 23, 1977, Eizenstat, Box 159. Ostrom notes that when policy makers use the “rhetoric of warfare” and policy outcomes “radically diverge from expectations . . . the illusion of perpetual crisis will permeate public affairs.” “Oil Consumers Seem to Learn Little from ’74,” New York Times, May 27, 1979, E3. Nov. 11, 1979, E20. In February 1980, U.S. State Department position paper on “International Energy Strategy” observed that if the CIA’s estimates were correct by 1990 “the world will come to an end.” Although that was meant archly, the paper was itself pessimistic about oil supplies after 1985 (U.S. Department State 2012 , 813). Optimism about resource availability apparently led to the firing of the head of the USGS, the first time such a firing had occurred. Many neo-Malthusians saw an end to economic growth as well. As the journal the Ecologist editorialized in its August/September 1975 issue, “The thesis that economic growth is rapidly nearing its end is generally accepted by all save the demented and those who simply don’t want to know” (242).

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thinking during the first energy crisis.19 The cartel (the Organization of Petroleum Exporting Countries; OPEC) did not just have pricing power; it would also be able to behave in astonishing ways, never wavering itself, able to impose unimaginable suffering on the rest of the world – a view it seemed that was common with much of the general public. To give one example as to the peculiar ideas people had developed about OPEC, a Harris poll in the summer of 1977 showed that a majority of Americans feared that if the United States cut its oil imports by switching to more coal that “Arab countries [would] raise the price of oil even higher.” In other words, if there was a major downward shift in oil demand as consumers turned to substitutes, the price would go . . . way up . . . ? Of course, this should have raised the obvious question: If OPEC was capable of defying economic logic then why was it keeping the price so low? But if Carter and his administration truly believed, as they seemed to, that the world was nearing the end of oil and gas supplies, then there was a rational policy that was actually quite simple. No, it was not a programmatic goal of 20 percent of all energy from solar by 2000 or 2.5 MBD of synthetic oil and gas by 1992 or mandatory conservation measures; those became the actual goals. Nor was it an avalanche of tax preferences, efficiency standards, or corporate subsidies. No, the best neo-Malthusian policy would have been straightforward. Nothing. This policy had no downside from a neo-Malthusian perspective. Assume that Carter considered it a 90 percent probability that oil was disappearing worldwide. It would clearly not, as some people feared, one day simply, suddenly “run out”; that was implausible. Wells do not yield 1 MBD one day and go dry the next. Output tapers off. So, instead of a sudden end, the real Malthusian outlook was that output would decline steadily and prices would rise for what remained. In fact, according to a Department of Energy (DOE) projection in 1980, the future price of oil, decontrolled and without the Carter program, was expected to rise to more than $100/bbl by 1990, in nominal terms (or about $165, in 2011 dollars). The price rise was projected to be inexorable but gradual – with some short spurts to be sure – gradual enough so that expectations and behavior could have adjusted.20 By 1994, 19

20

A few months after Carter took office, (Apr. 25, 1977) the U.S. representative to the Organisation for Economic Co-operation and Development (OECD), William C. Turner, reported that, “recent studies confirm that demand could significantly exceed available supplies in the early or mid 1980’s” (U.S. Department of State 2012, 419). It had been nonsensical in 1973 and was no less so four years later. Despite what Carter and Schlesinger seemed to be saying about the process of depletion, even the DOE recognized that the idea of the tap suddenly running dry was nonsensical.

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the price of gasoline would have been about $4/gallon and rising, and there would have been very high prices for natural gas, electricity, and virtually all energy-intensive products. What better incentive for conservation, or conversion to coal where possible, as well as a market impetus for alternative technologies? Now, the assumption also carried the possibility (10 percent) that the forecast was wrong. However, if that unlikely scenario played out, then Carter’s “nothing” strategy would have also worked. He would not have established unnecessary programs and spent billions of dollars in the process, and he would not have had to fight with Congress over energy taxes – which they were always disinclined to enact. That the DOE’s price forecast was wrong (amazingly by more than 90 percent) would not have mattered if the policy had been nothing.21 Of course, that was not the program. Instead, Carter began his administration with a sweeping energy proposal. And a few months after passage of his first program, in the face of new energy market disruption and convinced of the need to head off looming catastrophe, Carter proposed an even more dramatic program, covering all aspects of energy from electric utilities to research, development, and commercialization of new technologies. These aims often entailed specific numeric goals – benchmarks that could lend themselves to success measurements, such as the goal of cutting gasoline consumption by 10 percent and increasing coal output from about 700 million tons to more than a billion tons per year. But the Carter administration’s means to the ends were far more complicated than the ends themselves. If the goal was to cut gasoline consumption, what was the best way for government to do it? In general, the direct way to reduce quantity demanded, as economic theory would argue with an enormous body of evidence behind it, is to raise the price, and in fairness to Carter, he originally tried to increase prices of oil and gas through taxes and, when that failed, through eventual price decontrol. He and Schlesinger agreed at least in private that energy prices would have to go up, but they were thwarted in that regard by Carter’s own party in Congress, and at first, Carter backed off when Congress opposed him. Instead, in his initial attempt at comprehensive energy policy, he fell back on various kinds of pricing mechanisms, tax preferences, and threats, including a “standby” gasoline tax to take effect if “consumption exceeds stated annual targets.” (It was to be used, as one observer wrote, as punishment if the public was behaving badly; Cochrane 1981b.) Conservation would come mainly through Corporate Average Fuel Economy (CAFE)-type standards, a “guzzler” excise tax on inefficient cars, and miscellany such as “a vanpooling program for 21

For a discussion of price forecasting methodologies, see Alquist et al. (2011).

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Federal employees”(U.S. Executive Office of the President 1977, xvii). But the success of such measures was entirely conjectural. Just as the Nixon administration had unconvincingly predicted x number of barrels saved through such measures as the 55-mile-per-hour speed limit, it was only higher prices that really had much effect. Indeed, the guzzler tax was in fact passed, but when gasoline prices were very low, the tax did little to curb consumption. Low gas prices affected driving behavior of all car owners: they drove more. If the goal was to cut energy demand growth, was a multipart program for building weatherization and conservation the best way to achieve it? Complex tax preferences for building modifications (e.g., a “credit of 25 percent of the first $800 and 15 percent of the next $1,400 spent on approved residential conservation measures” [U.S. Executive Office of the President 1977, xvii]) also seemed highly speculative as to their effects. Higher taxes for home heating and electricity again might have made sense to achieve the benchmark, but no one was willing to go out on a limb to do it. If energy was cheap, however, why spend any money (even if partially tax deductible) to use less of it? Much of what Carter proposed in 1977 seemed most likely (a) to create a larger bureaucracy, which, after all, would have to decide whether a given conservation measure was “approved” or not and (b) to create a sense of complexity whether the problems were complex or not. So, both the means and ends were complexified. In many instances, this led to perverse incentives and little social benefit. For example, tax preferences for solar hot water or space heating were expected to lead to 2.5 million home solar energy installations by 1985, but this was not just speculative, it was (as the next chapter argues) completely ignorant of the way commercialization of new products occurs. Yet the proposal was supported intensively by a rent-seeking solar energy industry, which began gearing up for much new business that would be derived from the direction of government preferences, not those of consumers. This would in fact have serious consequences for the solar energy industry; once the tax breaks were removed, most of the firms in the industry had no market to fall back on and went out of business. Carter’s first National Energy Plan’s claim that government intervention with respect to new technologies was essential for “preparation for commercialization” (U.S. Executive Office of the President 1977, xxiv) was not just overly optimistic, it was entirely unproven and actually, wrong. Thus, the effort to forestall disaster failed as policy – failed because it was incorrect in its premise. The neo-Malthusian perspective of the 1970s, the narrative of intolerable dependence, drove much of this policy, and its failure should have discouraged such approaches in the ensuing years. But, of course, it did not.

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3. The “Moral Equivalent of War” The Carter administration began with a natural gas shortage. The winter of 1977 was unusually cold – it was termed a “hundred year winter” – and the United States did not seem to have enough natural gas to meet demand. One of Carter’s first initiatives was the Emergency Natural Gas Act of 1977, which spurred by “do something” demands from around the country, was passed overwhelmingly and quickly. The act allowed Carter to declare “natural gas emergencies where severe natural gas shortages threaten the supply of natural gas for high-priority users in the United States.” This included the option that would have allowed the president to divert gas from one pipeline to another or even to order a new pipeline if it would alleviate problems. The president called for people in cold climes to reduce thermostats to 65 degrees and generally observe “voluntary” conservation efforts. More whimsically, albeit a bit bizarrely, he suggested that people should dress in heavy underwear and sweaters around their homes. He made himself the example: “I am wearing heavy long underwear; it’s cold inside the White House.” But businesses, not homes, were often the ones that were often forced to cut back; at one time an estimated 1 million– plus workers in various places around the country were temporarily laid off because their place of business had no access to energy supplies. This crisis was considered opportune to Carter and his energy chief Schlesinger. As the latter explained, “We had the natural gas crisis about one and a half days after the administration started . . . and partly because of the natural gas crisis itself, it sort of pulled energy problems to center stage.”22 Carter, however, had already announced his intention at December 1976 transition meetings to introduce comprehensive energy legislation within the first ninety days of his administration. Even though there was no national energy crisis, Carter claimed, “[T]here was never a moment when I did not consider the creation of a national energy policy equal in importance to any other goal.” On the day he was inaugurated, Carter made public his pledge to produce a comprehensive energy program by “no later than April 20.”23 Schlesinger, a trained economist and one-time director of the CIA and of the Atomic Energy Commission (both posts were under Nixon), was designated as Carter’s main energy advisor and the candidate to become the head of a new cabinet-level department of energy that Carter thought a necessary component of his energy policy goals. Meanwhile, John F. O’Leary, who 22 23

Schlesinger interview, 16. According to an anonymous aide cited in Hargrove (1988, 49), Carter liked specific deadlines because “people work better with a gun at their heads.”

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had served as the chief of the Federal Power Commission (FPC) Bureau of Natural Gas during the Johnson administration, was picked to head the Federal Energy Administration until such time as it would be superseded by the DOE.24 The thrust of Carter’s energy program was revealed early. During his first trip as president (to Pittsburgh, Pennsylvania) he declared that the United States was facing a “permanent very serious energy shortage.” Carter’s solution (and Schlesinger’s) was mainly conservation. Carter also seemed to back away somewhat from a campaign promise to Texas and Oklahoma to begin decontrol of natural gas prices, especially for “new” (that is, newly discovered) gas; he talked about a possible experiment for a “limited period of time.” But partial gas decontrol as well as complete decontrol of oil for the time being was off the table. According to Schlesinger at the time, Carter believed “we must never remove controls over crude oil.”25 Besides the natural gas crisis, Carter and others were troubled by the continuing rise in oil imports in the U.S. energy mix. Nixon had called for autarky by 1980 when the United States imported 35 percent of its oil, but despite the handwringing over dependence, the percentage of imports kept rising to more than 40 percent when Carter took office (about 9 MBD). Fears about balance of payments as well as OPEC blackmail were repeated often. As a leading political scientist argued (Rustow 1977, 513), “It also should be reemphasized that the United States has become rather more than less vulnerable to any renewed Arab embargo.” Schlesinger, head of what was called the White House Office of Energy Policy and Planning, assembled a team to meet Carter’s deadline, although he later confessed that the ninety-day commitment was far too ambitious and led to some shortcomings in both the construction of the program and the sale of it to Congress as well as “to various interest groups.”26 Schlesinger’s team had no one from any energy industry and was composed entirely of lawyers, regulators, government officials, congressional staffers, academics, and most notably former Nixon aide S. David Freeman. Freeman had just completed work on a Ford Foundation energy project, which had released the controversial book, A Time to Choose (1974). There was no doubt where Freeman stood. The book’s conclusion: “It is important that Congress . . . enact legislation which declares that energy conservation is a matter of highest national priority and establishes energy conservation goals for the nation” (p. 329). 24 25 26

O’Leary then became deputy secretary of energy under Schlesinger. Schlesinger interview, 35. Ibid.

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Schlesinger’s group worked initially in isolation, which was not appreciated by other members of the administration who were kept in the dark about the direction of policy. By March, cabinet officers and the Council of Economic Advisors were complaining that they had no clear idea what Schlesinger was planning, and the chairman of the CEA, Charles Schultze, expressed concern that there was a lack of economic input (Hargrove 1988). In early April, cabinet members were finally given a briefing, which produced “vehement criticism” of Schlesinger and led Treasury Secretary Michael Blumenthal to suggest a postponement because he worried that the plan would raise inflation (Hargrove 1988). No postponement, however, was contemplated by Carter. In the meantime, the energy group posted a letter to 450,000 randomly chosen Americans asking for advice. Cochrane (1981b, 555) termed it “essentially a charade,” and the effort produced many odd ideas such as “reduce the birthrate” and stop manufacturing plastics; in all, around 28,000 responses were received. Pundits and observers from all parties added many suggestions, including from a director of First Boston Corp., to revive the Energy Independence Authority. But most endorsed the expected call for conservation. As New York Times columnist Anthony Lewis wrote (Apr. 18, 1977), “In the years ahead, there is no way out but strong conservation measures.” The message emerging from the White House well before the April 20 deadline was that such measures would be called for and they would be severe. Schlesinger repeated the refrain of approaching resource exhaustion and catastrophe. The world was facing, he said, “one hell of an energy famine,” and O’Leary went even further in his prediction that absent “all-out” conservation, “we’ll fall off the cliff in the early 1980s.”27 Many observers thought that Carter would utilize the most straightforward method possible to encourage conservation: raise energy prices through taxes, especially on gasoline. Experts expected a large tax, probably about 50 cents per gallon. An anonymous member of the planning group candidly told the press, the plan would require Americans to “use less and pay more.”28 But even as experts were making this prediction Carter was denying it. He took questions on a call-in show in March and was asked about a possible $0.25/gallon gasoline tax; Carter replied, “I’ve never proposed any such thing . . . and I have no intention of any such increases . . . ” This 27 28

Both quotes cited in the New York Times, Apr. 17, 1977, F14. New York Times, Apr. 1, 1977, 45.

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was strictly accurate but also somewhat disingenuous; his plan had a tax, called the Crude Oil Equalization Tax, that while not a “gasoline tax” would surely have raised gasoline prices, albeit only by an estimated five cents per gallon. But this was the first inkling that Carter had come up against the energy policy conundrum. How could he find a way to satisfy the public by keeping prices low while reducing energy dependency at the same time? Carter would argue not just for conservation, but for people to agree to “sacrifice.” Fragmentary media reports of what Carter would likely propose invested the process with a certain amount of drama and mystery. Carter, it was said, was also considering some ways of developing supply, but his policies were not expected to have a large impact on energy production. There was speculation about gradual decontrol of “new” natural gas along with an immediate boost in prices, but observers doubted that much new natural gas would be found. Even the American Gas Association expressed the view that if in fact there were complete gas price deregulation, production would likely fall inexorably by 1985 and beyond.29 There were also hints he would call for incentives to increase coal production and consumption as well as for measures to “enhance” the building of new nuclear power plants, although the breeder reactor program was definitely ruled out because of concerns about nuclear proliferation.30 The breeder reactor had support from legislators of both parties and Carter’s opposition became a source of conflict between him and Congress. But the breeder was not the only source of conflict. Democrats had overwhelming majorities in both houses, and thus it might have been expected that Carter would be able to get most of what he wanted for this, his most important domestic initiative. But in fact, he managed to alienate many in Congress from both parties. First, in February 1977, he vetoed a bill for funding of water projects in seventeen states because (as he correctly argued) they were largely pork. But as Office of Management and Budget director Bert Lance observed, it was “absolutely the worst political mistake he made” (quoted in Morris 1996, 255). Now after taking away an argument for the representatives’ reelection, Carter was going to ask everyone to “sacrifice,” an argument that could also be used against a member of Congress’s

29

30

“Gas Crisis Has Complicated Origins,” New York Times, Jan. 30, 1977, 1. Many in industry shared the Carter administration’s pessimism about the future supplies of oil and gas (Pratt 2013 forthcoming). The fissile by-product of a breeder reactor would have been plutonium, which can readily be used to make nuclear bombs.

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reelection. Carter seemed oblivious to the way the legislative sausage factory actually worked. He told his most important ally in Congress, House Speaker Thomas “Tip” O’Neill (D-MA), that he did not need to cut political deals as O’Neill recommended. Rather, he would show everyone that he was right, and so they would vote accordingly (Kalman 2010). Representative Mike McCormack (D-WA), who sat on the major House energy committees, believed that Carter filtered every action through the question of whether Carter’s “Baptist God” would approve.31 But his unwillingness generally to play the political game led to uneasy relationships even with his staunch supporters. Some important Democrats were alienated more personally. Henry Jackson, the Democratic leader on energy in the Senate, was treated with contempt by Carter’s aides. Jackson and Carter had been rivals for the Democratic nomination in 1976, and as Schlesinger recalled, when Jackson’s name would come up, “somebody in the Carter entourage would say, ‘Well we whipped his ass in Pennsylvania,’” a message that apparently got back to Jackson. Schlesinger reported that Carter’s aides also alienated the second most powerful Democrat in the House, Ways and Means Committee chairman Al Ullman.32 The result was that both Republicans and Democrats took up the energy plan with less than complete enthusiasm. Carter’s difficulties with Congress over energy became evident even before the release of the April plan. In March, the bill to create the Department of Energy (DOE), Carter’s first energy goal, was introduced. It immediately sparked conflict within the Democratic caucus. Senior Senators Jackson and Abraham Ribicoff (D-CT) introduced separate versions of more or less the same legislation, delaying passage. But the biggest area of controversy with respect to a new DOE was, unsurprisingly, related to natural gas pricing. While the functions of the FPC were to transfer to the new DOE, Congress opposed giving discretion over pricing to the DOE, and especially to Schlesinger – who, as a one-time Republican appointee, was mistrusted by many Democrats in Congress. Their real fear was that Schlesinger would force prices higher – just in time to create a disaster for Democrats in the 1978 midterm elections. This fight over natural gas was a harbinger of a more difficult battle over a natural gas bill itself. In fact, Congress took gas-pricing power out of the proposed cabinet department and handed it to a new independent five-person Federal Energy Regulatory Commission. 31 32

Interview with the author, April 2010. Schlesinger interview, 4.

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By summer, Carter was able to sign into law the bill creating the DOE, subsuming the functions of the FEA, ERDA, and parts of the FPC, as well as some functions of the Interstate Commerce Commission, and the Departments of Urban Development, Interior, and the Navy; Schlesinger was to be its first head. The DOE did remove some of the confusion that still affected energy policy – just who was in charge of what. As of October 1, most of the alphabet soup would be reduced to DOE.33 By the next year, the DOE was in operation with 20,000 employees and a budget of $10.4 billion. While the members of Congress acquiesced to the DOE, they were less accommodating when it came to actual policy. There was a great deal of speculation about the package in the days before it was presented to Congress, but Carter planned to introduce the plan in a televised speech to the nation – a tough speech on the “brutal facts” of the energy situation. On April 18, Carter went before television cameras in what he termed, in the spirit of Franklin Roosevelt, a fireside chat. He began: Tonight I want to have an unpleasant talk with you about a problem unprecedented in our history. With the exception of preventing war, this is the greatest challenge that our country will face during our lifetimes. The energy crisis has not yet overwhelmed us, but it will if we do not act quickly. . . . Our decision about energy will test the character of the American people and the ability of the President and the Congress to govern this nation. This difficult effort will be the “moral equivalent of war” – except that we will be uniting our efforts to build and not destroy.

This phrase, “moral equivalent of war,” was the take-away from the speech both by supporters and detractors, who noted that its acronym was MEOW. The phrase was from the work of William James, and, according to Carter, was suggested to him by Admiral Hyman Rickover (Carter 1982).34 But it was a strange application. What exactly was the moral issue that was “equivalent” to war? Saving the nation from an undefined energy-related catastrophe?35 It seemed a stretch. Even if the neo-Malthusian case was correct, what was the moral imperative? It seemed to be “use less energy (!)” which people would do anyway if it were going to cost more. It was hard to equate that in any case with the moral of war, “save the nation from destruction and death.” But that framework suited Carter’s perspective on 33 34 35

The Federal Energy Regulatory Commission and the Nuclear Regulatory Commission remained as independent authorities. Schlesinger in his 1984 interview said he was the source and noted that he had used the phrase to journalist Nancy Dickerson. Or, as Carter put it, “The most important thing about these proposals is that the alternative may be a national catastrophe.”

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the energy issue. Policy was to be tied to moral imperatives at least as much as to practical ones. Sacrifice, change, be better. Even his supporters were uneasy with this approach. As Amory Lovins, an energy expert who endorsed conservation in no uncertain terms, noted, “Sacrifice is dull and unwelcome.” He wanted Carter to emphasize sustainability and fairness.36 But that might have run counter to a recitation of the “brutal facts.” These “facts” rested on four “realities” as a later DOE memo37 noted: 1. World oil production will peak within the next 15 years, leading to a supply-demand gap by the mid to late 1980s. At that point, “the petroleum era will be over.”38 2. Even if there are petroleum supplies, the “US could not afford to pay for them”; the price would be too high and would lead to a ruinous trade deficit. 3. Greater import dependency means “intolerable foreign policy, national security implications.” 4. The world oil problem will be resolved [without a proactive policy] through worldwide depression and social upheaval, or [with such a policy] through early action to “cushion the inevitable transition.” Perhaps point four was the origin of the moral equivalency (war = energy crisis = disaster) argument; there would have to be worldwide suffering unless America acted, so to not act meant tolerating, even accelerating, worldwide suffering. But whether these “realities” were real was another question. The “facts” were brutal to be sure, but were they really facts? To make the point, Carter released the CIA study on which these points (and indeed most of the legislative proposals) were based. The fact that the history of energy policy was replete with “brutal” forecasts that were always wrong seemed largely to be ignored by administration officials. On top of four realities, there were ten principles, which were spelled out directly in his April speech. Most of these were standard tropes of energy policy pronouncements of his predecessors: the need to reduce vulnerability; the need to protect the environment; the need for economic growth to continue; the requirement to employ abundant resources such as coal while 36 37 38

CPL, memo included in correspondence, Schirmer to Eizenstat, Schirmer/Ward, Box 1, Nov. 15, 1977. CPL, DOE memo dated July 19, 1978, Schirmer/Ward, Box 5. To some, even in the late 1970s, that “reality” seemed unduly alarmist. As Landsberg (1979, 3) and colleagues (a group that included scientists along with one current Nobel laureate in economics, Kenneth Arrow, and one future one, Thomas C. Schelling) wrote, “Reality One [is that] the world is not running out of energy.”

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reducing the use of presumably scarce resources such as natural gas; the importance of certainty in government policy; equity for all regions of the country; the requirement that prices should reflect “true” replacement costs of energy, although this truth was apparently to be determined by government; the need to restrain demand; and the necessity of “nonconventional” (alternative) energy technology development. But Carter’s first principle was that the government had the major role to play in any solution, and it was the duty of the public to follow. Or, more specifically, “The first principle is that the energy problem can be effectively addressed only by a Government that accepts responsibility for dealing with it comprehensively, and by a public that understands the seriousness and is ready to make sacrifices.”39 The program to fulfill these principles was extensive. The National Energy Plan in summary form filled more than a hundred pages, with a total of 113 provisions, which filled five “phone-book-sized volumes” (Morris 1996). The legislation had seven specific targets for 1985: reduce energy demand growth to 2 percent; reduce gasoline consumption by 10 percent over 1977 levels; reduce imports to 6 MBD; fill the strategic petroleum reserve (SPR) with 1 billion barrels; increase coal production and consumption by twothirds; bring 90 percent of buildings up to “minimum energy efficiency standards”; and use solar energy in 2.5 million homes. In all, these were to be accomplished with a bill with ten separate titles that covered a wide range of energy-related issues: from expanded duties of the FPC to natural gas pricing to electric utility reform to tax credits for solar energy (with, of course, benefits for small oil and gas producers). But the number one goal – and Title I – was conservation. Great conservation expectations were to be codified in law. But the actual means seemed unequal to the task. There were to be some new taxes: most notably, the Crude Oil Equalization Tax (COET). COET was an expression of the belief that prices of oil were “artificially low,” encouraging wasteful overconsumption. There was undoubtedly truth in this argument. The prices of various types of crude were still controlled; there were actually five official categories including a price for “new” crude of $11.28/bbl which had been written into the EPCA, as well as a price of $5.25/bbl for old oil and a completely uncontrolled world price of approximately $13.50/bbl (which also was to apply to stripper wells in the United States). Controls were to stay in place with respect to old oil but would be taxed (COET) so that the price per barrel in the United States would eventually equilibrate with the world price. That is, over time, 39

The National Energy Plan (U.S. Executive Office of the President 1977, 26).

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consumers would pay world prices, but the government would collect the difference between the world price and a weighted average of controlled prices of new and old oil; increases in the controlled price would be allowed based on the inflation rate. It was in fact an excise tax on domestic production but also had its own moral dimension; the government would not let the oil industry profit unfairly.40 Rather than raising prices on the people for the benefit of the oil industry, the government would raise prices on the people for the people. The tax money was to be used to help poor people pay for energy when it became higher priced due to COET. But this tax was not supposed to raise consumer prices appreciably; as noted, the impact on gasoline was estimated at only five cents per gallon. New taxes were supposed to be only a small contributor to the conservation effort. Mostly, conservation would depend on a mix of financial inducements – tax credits, low-interest loans – as well as various efficiency standards, including a boost in CAFE standards to 27.5 miles per gallon. In a May interview, Carter gave Congress a deadline of October 1 to pass this bill; as James Cochrane, who was National Security Council staffer, later (1981b, 578) wrote, “President Carter and his associates felt that the people of the United States needed to recognize the energy crisis and accept the administration’s solution.” But what did the battle plan for the moral equivalent of war actual entail? Little sacrifice, lots of ideas already on the table, most of which were old ideas that had come up in Ford’s and even Nixon’s proposals. The one claim for the Carter plan was that it was supposed to be a fully fleshed out national energy policy in which conservation was the dominant theme, as opposed to the hodgepodge that had been brought forward by his predecessors and that was embodied in the EPCA. But there were many question marks about just how effective it would be in achieving the savings of 4.5 MBD of oil by 1985, which was the administration’s overall objective. The whole program seemed to embody the contradiction that had been evident in the energy proposals of congressional Democrats since 1973. To the extent that conservation or alternative energy technologies such as solar depended on consumer choice, why, if costs were to be kept down and few new taxes imposed, would people actually conserve? There was little reason to expect that the program would be successful absent (a) coercive mandates, (b) a spiritual reawakening focused on energy, or (c) soaring energy prices. Because there was no plan for an energy police to coerce consumers and 40

As Schlesinger noted in his 1984 interview (36), “A fact of life is [Carter] did not like big oil.”

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Carter’s ability to make us more moral was not legislate-able or predictable, these numeric goals depended entirely on soaring real energy prices in the years ahead. After all, why accept an out-of-pocket cost for a solar hot water system (even with the tax break the consumer would have a large expense) if the price of conventional fuels was low? So, even though Carter was eschewing large new taxes on fossil fuels that impacted individuals through high prices, he was in fact depending on the same kind of result.41 If there were cheap oil, natural gas, gasoline, electricity, then few of these programs made any sense at all. But if it were the case that prices would soar, why have the programs? High prices would induce conservation, a switch to fuelefficient cars, weatherization and even solar hot water heating. In Carter’s plan, there would be little to make energy prices high, but these programs only made sense if the prices were high. Even if people did utilize Carter’s programs, the 4.5-MBD figure was unsubstantiated and conjectural. Although with such a precise number, it seemed like an easily measureable goal, it was not. How much energy would be saved actually depended on unprovable counterfactuals. That is, in 1985, whatever the actual quantity of imports, it could always have been asserted either that it would have been 4.5 MBD higher but for the energy bill of 1977, or that the energy bill had virtually no impact even if overall imports had fallen. In 1977, however, most objections were directed toward the administration’s specific analysis. The Congressional Budget Office claimed its study showed that if the plan was passed in full, the reduction would be only 3.6 MBD. The General Accounting Office also said the Carter plan would fall short of its goals. Controversy erupted especially with respect to the impact of natural gas pricing rules on oil imports. The assumption was that if the government changed the price of natural gas, this would have an impact on oil imports given that in some applications the two fuels are direct substitutes. The DOE claimed that correct natural gas pricing could produce a saving of 1 MBD of oil by 1985; later it upped the count to 1.4 MBD. But according to the American Gas Association, these estimates were far too optimistic. The AGA even suggested a scenario under which it was possible that the United States would be importing more oil as a result. The natural gas component of the bill was by far the most contentious. There were those who sought complete deregulation, and those who sought 41

There were some other proposed taxes including an excise tax on inefficient cars. But these were expected to have relatively minor impact and were to be mitigated by rebates and other forms of direct relief. They were unlikely to raise the price of fossil fuels and electric power, and they were not of sufficient magnitude to have spurred a significant reduction in consumption.

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no deregulation and who resisted any increase in prices. Although during the 1976 campaign, Carter had seemed to want to make some movement toward deregulation, especially of new gas, the National Energy Plan did not contain it. Rather the innovation in the plan was to direct governmentfixed pricing toward an oil-gas equivalence. That is, the price of new gas would be determined by the relative cost per unit of energy (BTU) of oil, so that the two would be more or less equivalent. Whether or not this was a useful idea, it did clearly mean to keep government in the price-setting business. Moreover, there were other natural gas pricing stipulations that seemed destined to make pricing more complicated, not less. Soon after Carter’s speech to the nation and special message to Congress, the National Energy Act was introduced in the House by Representative Jim Wright (D-TX) as H.R. 6831 and in the Senate (S. 1469) by Henry Jackson. The bill quickly entered the committee process, which can always delay action, but the bill was expedited in the House. Speaker O’Neill decided to get behind the Carter program. He both set deadlines for the committees that would be considering the bill and also established an “Ad Hoc Select Committee on Energy” as the group to give the House an “overview of the President’s energy proposals” and put “comprehensive energy policy in perspective.”42 The committee was placed under the chairmanship of Representative Thomas L. Ashley (D-OH), who was clearly a supporter of the president’s energy initiative. Given that O’Neill commanded a 149person Democratic majority it seemed likely that the bill would sail smoothly through at least one branch of Congress. Administration officials received a generally positive reception. Deputy Secretary of State Warren Christopher was asked just how much confidence he had in the CIA’s pessimistic estimates of future oil and gas resources; it was high, he said. James Schlesinger, appearing a few days later, was also questioned on this. He, too, expressed the view that there was “a high degree of unanimity about the estimates of future capacity.”43 He noted that not only had the CIA come to a pessimistic conclusion, but OPEC and oil companies also had arrived at the same kind of bleak assessment. Some Republicans on the committee were skeptical of the underlying premise of looming resource disaster. Republicans placed dissenting views – not just their own but those of other experts – into the hearing record. One of these, a Stanford Institute Research Study (Henry 1977), argued that higher energy prices had already led to greater efficiency, and so future 42 43

Hearings before the Ad Hoc Committee on Energy, U.S. House of Representatives, 95th Congress, on the National Energy Act, May 1977, 1. Ibid., 134

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demand estimates needed to be revised downward; demand elasticities for fuels were proven to have been underestimated and consequently, long-term demand was going to fall below current expectations. There were also sufficient quantities of oil and gas to supply fuels into the next century, with natural gas especially playing a larger role; nuclear power would grow; and supply was going to become more diversified. In other words, while Congress debated measures to make us use less, reduce our long-term demand, and increase resource supplies, higher prices were already doing all of those things. Or, as Representative David Stockman (R-MI) would write (1978, 5), Carter’s proposals were based on “Chicken Little’s defective logic.” But O’Neill was determined to rush Carter’s bill through the House, and despite Republican objections, Ashley’s super committee effectively limited debate. As was often to be the case, only concerns over natural gas pricing delayed progress, but the bill made it through committees and to the House floor for a vote in early August. There was one new element added by the Ad Hoc Committee: an increase in the gasoline tax by five cents per gallon, but it, along with Carter’s request for standby authority to impose gas taxes of up to fifty cents per gallon, was defeated. From the outset of the process, O’Neill’s goal had been to pass a bill “more or less as the President proposed it.”44 The natural gas problem was resolved with a higher ceiling price for gas, not what Democratic legislators from gas-producing states wanted but enough to prevent them from thwarting the Speaker’s will. O’Neill appeared satisfied when the House voted 244 to 177 for passage on August 5. In the Senate, however, arguments over energy policy could not be settled quickly. Despite a 61 to 39 majority, Democrats were divided along regional and ideological lines. Energy state legislators wanted deregulation of oil and gas prices, which the Plan did not offer. Consumer-oriented senators opposed higher prices, whether by design or partial deregulation, some dismissing the idea that higher prices would induce conservation. Senator Howard Metzenbaum (D-OH), for example, argued that “Most people will pay what they have to pay to keep their cars going and keep their houses warm.”45 At contentious hearings in May, Schlesinger tried to take the high ground, quoting (he thought) Winston Churchill, “make no little plans; they have no magic to stir the souls of men,”46 and predicting catastrophe if the United 44 45 46

“O’Neill Imprint on Energy Bill,” New York Times, Aug. 1, 1977, 40. Quoted in “Senators Give Skeptical Reception to Schlesinger Energy Proposals,” New York Times, May 4, 1977, 32. The quote is actually a revised quote from architect Daniel Burnham, who had ended it “to stir men’s blood.”

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States did not take immediate action on energy. The Senate was in no mood to listen. Politically it must have seemed extremely hazardous to have endorsed any program that led to even slightly higher prices. At the time, although memories of 1973–4 lingered, there was no apparent crisis. That summer a poll found that a declining percentage of the population regarded energy as a major issue, and energy companies were viewed by a significant minority of the population as perpetrators of the “energy crisis” (Morris 1996, 256). Thus, even partial deregulation that might raise industry profits was not likely to gain much support with election-conscious legislators. Any new taxes were also unpopular. According to a Harris poll, more than 60 percent of the American public opposed even a five-cent-per-gallon gasoline tax (Fusso 1978); larger taxes drew larger negative responses. The administration also seemed to display continuing ineptitude in dealing with Congress, supporters as well as foes. In September, for example, backers of the administration’s convoluted pricing policies for new natural gas began a filibuster to prevent a vote on a bipartisan amendment from Lloyd Bentsen (D-TX) and James Pearson (R-KS) to phase out price controls on new natural gas altogether. The administration first offered a higher new gas ceiling price but then capitulated and agreed to end the debate, undercutting and angering the senators who had filibustered (they thought) on the administration’s behalf. The Senate ultimately carved up the plan into five separate bills, which were combined with other bills that had been introduced in Congress by various members in March 1977. The bills, the National Energy Conservation and Policy Act, the Public Utilities Regulatory Policies Act (PURPA), the Natural Gas Policy Act, the Powerplant and Industrial Fuel Use Act, and the Energy Tax Act, all passed in some form in the Senate in the fall of 1977 (not without a good deal of contentious debate) and then moved to conference with the House. But the reconciliation process between the House and Senate legislation led to gridlock. The deadline Carter had set in the spring came and went, and in November, Carter decided again to take to the airwaves to build support for energy legislation.47 He blamed the oil companies, which he complained wanted “tens of billions of dollars more” than they were already getting, and he added some new elements to his argument, including the “fact” that imported oil was costing the U.S. jobs. “Every $5 billion increase in oil 47

Carter originally intended to give his talk on Monday, Oct. 31, 1977. It was postponed on the advice of his chief domestic aide Stuart Eizenstat who noted that the 31st was Halloween and Monday Night Football. CPL, memo Eizenstat to Carter, Eizenstat, Box 197, Oct. 21, 1977.

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imports costs us 200,000 American jobs,” he claimed.48 Some economists as well as politicians have tried to make such quantitative assertions about the impact of trade flows. During the debate over the North American Free Trade Agreement in the 1990s, similar calculations were made, but they were refuted by empirical studies. There is no necessary connection between increased imports and unemployment, especially if current account deficits translate into capital inflows into productive sectors of the economy. Carter’s plea produced no breakthrough. Many legislators blamed Carter for handing them a huge bill and then, as Carter apparently was inclined to do, “put a gun to [our] heads,” which was not appreciated or motivating. In fact, many were angry that, like members of the cabinet, they had not been consulted in advance, and Carter was criticized for making a poor effort at selling them on the package (Cochrane 1981b, 579). There was no movement before the end of the year or much when Congress reconvened. As business journalist Robert Samuelson (1977) wrote, with a peculiar turn of phrase, in Congress there was “the moral equivalent of chaos.” Carter had also increased the rancor toward himself when he vetoed the congressional authorization for the DOE because it included funds for the breeder reactor – a program that had strong supporters in both chambers. To make matters worse, a coal strike in December threatened a different kind of energy crisis.49 When Congress reconvened, the debate continued and so did the gridlock. Outside of Congress, more and more observers were questioning the rationale behind the entire energy policy enterprise. Press reports that had earlier seemed to bolster administration claims of impending disaster began to illustrate the arguments made by Henry (1977). Consumers and producers in developed countries had been behaving rationally: because prices had gone up, they cut back on consumption and increased production. There was, in fact, embarrassingly for the Carter administration, a glut of oil on world markets. This appeared to follow a historical pattern: whenever the forecast for an energy resource supply became especially bleak, a glut loomed. One curious aspect of the situation was that decreased demand and increased drilling activity had continued even though prices were no longer rising. The economic explanation lay in the process by which price effects 48 49

Carter, address to the nation, National Energy Plan, Nov. 8 1977, available at http://www .presidency.ucsb.edu. As the strike dragged on into March, Carter prepared to invoke the Taft-Hartley Act to force a temporary halt to the strike. Its continuation was deemed a potential “catastrophe” for the U.S. economy.

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appear in the market over time. A price spike is unlikely to have large immediate effects with respect to something like oil because it is difficult in the short run to substitute among energy resources or to substitute more energy-efficient capital for less. However, a high price affects behavior over the ensuing months and changes expectations about the future price of energy – leading to continued demand and supply responses. These lagged effects meant that changes in demand and supply would likely persist until expectations changed. Study of the actual effects of the 1973–4 energy crisis led many experts in industry as well as academia to become skeptical of doomsday forecasts. Said Massachusetts Institute of Technology energy economist Morris Adelman, “The crunch Schlesinger talks about so eloquently is like the horizon – it recedes as you approach it.”50 The administration seemed to view this as inconvenient at best. Schlesinger certainly was not convinced to change policy. “If you look to future oil demand, you see a serious deficiency at any prices we have historically known.” With the world price of oil at $13.50/bbl, Schlesinger was adamant that when the “crunch” came in about 1985, the real price would at least double.51 But one of the leading energy analysts of the time, John Lichtblau, was far more sanguine. He forecast a 1 to 2 percent real annual increase, although he allowed as how prices might not even go up that much. But if he was correct, why bother with this extensive legislation? An important compromise was reached in the spring on natural gas pricing. There was to be an immediate price boost for new gas (from $1.49/thousand cubic feet, to $1.93), with small escalations each year until the end of 1984 when new gas would be decontrolled – unless controls were reimposed by the president or Congress.52 Both the pro- and anti-decontrol forces got something in the deal – price controls for another seven years on all gas then decontrol on new gas. This opened the way for adoption of the Natural Gas Policy Act, which was the trickiest of the five bills to resolve. The bill, although acceptable to a majority in Congress, was a mess and was destined to make life more complicated for any branch of the government that had to enforce it. Where before the legislation there were four prices for natural gas, after the bill was finally passed in 1978, there were seventeen categories and prices of natural gas. Whatever the intention 50 51 52

Quoted in “Experts Dispute Administration, Doubt World Oil Shortage in ’80s,” New York Times, Jan. 18, 1978, D12. Given the actual inflation rate, this would have meant a nominal price of about $44/bbl at the time. An effort by senators Kennedy and Metzenbaum to lower the controlled price of natural gas to $1.40/tcf was defeated.

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of the natural gas component of the plan – said to promote development, maintain “realistic” prices, and “rational” distribution – the complexity alone would make it likely that none of these objectives would be reached. As Sheila Hollis, enforcement director for the Federal Energy Regulatory Commission (the agency placed in charge of natural gas pricing since the creation of the DOE), said frankly, the terms of the bill make it “virtually impossible . . . to enforce it in a conscientious and equitable manner.”53 Moreover, the eventual decontrol of even “new” gas was pushed so far into the future it was practically meaningless. In the meantime, the rules were unlikely to stimulate much new production. By fall, the other areas of conflict were resolved and all five acts, together called the National Energy Act (NEA), were signed by Carter on November 9, thirteen months after his deadline. But what had been accomplished? Even supporters admitted that the legislation left Carter’s specific benchmarks in place but the means to those ends had been curtailed; given that the General Accounting Office had thought that the goals were unrealistic even with all of Carter’s mechanisms in place, they clearly were unreachable once the bill had passed. Besides the impenetrable gas act, the NEA was stripped of most of the additional taxes; the oil tax was gone, there were some conservation measures and investment tax credits for renewable energy sources like wind, and there were still price controls for oil and gas. Probably the most consequential act was PURPA, which gave independent power providers the ability to enter the market dominated by franchised monopoly electric power companies. Whereas previously independent generators could not sell power to the grid, PURPA required utilities to buy power from independent producers who could generate electricity for less than what it would have cost for the utility to generate the power itself, called the “avoided cost.” But this was a small gain, and for the most part, it seemed clear that most of the NEA like the EPCA was wasted effort. Perhaps the most striking failure concerned solar energy. Carter sought to give a boost to solar hot water and space heating, a technology called “ready for widespread commercialization” (U.S. 1977, xxiv), by providing tax preferences to purchasers of this equipment; the explicit goal was 2.5 million solar heating units in homes by 1985. Initially, the plan proposed tax credits of 40 percent of the first $1,000, and 25 percent of the next $6,400, up to a maximum of $2,000, later changed to $2,150 on the first $10,000, and then in the final bill to “30 percent of so much of such expenditures 53

Quoted in “FERC Official Regards Gas Price Compromise as ‘Monster,’” Oil & Gas Journal, Aug. 28, 1978, 33.

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as does not exceed $2000, plus 20 percent of so much as such expenditures as exceeds $2000 but does not exceed $10,000.”54 The tax breaks were originally scheduled to end in 1984 but by the time the legislation passed, the end date was pushed forward to 1987. By that time, the solar industry would be able, it was assumed, to get by without subsidy because the price of conventional fuels would be high and because “economies of scale” would be achieved so that “prices [of solar equipment] should be reduced” (U.S. 1977, 75). But the legislation perversely managed to devastate the solar energy industry. Twice. The first time occurred in the months after Carter announced his energy program in April 1977, largely because of congressional dithering over the terms of the bill. Consumers who were contemplating purchase of solar heating systems waited to “see if the credits would get through Congress.”55 Numerous firms were bankrupted before the credits in fact passed sixteen months later; the industry was left “crippled” (Deudney and Flavin 1983). The problems for solar companies were compounded by the Department of Housing and Urban Development (HUD). HUD was to provide 10,000 people with grants to buy solar-assisted hot water systems, but only if the solar equipment met HUD guidelines. Unfortunately, no such guidelines existed. Still, the passage of the energy bill with its solar tax preferences provided an incentive for new firms to enter the market, but naturally the firms made plans based not on what they perceived as inherent consumer demand but rather on products that were eligible for tax subsidies. Yet, subsidies notwithstanding, it was not clear in 1978 that it made economic sense for most consumers to buy solar equipment, which cost at least twice as much as heating systems that used conventional fuels. Some state governments stepped in to augment the federal tax breaks to induce a change to solar, and there were predictions from advocates that by 1987, solar heating would be a $10 billion per year industry and that solar would provide up to 7 percent of the entire nation’s energy by 2000.56 But it was clear that these systems would become economically viable in most parts of the country only if the price of oil and natural gas kept rising. This led to the second collapse of the solar energy industry. Energy prices eventually fell and the tax preferences, due to expire in any case, would have had to grow, not end, to have continued to provide incentives for homeowners to purchase them. But, of course, if an industry is geared 54 55 56

Public Law 95–618. “How Popular an Option Is Solar?” New York Times, Mar. 8, 1979, C1. This would mean solar would have replaced the equivalent of 3 MBD.

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toward subsidized production and the subsidies expire, the industry will fail unless technological improvement makes the equipment cost-effective on its own. In this case, it did not. Thus, one of the much-publicized components of the Carter National Energy Plan was passed and ended up mostly ruining the industry it was supposed to promote.

4. “Sun Day” and Carter’s First Large-Scale Alternative Energy Goal On May 3, 1978, while his energy plan was still stymied by Congress, President Jimmy Carter traveled to Golden, Colorado, to observe the first “Sun Day,” expected by the organizers to be the solar energy equivalent of the environmentalists’ Earth Day. It was raining. Very hard. In other words, on that day, solar energy equipment would not have worked. But it was time for Carter to announce a “national solar strategy”; an extra $100 million for solar research and plans to install solar equipment in federal buildings including the White House were to be the first steps. The full strategy would be determined by a cabinet-level Domestic Policy Review (DPR), formally initiated a couple weeks after Sun Day.57 In his speech in Colorado, Carter suggested that the strategy would lead to a far greater effort for solar than the tax preferences in the National Energy Act.58 He noted that the government’s Council on Environmental Quality thought that solar energy could provide 25 percent of all U.S. energy by 2000, and more than 50 percent by 2020.59 Had Carter thus far been too timid? Outsiders like California political figure Tom Hayden thought so, sending a letter to the administration blaming the DOE as an “obstacle” to solar commercialization, a technology that he said was “there.”60 The DPR was intended to figure how “there” it was and how much more “there” it could be in 20 years. But the 25 percent figure of the council became the 57

58 59

60

There were those in the administration who believed that the solar DPR was needed even before Sun Day. Wrote the DOE’s Charles Warren, “There is a major benefit in focusing Presidential attention on the establishment of a high priority and well coordinated Administration solar development program” [emphasis in the original]. CPL, memo Warren to Eizenstat, Schirmer/Ward, Box 22, Apr. 6, 1978. In fact, there were many criticisms of Carter and Schlesinger for not emphasizing alternative technologies more in the NEA. The solar energy industry lobbying group estimated that there would be 11 million solar heating systems in homes by 1985, five times more than the goal of the National Energy Act. Then again, when the DPR started, the National Energy Act still had not been passed, so the fate of even the modest tax incentives for solar was uncertain. CPL, letter to Peter Bourne, Schirmer/Ward, Box 22, Apr. 18, 1978.

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initial target for the DPR. This was a staggering sum, equal to the energy equivalent of 10 MBD of oil. What would it take to get America there? In reality, a miracle. Yet, there was an important aspect to the DPR in addition to the specific focus on solar energy. It was the first time since the energy crisis that an administration systematically addressed the question of what specific technological developments might solve America’s long-term energy problems.61 Of course, Nixon had used Apollo analogies to spur a drive for energy self-sufficiency within seven years including heavy funding for research (and development of breeder reactors), and Ford’s Energy Independence Authority was presumably going to direct funding for major alternative energy technologies (especially synfuels). But the thinking behind the Nixon and Ford programs was much as Henry Kissinger had described it: spend $10 billion or $100 billion on scattershot research, pilot plants, and so on, and some breakthrough or other was bound to happen. This effort was different: the DPR was to compose a program specifically with a goal of creating a commercially viable alternative energy technology that would become a dominant energy technology by the twenty-first century. The DPR group started with a basic question: how urgent was solar energy development? This had effectively been answered merely by the group’s formation. And given the first assumption with which the DPR started – that by 2020, the world’s recoverable oil resources (not reserves but total resources, OPEC included) would be exhausted – solar was obviously urgent. More problematic was the second question: how to make solar economically viable? The market could not be trusted, the group decided. There was a fear expressed that if left to the market, the price of solar technology would fall to competitive levels – the marginal cost of production – which for reasons not noted in the archives was presumed to be bad – bad for solar and bad for the national economy. Most economists would assume that competitive levels would be good for consumers, because that would mean the cheapest possible prices. But if that was ruled out, how best to make solar economically viable?62 Explicit or implicit subsidies. DPR members hoped that subsidies, along with a government utilization of solar (with a target of 30 percent for all government energy needs by 2000) would lead to solar preeminence in the U.S. energy marketplace. 61 62

As Chapter 3 notes, there was an attempt at a commercialization program for synfuels in the late 1940s that never quite got off the ground. CPL, Draft DPR chap. 5, Schirmer/Ward, Box 22, Aug. 11, 1978. Marginal cost pricing would, of course, mean a competitive equilibrium and the lowest possible market prices. The only way to make them lower would be subsidies.

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Solar had strong support in Congress. A group dubbed the Solar Coalition (forty-four representatives and twenty-six senators) had already begun to write several pieces of solar-related legislation. In fact, in the 95th Congress, 268 bills dealt with some aspect of solar energy development.63 In the 96th, there would be 121 more. Often, enthusiasm for solar outran reality. Representative Mike McCormack (D-WA), although best known for his support of nuclear power, was also an enthusiast of solar, in fact was the solar industry’s Man of the Year in 1975. But he killed one bill introduced by Representative Paul Tsongas (D-MA) in 1977. Tsongas proposed that the government buy a large quantity of photovoltaic (PV) cells that year; as McCormack pointed out, the amount Tsongas proposed to buy was far more than the industry was actually capable of manufacturing. (Of course, this would not be the last time that some in Congress equated passage of energy legislation with its technical feasibility.) Nevertheless, around the time five bills of the National Energy Act passed, so, too, did H.R. 12874, which was intended to promote PV commercialization aggressively, calling for installation of 4,000 megawatts of PV by 1988. Carter noted in his signing statement that the bill’s “specific objectives are very optimistic.” Many in his administration viewed the target as implausible, but they urged Carter to sign it so as not to seem antisolar. The DPR reached a conclusion that 25 percent solar was unrealistic, but after noting all the obstacles, the group still thought 20 percent was a feasible target. Two Carter aides, science legal counsel Richard Meserve and science advisor Phillip Smith, however, expressed doubts that the country would achieve even 12 percent, a level thought to be very doable by the DPR group. Even more pessimistic, Representative McCormack wrote that “with generous funding for solar energy development, we may, if we are extremely fortunate, produce 3–5% of total energy demand from solar including bioconversion by the year 2000.”64 The DPR group appeared to believe that 12 percent was all that anyone could reasonably hope for, but they decided 20 percent was the minimally acceptable political goal because Carter had at least tacitly endorsed 25 percent in his Sun Day speech. At the same time, the group concluded that 20 percent was the maximum possible, the “technical limit to penetration.” Advocates in Congress such as Democratic Representative Peter Peyser of New York also came out for the 20 percent solution,65 and a letter from 114 legislators calling for something 63 64 65

Of course, some of these were duplications – slight alterations of the same bill. McCormack Papers, Washington State University, Energy Notes, May 13, 1978. As we will see, 20 percent would become a favorite number with respect to energy technology goals.

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like an Apollo project for solar reached Carter’s desk in February. “We urge that you lead the nation to a solar future,” the letter concluded. In general, science aides were nervous about setting any numeric solar target. The Office of Technology Policy drafted a memo calling for a “qualitative” rather than quantitative goal to avoid the embarrassment of missing it. The memo doubted that any quantitative objective made sense, much less one deemed the “technical limit.” “We can have no confidence that any particular goal is socially optimal or even economically or technically reasonable.”66 Solar was being interpreted broadly to include solar heat, direct conversion to electricity (PV), wind (which depends on solar atmospheric heating), hydropower, and even biomass, particularly the blend of corn-derived alcohol (ethanol) with gasoline, known popularly as gasohol. Gasohol on the surface appeared a useful addition to America’s energy mix – home grown, renewable – but it was already under attack from within the administration. A 1978 report on alcohol fuels from the U.S. Department of Agriculture was overwhelmingly negative. The report argued that to be competitive, 10 billion gallons of gasohol would need $10.4 billion in subsidies; would have a negative energy balance (that is, more energy would be required to produce the ethanol than would be available as a transportation fuel); would “sharply” increase prices of feed and food grains; would decrease livestock production; and would raise consumer prices generally.67 Still, the 20 percent solar plan was pushed forward; given that this was determined politically, not technologically, the actual odds of achieving this goal were virtually zero.68 The DPR was published in February 1979, and a message from Carter in June made 20 percent solar by 2000 the goal. To emphasize his commitment, Carter installed a solar heating system at the White House.69 He pledged to spend $1 billion on solar subsidies in fiscal 1980 and to develop a long-term financing vehicle, a solar bank; he also called for gasoline tax exemptions for gasohol. But the world had changed during the months from the start of the DPR to the time Carter issued his 20-percent goal. The Iranian government had 66 67 68

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CPL, solar policy memo OSTP to Eizenstat and Schirmer (undated), Schirmer/Ward, Box 23, 1979. McCormack papers, U.S. Department of Agriculture study for the House Committee on the Budget “Gasohol from Grain: The Economic Issues,” Jan. 19, 1978. Although the chances of success were low, Carter, along with other proponents, did convince the public that solar was the future. In two 1979 polls, more than half the population thought solar both a short-term and long-term answer to U.S. energy needs (Richman 1979). It would be removed by his successor.

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fallen, and Americans were again in the middle of the next energy crisis, this one worse than 1973–4. The sudden and persisting crisis gave impetus to a new energy plan, one far more dramatic, costly, and ambitious than the one that had passed in 1978. But the sacrifices that it would entail would be relatively light because much of the funding would come from taxing the oil companies. By the end of Carter’s term, something close to his full package had been passed – most of it overwhelmingly – by legislators fully gripped by the “do something” problem.

5. “A Crisis of Confidence” After passage of the five bills of the National Energy Act in November 1978, the administration seemed to want to take a break from the energy war – as Carter liked to describe it. In December, the administration put together an Energy Coordinating Committee mainly to implement the NEA that had just passed as well as to look into cases of energy facility permit delays. Even turmoil in Iran, leading to the Shah of Iran’s ouster in December and to some disruptions to Iranian oil production, did not change the basic thrust of Carter administration policy. There was even some good news on the supply front; Mexico had discovered significant quantities of oil and natural gas and negotiations were underway to import some of both to the United States. Carter’s January State of the Union address was notable for the relative absence of any discussion of energy. A mention of solar and an admonition that Americans not waste resources put energy issues in the background of an address that focused most prominently on health care and international affairs; even his much longer later message to Congress had little new on energy. Yet, events in Iran soon put energy back in the spotlight. On December 26, chaos in Iran halted oil production, and exports did not restart until March.70 In 1978, Iran was producing between 5 MBD and 6 MBD. When production restarted in 1979, Iran’s output was close to 4 MBD below its 1978 average; production was still well below its 1978 average by June. In 1978, the United States had imported an average of 770,000 bbl/d from Iran, approximately 4 percent of all U.S. oil consumption. With the first shutdown of Iranian oil, other exporters – including Saudi Arabia – stepped up production to reduce the worldwide shortfall. In late December 1978, Schlesinger expressed optimism about available supplies, and in early January told Carter that the short-term outlook was positive although he 70

Iran’s production had fallen so dramatically, it needed to import oil during January and February (Comptroller General 1979).

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worried that a protracted shutdown of Iranian oil might lead “to actual supply shortages during next winter’s peak [heating oil] demand”71 By February, the supply issue was called “serious but not critical,” but there was a demand for at least some sort of planning if not direct action. Members of Congress began the call for some new measures by the administration. Paul Tsongas, now the junior senator from Massachusetts, gave a speech on the Senate floor in early February describing the Iranian oil cutoff as the “Fourth Energy Crisis” and declaring that in the coming summer, “you and I will sit on long gas lines . . . [but if we do not act now], the gas lines of 1979 will be hardly remembered in the harsh light of what awaits us in the eighties.”72 Yet, at the moment there were not many gas lines. There were higher prices and it seemed likely they were going higher still. OPEC had announced price increases of 14.5 percent to around $15/bbl. But soon after January 1, prices began climbing rapidly, and by February oil was reportedly selling at over $20/bbl in some spot markets, as nervous oil refiners and others bought in fear of the spread of turmoil from Iran to the rest of the Persian Gulf region. There were more calls from Congress for the administration to take action, but these were somewhat muted as a sense of crisis was only gradually building. The Carter administration had in fact begun to lobby OPEC producers intensively, especially the Saudis, to hold down price increases, and officials began to consider policy options though most of them only as standby provisions. But for Schlesinger in particular, this incipient crisis was considered an opportunity, not for a massive energy bill but for something he had advocated privately within the administration: the phased but complete decontrol of oil prices. The previous fall, an unsigned memo circulated to Carter and senior members of the administration argued that since COET was dead the only alternatives for seriously checking imports were quotas and price decontrol (along with a windfall profits tax). Nothing necessarily needed to be done. According to legislation that had most recently extended controls beyond Ford’s 40-month phase out in the EPCA, controls were supposed to expire on June 1, 1979. Though Congress was unlikely to accept an abrupt phaseout, the memo suggested a gradual decontrol process to be completed by December 31, 1980. The benefits of decontrol seemed clear: “conservation via price” and incentive for “additional domestic supply.” Schlesinger appreciated the logic of decontrol and he hoped to finally persuade Carter. 71 72

Memorandum, Schlesinger to Carter, Jan. 4, 1979, (U.S. Department of State 2012) p. 578. CR, 96th, 2126–27, Feb. 8, 1979. The other two energy crises he was counting were the natural gas shortages of the winter 1976–7 and a coal strike in 1977.

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Though Carter had been against decontrol, Schlesinger apparently persuaded him it was their only option to get the conservation results they had sought. Reports in late December 1978 suggested that Carter was in fact considering the end of gasoline price controls, and in late January he proposed lifting price controls from aviation gasoline and jet fuel. The next day Senator Jackson introduced resolutions disapproving both plans. But enough Democrats voted with the administration (total of 53 senators against) and the two fuels were decontrolled. Gasoline price decontrol and crude oil decontrol were more problematic propositions. There were, of course, a number of legislators who had a strong ideological, or at least political, bias toward decontrol, just as there were those with a strong bias against it. Actually, Congress seemed to be divided into three groups, not strictly along party lines. Group one consisted of oil-state legislators who were for decontrol of oil and often of natural gas, as quickly as possible; group two supported the administration and would be willing to endorse plans for gradual decontrol of oil (as Schlesinger advocated) with very limited decontrol of “new” gas if Carter wanted it. The third group comprised consumer advocates, those who were for controls to be extended both in time and across the range of energy products. Most of these were Democrats, and with the price of oil once again rising, they wanted both an extension of controls and strong mandatory conservation measures beyond any in the NEA. When the administration offered a proposal for some voluntary measures and only standby authority for mandatory ones, leading consumerist voices found them weak indeed. “I see no sense of urgency at the Department of Energy,” said Senator Howard Metzenbaum (D-OH), who was often a spokesman for the consumerists. He complained that Schlesinger was trying to force decontrol and had a “strategy based on the highest possible prices for all forms of energy.”73 As the sense of crisis built, the pressure on Carter grew, and in a speech on April 5, he made a new set of energy proposals, spelled out a month later by the second National Energy Plan.74 In this latest televised address on energy, Carter emphasized two related programs: gradual decontrol of domestic oil prices and a windfall profits tax. As had become the norm, Carter was severe and reproachful, telling the American people he was going to “give it to you straight: each one of us will have to use less oil and pay more for it.” The administration estimated that it would raise the price of gasoline by five 73 74

CR, 96th 4961, Mar. 14, 1979. Actually the bill that had established the DOE (Title VIII) required bienniel reports on national energy policy that had to be presented to Congress, and this one was transmitted “as required” under Public Law 95-91.

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cents per gallon by 1982. The tax on “undeserved” oil company profits would go into a fund (called the Energy Security Trust) to both support alternative energy development and help poor people with higher energy bills. Furthermore, Carter would demand that any new untaxed profits be used for more domestic supply development. Controls were to expire in June, and Carter made it clear that absent any impediment from Congress, he would begin the process. It should be noted that Carter’s windfall profits tax was not actually a tax on profits. It was to be a tax on the difference of the market price of oil and the “correct” price, as determined by energy officials. A company could in theory have been losing money, but if it sold oil for $15 when the government determined the correct price to be $10, there would have been a tax on the five “undeserved” dollar excess, whether it was booked as profits or not. It was correctly viewed as a variable excise tax, imposed at the wellhead. Still, the new plan was regarded as a victory for Schlesinger (the strongest advocate for decontrol) and a “turnabout” for administration policy generally.75 Carter’s aides told the press that this bill was developed in accord with congressional proposals, and administration officials were confident that Carter’s implied threat to decontrol prices with or without the windfall tax would bring support for both programs. However, the entire package was received coolly in Congress – especially by Carter’s fellow Democrats. Although O’Neill promised loyalty, many senators went on the offensive against it. Senator Metzenbaum attacked the plan for the “devastating impact” it would have on consumers, suggesting that current shortages were largely an oil company plot.76 Jackson introduced a bill in the Senate a few days later “to extend mandatory crude oil price controls until December 31, 1982,” a direct slap at Carter. Jackson said that the administration was seriously underestimating the impact on gasoline prices: he pegged it at about five times the four- to- five-cent estimate.77 One 75

76 77

Actually, in February, Schlesinger had expressed concern about pushing decontrol because he thought the country was not ready for it. Presumably as the sense of crisis grew and “do something” demands intensified, he and Carter believed the country was ready. Schlesinger’s reservations expressed to a meeting of the administration’s Policy Review Committee, Feb. 8, 1979. Noted in U.S. Department of State 2012 p. 601. These claims were in a New York Times op-ed by Metzenbaum, “Now, Oil Decontrol,” Apr. 5, 1979, A23. Some economists and energy experts opposed decontrol as well. Economist Paul Davidson (1979), for example, argued that decontrol would represent an unfair wealth transfer to producers and would be inflationary. Members of Congress cited various studies of the negative impacts decontrol would allegedly produce. Another energy expert would argue

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of the most enthusiastic supporters of Jackson’s effort was Senator Edward Kennedy (D-MA), expected to be Carter’s rival for the Democratic nomination the following year. Congress was fighting Carter on other fronts as well. Legislators also rejected the standby gasoline-rationing plan (a step that was required under the EPCA) that Carter had sent for congressional approval. Meanwhile, the energy situation in the country was deteriorating and becoming a political disaster for the Carter administration. There was one mess after another, and Carter appeared to be reacting to events, or to the comments and actions of Congress, rather than taking charge. As turmoil in Iran roiled energy markets, gas lines, which had begun sporadically (mainly in California at first), became increasingly widespread. To the anger and dismay of the general public, the administration could not even tell people why there were gas lines again. The answer was relatively simple: there were still price and allocation controls, and because world market supply was constrained by troubles in Iran and buyers were reacting to the latest news, prices were increasing almost daily in most of the world. However, the U.S. price control and entitlement allocation systems could not assimilate these changes so quickly. So, there were shortages, misallocations, and gas lines. Rising prices and gas lines actually led initially to increases in demand; consumers expected worse to come and so were “topping off” their tanks to be sure not to get caught with an empty tank at an empty gas station (Hall 2003). Then, in late March, there was another problem: the Three Mile Island nuclear power plant failed dramatically, putting that energy source out of bounds – it would turn out for decades. In Congress, energy once more leapt to the forefront of the agenda, and legislators switched into “do something” crisis action. They cast blame on everyone from Carter to OPEC to oil companies. As Senator Metzenbaum and Representative Toby Moffett (D-CA) wrote to the Comptroller General, Elmer B. Staats, “It is our suspicion that once again the American people are being manipulated by oil companies, that the shortage is contrived, not real.”78 Still, no one received more obloquy than DOE Secretary Schlesinger. He was accused of mismanagement and of manipulating data.

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even after decontrol was put in place that “only national governments have the perspective needed to set socially optimal oil prices” (Weyant 1983, 17). Letter contained in Appendix II (U.S. Comptroller General, 1979). Carter also asked the DOE to undertake its own investigation. This report issued in September, suggested that (a) there was no conspiracy to withhold supplies and raise prices, (b) the Iranian oil cutoff in itself was at most partly responsible for the shortages, and (c) many of the problems resulted from DOE allocation and pricing regulations. According to Schlesinger, Carter had hoped that they would “find the evidence of this conspiracy of artificial shortage” (Schlesinger interview, 36).

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A DOE investigation exonerating the oil companies of charges of collusion and market manipulation did not help his cause. Howard Metzenbaum called for Schlesinger’s resignation; so too did fellow Democrats George McGovern and Dennis DeConcini, as well as several Republicans including the governor of Texas. Senator Alan Cranston (D-CA) argued that America was losing what Carter had called the moral equivalent of war and so it was “time we find a new general.”79 Members of Congress also demanded the administration come up quickly with a robust energy policy – something more dramatic (and more acceptable to a majority of legislators) than oil price decontrol. Congress began to take the initiative with crisis legislation, introducing many bills and resolutions. Some (typically) were symbolic; Senator Strom Thurmond (R-SC), for example, introduced a resolution to make July 4, 1979, “Energy Independence Day.” But measures that promised long-term solutions to American energy problems began to appear as well. There were bills aimed at energy independence, and crash Apollo-type programs for synfuels or solar energy. Synthetic fuel (synfuels) – primarily coal liquefaction and gasification – was the technology of most interest. In early April, the Senate began consideration of a bill to amend the Defense Production Act of 1950 to undertake a major effort in synfuels. By June, several other bills calling for large-scale efforts in synfuels were introduced. One of these expressed the ongoing narrative of energy policy that was sure to surface in any crisis; it was called the National Energy Self-Sufficiency Act of 1979. At the same time, oil prices kept rising. Whereas at the start of 1979, the Carter administration (as well as most industry and independent forecasters) had anticipated a doubling of the $13.50/bbl price in about seven years – which was assumed to be potentially catastrophic for the U.S. economy – it appeared by June that the doubling would take only seven months. The spot market price of oil by May was firmly above $20/bbl, and some shipments were going for more than $30/bbl. Members of Congress who were not pressing a particular agenda were growing desperate, overwhelmed by the need to be seen to be doing something. As Eliot Cutler, who was in charge of energy issues at the OMB, wrote in mid-June, “The frustration and uncertainty, combined with increasing apprehensions about vulnerability, that has gripped the country has produced an environment in Congress where any answer is an attractive one – even if its (sic) wrong.”80 Because synfuels had become the technology of 79 80

Public comment, read into the Congressional Record, 96th, 11719, May 17, 1979. CPL, memo Eliot Cutler to McIntyre and Eizenstat, Eizenstat, Box 286, June 12, 1979. Emphasis in the original.

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the moment, Cutler wanted Carter to take the initiative on it. Even Jackson had joined the synfuels chorus, suggesting a program much greater than the one before the House. He called for an effort to produce as much as 6.2 MBD-oil-equivalent (MBDOE) of synfuels. Three leading figures in Washington outside of government at the time also called for a massive effort in synfuels to reach 5 MBDOE by 1990. Carter had lost all advantage with respect to energy. As Schlesinger put it later, “[A] President should be making announcements rather than responding belatedly to congressional initiatives.”81 Carter’s own proposals centering on oil decontrol and a windfall profits tax seemed weak and, the tax notwithstanding, all too favorable to hated big oil companies. Moreover, decontrol did not appear to Congress to be a way of ending the gas lines or of reducing prices in the near term. As the lines were reaching their worst, the New York Times published an article that suggested decontrol might not help in the long run either. Energy expert Robert Stobaugh told the Times that even with more drilling it was unlikely that much new supply would be found, “[T]he chances of finding a really big field are quite remote.”82 Still, Carter focused on decontrol and windfall taxes through much of the spring, and as he did, his approval ratings fell to the level of Richard Nixon in the last weeks of his presidency. As one writer put it, “[Americans] had tuned their leader out” (Mattson 2010). Even his plan, announced in June, for 20 percent solar by 2000 did not revive his standing with the public. Later that same month, Carter traveled to Tokyo to meet with the leaders of other developed oil-consuming nations to discuss a mutual plan for cutting consumption and jointly advancing alternative energy technologies. OPEC ministers were meeting simultaneously in Geneva. The oil ministers (especially the Saudi minister) were concerned that pricing had gotten chaotic. One country would announce a price hike one day, and someone else would promise an ever bigger increase the next. The spot market price gyrated. But the ministers finally reached an agreement; the ceiling price was set at $23.50/bbl, whereas the Saudis were to keep market stability by maintaining a price of $18/bbl. These were, of course, far above the January 1 price. At that time, it was expected that after the first 14.5 percent increase prices would rise at most another 5 percent by the end of 1979. Instead, they had risen by 75 percent in six months. Two states, New York and Connecticut, passed laws that were probably unconstitutional, forbidding oil 81 82

Schlesinger interview, 40. “Critics Assert Oil Price Decontrol May Not Spur Production in U.S.,” June 17, 1979, 1.

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companies from passing along their costs of crude to consumers. This actually threatened local consumers; the rule would have forced oil companies to lose money and most surely to end operations in those states. If Americans generally were shocked and outraged, administration officials seemed near despair. Eizenstat composed a memo to Carter83 that he sent to Tokyo on June 28 detailing the deteriorating situation. In brief, it said consumers were angry, gas station operators were angry, truckers were striking, the state of Maryland was suing the DOE over its (perceived) mishandling of allocations, the administration’s political position was in free fall, and Congress was completely panicked. “Members are literally afraid to go home over the [Fourth of July] recess,” Eizenstat wrote, “for fear of having to deal with very angry constituents.” The House had just passed a synfuels bill offered in May by Representative William Moorhead (D-PA) to produce 500,000 BD of synfuels within five years and 2 MBD within ten years. It passed simply because as Representative James Quillen, a Tennessee Republican, explained, “the American People have demanded action by the Congress that something be done.”84 An immediate appropriation of $3 billion was called for in the bill. Eizenstat commented, “It is fair to say that in normal times, a bill as significant as Moorhead’s would have been considered much more carefully.” It passed the House 368 to 25. Eizenstat pleaded with Carter that he had to show leadership on energy. He needed, Eizenstat argued, to devote himself totally to the effort for at least a few weeks to show that he was in charge trying his best to do something about this problem. The process, Eizenstat added, should include visible consultations with members of Congress. Eizenstat suggested that Carter needed to focus on OPEC as the enemy, address the “enormous credibility and management problems of the DOE,” and announce a major synfuels initiative using windfall tax revenues to support it. Eizenstat also argued for the creation of a “National Energy Mobilization Board” to cut through red tape to get energy projects going. Wrote Eizenstat, “In many respects this would appear to be the worst of times. [But] we have a better opportunity than ever before to assert leadership over an apparently insolvable problem.”85 Carter got the message, returned from Tokyo without a planned vacation stopover in Hawaii, and once again prepared to make a speech on energy. 83 84 85

CPL, memo Eizenstat to Carter, COS (Butler), Box 98, June 28, 1979. The memo was subsequently published in the Washington Post. “Compilation of the Energy Security Act of 1980 and 1980 Amendments to the Defense Production Act of 1951,” June 26, 1979, 614. CPL, Eizenstat memo to Carter, see note 83.

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The speech was written, and the television equipment was brought to the White House for the July 5 address. But this speech was just like every other one he had delivered on the subject. He was going to talk to the American people about “the unpleasant realities” that the “long-predicted energy crisis” is “here” “now.” “[O]ur independence is in danger.” Energy is a “battlefield,” but if we do “our solemn duty” and “mobilize,” we could achieve “ultimate victory in the energy war.” There were some specifics about synfuels and development of other sources of supply, and there was a short sermon about how “fear . . . had clouded our response to the energy crisis at hand.”86 Carter read through it; so did his aides and his wife, and they all thought it a poor effort (Mattson 2010). Indeed, even the writers apparently believed it a bad idea to give another energy speech to a nation that was not listening. Carter went to Camp David for the Fourth and decided to stay there. The speech was cancelled and Carter’s next step was left hanging. But once at Camp David, Carter began a series of strategy sessions with his aides, members of Congress, governors, business, and labor leaders – more than one hundred people in all – about what to do with respect to energy policy. It created, as Schlesinger recalled, “an aura of mystery” but also puzzlement as to just what Carter was up to. There were some in the administration, notably pollster Pat Caddell, who had been arguing since the spring that there was a deeper problem than gasoline shortages, a national pessimism that was far more important for Carter to address than whether the country needed a major synfuels initiative. Caddell outlined his views in a long memo that he gave to Carter at the end of April – although it reportedly reflected views he had started to develop in 1977. The country had lost its confidence, Caddell opined, and he wanted Carter to address that perception to get people out of the rut they seemed to have fallen into. This view was not universally endorsed within the administration. Vice President Mondale reportedly argued vehemently with Caddell, saying that from a political standpoint it was a bad idea to scold people for being depressed, especially if they really were. But other visitors to Camp David echoed the pollster’s concerns (Mattson 2010). As Carter later noted, some of the advice he had received went along these lines: “Mr. President, we’re in trouble. Talk to us about blood, sweat and tears.” And, “If you lead, Mr. President, we will follow.” The national rut – a “crisis in confidence” – emerged as the major theme of Carter’s speech, which was finally given on July 15. A few pundits and 86

Schlesinger interview, 61.

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some historians considered it then and now a great speech that should place it alongside those of Lincoln, Roosevelt, and Kennedy (Mattson 2010). Columnist David Broder called it “one of the most extraordinary addresses a chief executive has ever given.” Although it received much favorable press coverage, it was remembered not as the “crisis in confidence” speech, a phrase actually in the speech, but rather as the “malaise” speech, a word never used but fairly implied in phrases such as, “We can see the crisis in the growing doubt about the meaning of our own lives” and “We have learned that piling up material goods cannot fill the emptiness of lives which have no confidence and purpose.” After his spiritual pep talk, Carter enunciated a six-point energy program, including an “Energy Security Corporation” (ESC) to replace 2.5 MBD of imports by 1990 with a “massive peacetime commitment of funds” for alternative energy, primarily synfuels; a mobilization board (EMB) to prevent delays in energy projects; import quotas to “forbid the entry into this country of one drop of foreign oil more than these goals allow;” a switch from oil to coal for electric utilities; and finally a “bold conservation program” along with standby mandatory conservation and rationing authority and $10 billion in additional funding for mass transit. The synfuels program represented a change of heart for Carter; although it had been under discussion at the DOE and the White House all spring, Carter had opposed it on environmental grounds. And although these proposals had been discussed, in July, they were rushed to the forefront by political necessity. Of course, the administration offered a market failure justification. A government synfuels initiative was necessary because synfuels would not be cost-competitive until the 1990s when they would be highly profitable; presumably if the market were sufficiently farsighted, it would invest in synfuels now. There were also nonappropriable positive spillovers, related to U.S. energy security, which also warranted government intervention. Finally, private investment was deterred by high investment risk and regulatory uncertainty – again necessitating a federal government program. Over the next few days, the scope of these proposals was made plain. The total cost was estimated at $140 billion ($435 billion 2011 dollars). ESC was a virtual twin of the Ford administration’s Energy Independence Authority. In fact, so close was the parallel that the administration made a point to rebut it by noting that the Authority’s goals were ambiguous whereas the ESC would have specific benchmarks. Of the $140 billion, an estimated $88 billion (about $270 billion 2011 dollars) would be directed to synfuels development and commercialization – which would include “a limited number” of government-owned facilities, as well as loans and

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subsidies to private firms willing to begin commercial production. Overall, the administration estimated a savings over expected import levels by 1990 of 8.25 MDB.87 The proposed scale was impressive but contained many unexplained aspects. Just where did the figure $88 billion come from? According to Schlesinger (in his 1984 interview, p. 43), it “came from nowhere” and seemed very much like the random $100 billion chosen by Nelson Rockefeller for the Energy Independence Authority. But then the synfuels target of 2+ MBD was also widely deemed unachievable. Over the ensuing months, the Congressional Office of Technology Assessment was one of five different agencies inside the government that criticized the synfuels program as overly optimistic. The governors of states in the Midwest attacked the program, with one noting that the synfuels program “fails the most basic principles of cost effectiveness.”88 The press response was at best mixed. The New York Times voiced support, as did Business Week. But the liberal New Republic magazine labeled synfuels “The Edsel of energy alternatives,” arguing that the program was “likely to be an economic, social and environmental disaster.” Many liberal critics felt the effort should go into Carter’s solar plans instead; Robert Stobaugh argued that studies showed we could get as high as 25 percent solar by 2000. But actually the 20 percent goal was itself well beyond anything realistic. The confusion surrounding this massive new proposal was predictable given that the new energy package had been brought out in exactly the way Carter had said in 1977 it should not: it was crisis-driven, pointed to “ever more massive government bureaucracy and regulations, and ill-considered last-minute crash programs.” The EMB was intended to make sure those crash programs went through, but the EMB by its very nature embodied many of the problems and contradictions of U.S. government energy policy. Basically, the EMB’s purpose was to establish a bureaucracy that would make sure other bureaucracies did not impede the efforts of government programs – that is, programs run by still more bureaucracies – from taking effect. What exactly were all of these bureaucracies doing in the first place? Presumably some vital government function that was now, if in fact the EMB was necessary, in opposition to some other vital government function. Rather than repealing or at least limiting the older functions, there would be instead a new monitor of a monitor of a monitor. But there was no reason 87

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The Carter administration counted savings of 2.5 MBD from the 1978 NEA, 1.5 MBD from solar, 2.5 MBD from synfuels, utility conversions 0.75 MBD, residential conservation 0.25 MBD, and other, 0.75 MBD. Quoted in the New York Times, Aug. 28, 1979.

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to think that the EMB would have full or even good information with which to make its decisions; many would necessarily rely on notoriously bad energy forecasting. On what basis would it know which rules should be circumvented when? The EMB seemed certain to engender government failure, more than energy development success. Consider it with regard to the categories of government failure in Chapter 2. The problems of internalities, for example, would be compounded, because the metric used by Bureaucracy A was unlikely to align with that of Bureaucracy B. Hasty (indeed panicked) implementation was in fact built into the 1979 energy program and would likely produce rising costs. Derived externalities – there were many reasons to worry – about the environmental spillovers from massive synfuels development (it had worried Carter), and distributional issues were guaranteed to arise over a program that was to have at least $88 billion appropriated to it. Presumably if the EMB led to an evident government failure, Congress would appoint another board to monitor the EMB. In fact, no part of the 1979 energy package raised more concerns than the EMB, but it was not because of its contradictions. Rather, it was defeated mainly by Democrats who saw it as abandonment of environmental protection, particularly provisions of the National Environmental Policy Act (NEPA) of 1969 that called for the creation and filing of environmental impact statements for all projects receiving federal funding. The fear was that the EMB would simply be a way to circumvent NEPA rules. Objections to the EMB, in fact, came from within the Carter administration itself. As James “Gus” Speth, chair of the Council on Environmental Quality wrote in a memo to Carter, “nobody has demonstrated that [waivers to environmental rules] are necessary to meet our energy needs” [original emphasis].89 Still, the initial response to Carter’s speech and his proposals seemed positive. He received a “bump” in public opinion polls; he had apparently projected the necessary “take charge” attitude Eizenstat and others had wanted. And then he squandered it. About a week after the speech, Carter asked for the resignations of his entire cabinet, assistant and deputy cabinet secretaries, and his senior staff. It appeared to happen as the result of a spontaneous outburst of anger (as described by Schlesinger in a later interview). But actually, as Carter-era documents show, it had been planned in advance with his closest aide, Hamilton Jordan, designated now to become White House Chief of Staff, and was discussed with other senior staffers at Camp David. Carter had apparently wanted to get rid of two cabinet 89

CPL, memo Speth to Eizenstat, Eizenstat, Box 201, Apr. 4, 1980.

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members in particular: Joseph Califano, secretary of health, education, and welfare, and Michael Blumenthal, secretary of the treasury, whom Carter aides felt were not “team players.” As an added bonus for Carter, Schlesinger, the focus of so much congressional criticism, also would depart, along with his deputy, O’Leary.90 Jordan thought this an important action to do at the time to provide “a clear signal that you mean to get tough” and “do business differently,” “to show governmental movement immediately, and then get on to the business of being the leader of the nation not the government.”91 The result was quite opposite from the one Jordan expected. The firings were decried by people from both parties, some calling it that worst of 1970s political insults, “Nixonian.” When Jordan talked about loyalty on television, some critics asserted that Carter seemed to value loyalty over competence. One House Democrat suggested that some members of his party would conclude, after this botched episode, that they might be better off in 1980 with Senator Ted Kennedy as the nominee, not Carter. Although there were now going to be major changes with regard to personnel, the energy package was presented to Congress with a great sense of urgency. Congress, after the cabinet debacle and with August vacation time approaching, seemed in less of a hurry. At hearings of the Senate Finance Committee, ostensibly to discuss the House-passed windfall profits tax, most of the discussion was on synfuels and energy policy generally – a good deal of it skeptical. Schlesinger, testifying as the lame-duck secretary of energy probably did not help matters when he told the panel that despite Carter’s vast, expensive proposals “there is no comprehensive energy plan” for the country.92 Although he did not apparently believe in it, Schlesinger defended the $88 billion at that time as “based on very conservative assumptions.” Senator John Danforth (R-MO) seemed especially troubled by the proposed decision-making structure for the ESC. It was to have a twelve-year charter, directed by a seven-person board, three of whom would be cabinet secretaries (energy, treasury, and interior) and the other four presidential appointees (confirmed by the Senate), meaning that the board would not, Danforth noted, be “out of the political process.” So, Danforth wanted to know, who would decide how, when and where to spend $88 billion? “[W]e 90

91 92

Also leaving were Secretary of Transportation Brock Adams and Attorney General Griffin Bell. Bell, as well as Schlesinger, had announced an intention to resign earlier in the year, but both were essentially pushed out in this reshuffle. CPL, OCS (Jordan), Box 33 (hand-dated) July 1979. This was in contrast to Carter, who would say after passage of most of his program that the United States had in place a complete national energy program. CPL, Schirmer/Ward, Box 15.

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can say, well, we cannot make these decisions centrally and therefore we are going to let the marketplace decide. . . . Or . . . we could say, we in Washington really do know how to decide these things . . . [or] we can say well we will delegate such decision-making responsibility to a group of experts. . . . So I really do not know how to go about making the decisions, but I do know that somehow we have kind of fallen apart.” Schlesinger really did not provide an answer.93 Perhaps Schlesinger’s most surprising claim, however, was that OPEC had actually kept the price of oil unusually low; on a free market basis, it would have been higher, close to $25/bbl, he thought. In other words, although OPEC apparently had monopoly pricing power, the members were actually suppressing the price rather than obtaining full monopoly rents. But if the price was indeed low relative to market supply and demand, the proposed windfall profits tax made no economic sense because it was predicated on the belief that the market price was artificially high. This was not pursued at the hearing, but the sum of the discussion left little reason to believe that any part of Carter’s energy plan would be enacted soon – the gas lines and angry motorists notwithstanding. Members of Congress were, like Danforth, confused. When a few days later Jackson’s Senate committee decided to cut the initial authorization for synfuels funding from Carter’s $22 billion to a mere $3 billion, several senators simply confessed that they had no idea what kind of legislation they should pass and how quickly. As Senator Metzenbaum put it, “We’re moving without really knowing what we’re doing.”94 Nevertheless, at the White House, Eliot Cutler, who was given a large management role with respect to the new energy initiative, claimed that the administration had five months to get all of the components of the program into law because in 1980 politics would presumably trump policy. And so the administration pressed forward. Cutler set out an action plan with three primary goals: the enactment of the new energy plan along with the pending windfall profits tax, which had only just passed the House; display of “vigorous Presidential leadership”; and a confidence boost for America. Because the last of these was generally meaningless as an “action” item, the memo focused almost entirely on the passage of legislation. He was joined in this effort by a new secretary of energy (while the old one continued to advocate on the energy program’s behalf). Carter replaced 93 94

The Schlesinger-Danforth exchange: “Crude Oil Tax, Hearings before the Committee on Finance, United States Senate,” 828–35, July 31, 1979. Comment made at hearings of the Senate Energy and Natural Resources on synfuels, Aug. 1, 1979.

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Schlesinger with Deputy Defense Secretary Charles W. Duncan, Jr. John C. Sawhill, one-time head of the FEA, was given O’Leary’s old job as Duncan’s deputy. The cabinet-level Energy Coordinating Committee that had been active late in 1978 and early 1979 reconvened under Duncan’s direction. But not much was happening or seemed likely to happen because by September, the gas lines were gone. Prices were high, but supplies of heating oil as well as gasoline seemed robust. Also, Carter’s poll numbers were dropping again. These developments clearly took the impetus out of the legislative push, because the demand to “do something” precipitous had declined and gave an opportunity for legislators to put forward their own ideas on energy. In fact, from the time of Carter’s speech until the middle of October, more than two hundred pieces of legislation were introduced, clogging up committee time and distracting attention away from the administration’s program. It began to appear that if anything were passed, it would be closer to the EPCA than the proposed ESC. Included in the rival legislative offerings were some that were intended to be as comprehensive as Carter’s. Senator Metzenbaum, for example, unveiled his own major energy bill to be called “The Citizens Energy Act,” which Representative Moffett introduced in the House. It sought among other provisions the continuation of price controls until at least January 1, 1982, the end of any move toward natural gas deregulation, and the formation of two government corporations, one to have complete control over energy resources on government lands and the other to be the sole purchaser and distributor of imported oil. The oil companies were to be hit with new taxes, prevented from merger, and carefully controlled by the government. It appeared to have little chance of passage, but by October, neither did Carter’s legislation. And then crisis struck again, and there was a rush to do something once more. In late October, the deposed Shah of Iran came to the United States for medical treatment, and in retaliation, the Iranian government allowed a group of militant students to take over the U.S. embassy in Teheran and hold fifty-two American citizens hostage. The United States responded by freezing Iranian assets and barring the importation of Iranian oil. This second gesture was merely symbolic because oil is fungible. Iran did not cut back production, so to the extent the prohibition was successful, it just meant that oil from Iran went elsewhere and the oil that had been going to that elsewhere now came to the United States. But arguably, credit for passage of Carter’s energy program was due to the Ayatollah Khomeini as much as anyone in Washington. The outrage at Iran encouraged more than a few members of Congress to vote to “do something” that would get back at those like Khomeini who controlled oil and meant to do us harm.

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Indeed, the Senate’s version of the Carter program was reported out of committee to the full Senate on November 5. The ninety-six-page bill was, according to Senator Jackson, intended “to help the United States gain control over its energy and economic future.” He added, “In my judgment the overriding questions facing every Senator in this debate . . . have to do with the magnitude of the commitment we are prepared to make to free the Nation . . . of the bondage imposed by OPEC.” He repeated that idea: business as usual would leave us in “our present bondage.” Also, the oil companies were untrustworthy. Senator Mark Hatfield (R-OR) called them “just plain greedy.” The bill, which was focused mainly on synfuels (although there were provisions for large expansion of gasohol, a solar bank, a conservation bank, and authorizations for other alternative energy programs), was somewhat more modest than what Carter had proposed. It would be handled in two stages, with $20 billion authorized for the initial stage of synfuels development; $68 billion more for stage two to get the United States up to 1.5 MBD by 1995 – five years more and less output than Carter had asked for. Senator Pete Domenici (R-NM) denied that it was a “crash program” because they were proposing “only” 1.5 MBD – actually a large quantity – but by the time the bill passed, the time frame had been shortened (to 1992) and the amount raised (2 MBD). Senator J. Bennett Johnston (D-LA) also attacked environmentalists and “certain academic economists” – the latter for suggesting that conventional resources were cheaper to extract and so there was no market incentive to support synfuels development. But, he claimed, “These theories . . . do not incorporate any information about, or experience with, the worldwide cartel which controls the available incremental unused supplies of oil.”95 In other words, finally, the reason for passing the ESC was market failure. The momentum in favor of massive new spending was also due to the fact that OPEC was dissolving in internal chaos, but that was not how it looked to U.S. officials. The main sign of chaos was initially a free-for-all of price increases. Saudi Arabia had tried to hold the official price at $18/bbl while allowing OPEC members to charge prices up to about $25. But by the time of the November 5 Senate debate on the synfuels bill, it was clear Saudi Arabia had lost control. In December, at an OPEC ministerial meeting in Geneva, the Saudis tried to reassert price and quantity discipline (even agreeing to raise their own price to $24/bbl), but their effort went nowhere, and the meeting ended without an agreement. Saudi Arabia envisioned a nasty recession in developed countries, cutting demand, and greed from 95

Compilation of Energy Security Act, Senate debate, 957.

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cartel members shattering any kind of consensus in the group, leading to a loss of price leverage. The price had effectively doubled in twelve months. The average price by December 1979 was about $25/bbl, but several OPEC countries were charging more than that. Nigeria and Libya were asking $30 officially per barrel, but reports suggested spot prices even in November that were over $40/bbl. In fact, the spiraling price hikes were a kind of speculative climax that could only end badly for the cartel. How it ended for OPEC is discussed in Chapter 7, but in the late fall of 1979, it did not seem to be OPEC’s problem; rather, it was a problem for the developed nations. To the United States, it appeared that the cartel, more powerful than ever, was intent on draining the country’s wealth. Petroleum expert John H. Lichtblau put forth a “nightmare scenario” in which OPEC controls quantity, raises prices and cuts output, and finds that at the higher price, their revenues were unchanged – which would depend on the price elasticity of demand; in fact, producers might even find that their revenues would rise. But with the unchanged revenue scenario, OPEC members would have the incentive to cut production again and raise prices again, doing so over and over “until the breaking point – wherever that may be and whatever it may imply.”96 Added the usually cautious energy economist Morris Adelman, “[OPEC’s pricing policy] is brinkmanship . . . But this kind of brinkmanship puts us on the brink, not them.”97 It was at this time that forecasts of future oil prices became increasingly fantastical. Given that prices had doubled in only one year, what would happen in the next ten? In the middle of 1980, Fadhil al-Chalabi, an OPEC pricing expert, suggested that they would merely double again in real terms during the next decade, a seemingly modest 7 percent per year in real terms, so that they would be somewhere between $60 and $70 per barrel (the average being in the $30+ range when he made his forecast). Depending on inflation assumptions, that meant a nominal price probably in the $100 to $150 range by 1990. The DOE envisioned a price in the same range as al-Chalabi, but the possibility of higher prices seemed just as likely. After all, before the end of 1980, Libya’s official price was already more than $40/bbl. Natural gas prices, with supply dwindling rapidly, if uncontrolled, were expected to skyrocket. Under a so-called best scenario the natural price was expected to almost triple in real terms by 2010; the worst case suggested a price of nearly $50/tcf (National Research Council 1982). 96 97

Quoted in, “OPEC Role May Expand in New Oil Era,” New York Times, Dec. 16, 1979, 22. Quoted in “OPEC Learns to Supply Less and Demand More,” New York Times, Dec. 16, 1979, E2.

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Not everyone was so pessimistic. In August, John P. Henry, Jr., an energy consultant with Booz, Allen & Hamilton, pointed out that “price elasticities do exist” and that demand was falling in the United States. Moreover, the claim that OPEC would soon be the only exporters was belied by finds outside of OPEC in Mexico and the North Sea off the coasts of the United Kingdom and Norway, and that these finds were sufficient so that those three countries would soon be exporters, exporters the United States could rely on. Early in 1980, Wall Street investment advisor Eliot Janeway pointed out the fact that there were signs again – as there always had been historically in the aftermath of a shortage – of an impending glut.98 Mostly, this kind of analysis was ignored. With a strong belief in OPEC’s omnipotence, Congress took up Carter’s energy package. The Senate finally passed a version of the windfall profits tax, which was predicated on complete price decontrol, with a full phase out by September 1981. A number of issues delayed reconciliation and final passage including efforts to exempt small producers, which failed, although their windfall tax rate was to be lower than that on the major oil companies. Soaring prices for oil gave conferees and the White House confidence that windfall receipts would be great. Depending on how the bill was configured the ten-year take was assumed to be between $170 billion and $270 billion; Congress settled on a White House-driven compromise that was expected to net $227 billion over 10 years – presumably much of it to fund alternative energy development. The day after passage, the Wall Street Journal published an editorial with a black border called “Death of Reason,” arguing that the tax was a recipe for destroying the domestic oil industry. But Congress, lurching from crisis to crisis, was in fact to reach the end point of the “do something” decision problem: it had agreed to pass a bill that entailed a radical solution to energy, something that they could go back to their constituents and say, “Though things have been tough, we in Congress have begun the process that will bring us energy independence/security and we will be doing it in such a way that it won’t cost you anything – the money will come from the oil companies. The verdict on whether this works will come in about a decade” (mercifully well past the next election cycle). This was assumed by legislators to have political traction. Representative Peter Peyser (D-NY) had reported in debate the previous year that a friend had told him, “You know if the Congress was only doing something, even if it were long term . . . it would make it a lot easier waiting in these gas lines 98

Op-ed, “The Oil Shortage Is a Malthusian Myth,” New York Times, Feb. 24, 1979, F16.

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knowing that there was . . . a light at the end of the tunnel.”99 The proposed solution relying heavily on new technologies – synfuels and solar – appealed to people with its belief in American ingenuity, especially if it meant little in the way of direct sacrifice. It promised a solution to the energy policy conundrum: a wondrous domestic technological achievement, lower prices, and energy independence, ultimately the only acceptable answer. By the spring of 1980, Carter’s energy program seemed headed for passage largely intact. In April, the Crude Oil Windfall Profits Tax Act was signed into law along with a low-income energy assistance measure. In June, the ESC, which had been renamed the Synthetic Fuels Corp. (SFC), solar and conservation banks, and a major initiative for gasohol became law as well. Only the EMB failed to make it through Congress. But most of the money for synfuels had been restored. The SFC would have an authorization of $20 billion to start, appropriations to be made as needed. Another $68 billion was anticipated after commercial demonstration had been achieved. When the Energy Security Act became Public Law 96-294, the Carter administration put out a backgrounder report from the White House Press Office. It detailed how America now had a “virtually complete framework for a national energy policy,” listing fifteen points, some from earlier energy battles: the creation of the DOE, the partial (eventual) deregulation of natural gas, the effort to fill the strategic reserve. But most of the “framework” emerged from the new legislation: another timetable for oil price decontrol, a windfall profits tax, mass transit subsidies, various energy conservation measures (some from the 1978 energy act), standby rationing, increased coal use, and so on. The United States finally had an energy policy. But what was it premised on? Unshakable control of world oil markets and energy prices by a diabolical cartel, Malthusian resource projections, consumer demand largely unresponsive to prices, fantastic optimism about new technology, huge public financial resources to be made available courtesy of endlessly profitable big oil companies, and a conviction that this energy legislation was not just good policy but morally right. None of it held up; in fact, almost as soon as it was passed, it began to seem wasteful and irrelevant. In the spring of 1980, the average price of oil topped out at $38/bbl and began to decline. By fall, a glut – inevitably – had begun to appear although it was attributed to Saudi overproduction as a means to discipline other cartel members. In September, one Wall Street maverick, James Dines, said the price would fall by 50 percent. He was widely ridiculed, 99

Debate in the U.S. House of Representatives on H.R. 3939, Compilation of the Energy Security Act of 1980 and 1980 Amendments to the Defense Production Act of 1950.

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but as Chapter 7 shows, Dines would prove to have underestimated the size of the fall. The price projections used by more establishment types – not to mention the DOE – were in fact the ones that proved ridiculous; demand was not completely price inelastic; oil companies stopped making huge profits; the new technology was never cost-competitive – in fact, it was less so in the 1990s when it was supposed to be market-ready than in the 1970s when it was not. There was one lasting and important outcome of the Carter energy program: it made advocacy of price decontrol of oil and even natural gas more bipartisan, and more likely. True, the gas act that passed in 1978 was a monstrosity – complex, convoluted, and confusing, and it did take another decade for most of the natural gas price controls to end. But no factor in the history of energy policy had caused greater economic disruption than the controls on energy resources beginning with FPC wellhead gas pricing and extending through Phase IV oil price controls of August 1973 and the allocation controls of the same year. Amid the energy policy chaos of 1979–80, on this point, Jimmy Carter was right.

SIX

Apollo

The first man I saw was of a meagre aspect, with sooty hands and face, his hair and beard long, ragged, and singed in several places. His clothes, shirt, and skin, were all of the same colour. He has been eight years upon a project for extracting sunbeams out of cucumbers, which were to be put in phials hermetically sealed, and let out to warm the air in raw inclement summers. He told me, he did not doubt, that, in eight years more, he should be able to supply the governor’s gardens with sunshine, at a reasonable rate: but he complained that his stock was low, and entreated me “to give him something as an encouragement to ingenuity, especially since this had been a very dear season for cucumbers.” I made him a small present, for my lord had furnished me with money on purpose, because he knew their practice of begging from all who go to see them. – Jonathan Swift, Gulliver’s Travels, Part II, Chapter V

1. Introduction On July 16, 1945, in the New Mexico desert, the United States demonstrated one of the most amazing feats in the history of scientific and technological development: the explosion of the first atomic bomb.1 As General Leslie Groves described it in a memo to the Secretary of War, the test was “successful beyond the most optimistic expectations of anyone” (in Cantelon et al. 1991, 52). The effort was paid for, organized, and brought to fruition by the U.S. government’s vast, costly Manhattan Project. It clearly shortened World War II and without a doubt represented an astonishing achievement that changed global politics and the nature of war. Its success was a source of considerable pride for many in the United States who believed that Americans had demonstrated the nation’s technological and scientific preeminence. Twenty-four years later, almost to the day, America once again astonished the world with its technological brilliance. On July 20, 1969, Neil Armstrong 1

The chapter expands ideas expressed in Grossman 2009a and 2009b.

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stepped down onto the surface of the moon, fulfilling a goal stated by President John Kennedy in 1961 for a manned flight to the moon (and back) before the end of the decade. The $10 billion Apollo program, the designated name for the lunar project, even more than the Manhattan Project, came to symbolize American technological prowess. This was also a government program, but then the enormous expense, the risk of failure, and the absence of any clear return on investment made it unlikely to be undertaken by private entrepreneurs. Thereafter, one had only to invoke the word “Apollo” to connote the understanding that the U.S. government could accomplish any technological goal – so long as it was not impossible scientifically – that it set for itself. This was true from the moment astronauts Armstrong, “Buzz” Aldrin, and Michael Collins returned safely to Earth. “Apollo” had become the touchstone for American technological achievement. Not surprisingly, then, less than four years later, members of the Nixon administration were beginning to invoke Apollo (as well as the Manhattan Project) as the example for energy policy. Secretary of the Treasury George Shultz told members of a cabinet meeting in the spring of 1973, before the oil embargo, how he had cautioned Organization of Petroleum Exporting Countries (OPEC) finance ministers that they should not “underestimate” the ability of the United States to circumvent the world oil market – not a country that had built an atomic bomb in four years and put a man on the moon in eight.2 Unsurprising, too, was Nixon’s own reference to Apollo in November of that year when he launched Project Independence in the wake of the embargo. Kennedy had called for a man on the moon and the United States had gotten there in less than a decade; Nixon was going to achieve energy autarky in even less time. This was not the last time Apollo would be invoked with respect to energy programs. In fact, it would be referenced so often by so many people – presidents, legislators, pundits – that it soon became a clich´e bordering on a joke. One might have found it amusing after a while if not for the fact that the example was generally used seriously, motivated by a strong belief that, whatever the problem, if it had a technological dimension, America could solve it by modeling the effort on the Apollo program. The Apollo model comprised three elements: 1. a publicly stated, audacious goal; 2. a national commitment of both effort and (typically, a lot of) money; and 2

NPL, Tape, Cabinet conversation 123–2, Apr. 20, 1973.

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3. a specific timetable and a programmatic process to achievement of the ultimate goal. Energy independence, solar, synfuels, wind power, nuclear fusion, 80-milesper-gallon “super” cars, biofuels, electric cars, energy storage – whatever the problem, if we could put a man on the moon, then how problematic could something like commercializing liquid coal or wind energy be? The technological optimism, in one sense laudable, has had a pernicious effect on energy policy. Energy problems have too often been viewed through the prism of Apollo, seeing in the creation of new energy technologies the image of men walking on the moon and the determined effort that got them there. The trouble with this image is that it is the wrong one. The difficulty of creating a commercially viable solar energy technology bears no relationship whatsoever to the problem of putting a man on the moon. However spectacular the latter, it only misleads when applied to energy policy. It conflates a demonstration with commercialization, an engineering feat with a marketing one, a thrilling idea with everyday mundane market exchange. I have called this the “Apollo Fallacy.” Just because the government can create a program to put a man on the moon, where cost is no object and repetition is not especially important, does not mean that it can create a substitute for oil or automobile engines or gas hot water heaters that anyone will want to buy. The government did not demonstrate the ability to put a man on the moon to begin a large-scale, profit-making program of lunar vacation travel or lunar mining. The ideas seem absurd. Yet, the conflation of solar energy commercialization (for example) with a grand demonstration project shows that the speaker or writer misses the immense differences between those projects. Yet, for political reasons, as the solution to the policy conundrum, government officials keep coming back to the same kind of answer – an Apollo-like program to simultaneously give people energy independence and low energy prices. The fact that it is often U.S. presidents and legislators who make this mistake only shows how much energy policy has been harmed by the fallacy. It is not surprising, therefore, that in the history of U.S. energy policy, despite spending about $200 billion on R&D funding alone and tens of billions more in tax preferences, loan guarantees, and other types of support, no alternative technology developed by the government for the express purpose of mass substitution for conventional energy resources and technology has ever been successful. The fallacy reflects three tacit assumptions made by officials when the government undertakes to develop a commercial energy product,

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concerning the impetus for technological innovation, the role of government in fostering it, and the nature of technological adoption generally. First, government alternative energy programs assume that the impetus for innovation is market demand. If people want or need a new product, that should be sufficient to lead to its production; if no one has brought it to market, it is assumed (unless it is technically impossible) that there must be a market failure. Because political actors have perceived a great demand for major energy innovations but the market has not developed them, this is taken as prima facie evidence that the market has indeed failed. Thus, the government must step in to induce the innovation that the market should have provided. Of course, there is an alternative explanation: the market may be signaling that such products are not commercially viable or desirable and that government efforts are unlikely to succeed. Second, the government has assumed that given the huge start-up cost of new technological endeavors, and understanding that some costly and risky experimentation must occur, some or most of the costs must be underwritten by the government because private firms will not want to bear the risk. To give an example, several processes for the liquefaction of coal had been created before the 1970s, but to get any of them up to commercial size required large investments some of which would likely fail. So government had to provide the cushion against failure; commercialization required government support. This was stated explicitly by the Carter administration.3 Officials assumed that such support might well be required through development, demonstration, and the beginnings of commercial entry and might even result in temporary government ownership of development projects. The general point was unmistakable: Apollo cannot be achieved by entrepreneurs alone. Third, the government has assumed that a new technology, proven workable, given tax preferences or other forms of purchase incentives, will quickly diffuse throughout and dominate the market. Just as people marveled at Apollo, so they will, once they see them, marvel at low-cost solar panels and electric cars and buy them. Thus, the Carter administration expected large sales of solar heating systems based on enactment of solar tax breaks; so, too, did the Obama administration with electric cars. The idea that there might be competitive problems with new technologies – they are simply more costly, less reliable, and so forth than conventional technologies – is not something that seems to come up in the policy-making process. 3

Noted in Chapter 5 (U.S. Executive Office of the President 1977).

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The larger point is that all three assumptions are at least naive and mostly wrong. Innovation is largely a supply-side phenomenon; government skews technological progress by favoring those who are able to be most convincing in selling their ideas to the government officials, and the process of technological adoption is far more complex than government programs suggest. Over the decades, bureaucrats and politicians have proven poor at recognizing and fostering innovative products that they seek to make commercially viable.4 People both in and out of government confuse the fact that government programs have inadvertently produced commercially viable products – the moon program produced the orange drink Tang and the materials for nonstick cooking pans, for example – with the ability of programs to create by direct intention a commercially viable product. It should be noted that there is a considerable literature on government policy toward technology and technological development. Most often a study of government technology policy considers three phases of technological development and the role government might play in each. These phases are, first, invention, the creation of new products; second, innovation, the development of those new ideas into commercially viable products; and, finally, diffusion, the widespread adoption of the new innovations (Jaffe et al. 2002; Marchant 2009). Government policy is generally thought to aid the invention stage through basic research funding. The other two stages seem more problematic. Nevertheless, there are a great many arguments for policies to hasten and enhance innovation and diffusion (e.g., Anadon et al. 2010). Indeed, as a generalization according to these arguments, the bigger the idea, the more complex the solution, the more Apollo-like the ambition, the greater must be the extent of government intervention and direction.5 But if anything, the opposite is more likely to be the case: the more Apollo-like the ambition for a new commercial product, the less likely that it can be centrally managed successfully. In reality, Apollo is mainly a way to short-circuit debate. It is what Zahariadis (2007, 76) refers to as a “higher order symbol” that allows legislators to invoke the idea and not have to actually explain what a new proposal entails. Apollo has appealing historical references, makes an optimistic statement about American technological proficiency, and, due to its positive connotations, is politically appealing. But Apollo leads officials to propose far more than they can deliver and to 4

5

As Obama’s economic advisor Lawrence Summers wrote in an e-mail, “gov is a crappy vc [venture capitalist].” In “Emails Reveal Early White House Worries over Solyndra,” New York Times, Oct. 3, 2011, available at: www.nytimes.com. According to a NASA official quoted in Stephenson (2011), Apollo was “communism’s greatest achievement.”

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S Price P

Price

S1 (implicit w/o subsidy) P* S2 (with subsidy) P**

S3 free market D3 D2

D2 D1

D1

Q1 Quanty

a. Oil Market

Q1 implicit

Q2

Q3 Quanty

b. Synfuels Market

Figure 6.1. Synfuels Demand-Driven Model.

dismiss as too timid proposals that might actually do some good. In the attempt at the grand goal, they end up delivering little or nothing at all.

2. Supply and Demand for Innovation a. Demand-Side Models There is an implicit demand-side model in large-scale government energy technology programs – a model that has two variants. The first variant, what I call the Synfuels Model, posits rising prices in one market (e.g., oil) as the reason for an increase in demand for a substitute. Unfortunately, the substitute does not actually exist as a viable commercial product, and so not only must the product be innovated but a market for it needs to be created. The second variant is the Solar Hot Water Model. The model presumes that there is a solar hot water market that is profitable but small, perhaps located in a certain region of the country with particularly favorable climate features. In most of the larger national market, the price of this product is well above that of conventional technologies. Perhaps in the national market, there will be a few buyers, those, for example, who want to be known as technological trendsetters, an attribute for which they are willing to pay extra. But in general, the cost differential leaves the solar technology with a minor share of the overall market. Government is assumed to want to expand its market significantly. The Synfuels Model is depicted in Figure 6.1; it assumes a three-stage process. The first graph (a) shows the oil market with an inelastic demand

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(D1) and a completely inelastic and fixed supply curve, S. Price is initially at a market equilibrium (P) but the expectation is that when demand rises (to D2), the new market equilibrium would be at a much higher price (a point well above the graph). The second graph (b) is the market for substitutes (synfuels); demand is increasing because of expectations of high oil prices in the future, but supply is nonexistent. In stage 1, the supply curve S1 is only an implicit curve; that is, the government assumes that there is a current market price for synfuels, often based on analyses as to what the cost of synfuels would be if any firm was producing it for the market. It would then have an equilibrium but (initially) only at a price above that of the oil market (P* > P). Because synfuels offer no benefits that distinguish them from conventional resources, consumers are assumed to choose only on price. Rational profit-maximizing firms will not invest in synfuels when they know the product cannot compete on price. With a forecast for rising oil demand with static supply (as in (a)), the synfuels alternative should be an attractive investment for the future; the government projects a present value of future profits that is highly positive; therefore, the private sector should begin development. But perhaps due to risk, uncertainty, or capital market failure, the private sector does not. Policy makers see this as a problem because development will require several years, and the bleak prospects for oil mean that synfuels will be necessary before the private sector is willing to invest. From that perspective, government must begin the development process to encourage cautious private capital to enter the market. Still with output prices above those of oil, firms require a subsidy. In stage two, the government provides the subsidy, shifting the supply curve (from implicit to induced, S2 in (b)) down and to the right. This supply curve represents actual quantities offered as a substitute for oil at different prices. In time, this leads to stage 3. Because of continued increases in demand and soaring prices of conventional fuels, there is now an incentive for private firms to innovate on their own, shifting the supply curve still further right (S3). At this point, the government no longer needs to pay subsidies because the price is at least competitive with the primary resource. At the intersection of S3 and D3, the price (P**) is low and market quantities ample. In the Solar Model, there is demand and a small relatively inelastic (shortrun) supply curve depicted in Figure 6.2. Here, demand for solar will be increasing because prices for conventional fuels (substitutes) are rising, but the inelastic supply curve means that solar hot water systems can only be supplied at high prices; if S1 does not change, the shift from D1 to D2 raises the price by a much greater percentage than it increases quantity supplied.

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S1 S2(subsidy)

P2

S3 (inn

)

P1,P3 P4

D1 Q1 Q2 Q3

D2 Q4

D3 y

Figure 6.2. Solar Hot Water Market Model.

Subsidies to producers would lower the cost of production, meaning the supply curve shifts right (S2), and so the equilibrium quantity of solar hot water systems rises but the price drops back to the initial equilibrium (Q3/P3). But expansion of production lowers production costs through both innovation and capture of scale economies,6 shifting the supply curve further to the right (S3). New entrants into such a profitable market would also shift supply, and soon subsidies could be removed (1987 was the expected date).7 At that time, innovation would prove the price superiority of solar over alternatives such as natural gas, which many in government thought would be entirely exhausted by the late 1980s. Thus, demand “calls forth,” or should call forth, innovation – which itself affects the supply side, but then the argument seems to come down to an odd (by economic logic) conclusion: what shifts the supply curve is demand. To assert that demand shifts supply is considered a fundamental Economics 101 error, but it can be saved by stating that what shifts the supply curve is technical change induced by demand. But what of the evidence for these kinds of models? In the 1960s and 1970s, there were a number of studies that purported to show that in fact the most important influence on innovation was demand.8 Some of the studies were based on historical cases; others focused on more recent innovations. But the basic argument came down to this: because a product or service was needed/wanted, firms recognized a profitable opportunity and 6 7 8

Most arguments for subsidies for alternative energy technologies assume that production necessarily gets cheaper as scale increases (Grubb 2004). Of course, there may also be a subsidy for buyers, reducing price and increasing the quantity demanded. There were earlier efforts to tie innovation to market demand, for example, Gilboy (1967[1932]).

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undertook research and development to bring the innovation to market. The process was termed “demand-pull,” and this was the primary force for technological change. The alternative, “supply-push,” is where a new invention is developed and an entrepreneur needs to find or create a market for it. If she is right, she makes money; if wrong, she loses it. The prevailing view in the 1970s was demand-pull: demand leads to successful new technologies; new invention, on the other hand, does not have nearly the same effect in creating new markets. Importantly, the demand-pull position was made explicit in a report to a congressional subcommittee on economic growth (Gilpin 1975). The report stated: “Everything we know about technological innovation points to the fact that user or market demand is the primary determinant of successful innovation. What is important is what consumers need or want rather than the availability of technological options.” It was a kind of reversal of Say’s Law:9 demand creates its own supply. On the basis of this argument, government programs in the 1970s (and since) to develop alternative energy technologies to satisfy perceived demand were logical. But even before the end of the 1970s, a careful examination of demandbased studies showed that they were seriously flawed. Many dealt only with innovations that had had market success (e.g., Myers and Marquis 1969), so the argument was circular: Why was a product innovated? Because people wanted it. How do we know that? Because they bought it and it was a market winner. One study that seemed to confirm demand-side explanations was called HINDSIGHT. It was undertaken for the Department of Defense in 1969 and focused only on products for which the sole consumer was in fact the government. Although it was true that innovations in fighter planes and battleships could be observed, it is also true that in such contexts market demand has at best a restricted meaning.10 The studies, as Mowery and Rosenberg (1979) point out, seldom actually focused on what economics means by market demand – the simultaneous purchase decisions of all consumers with respect to the costs of production of all producers, leading to equilibrium quantities demanded and supplied at an equilibrium price. Often, market demand in innovation studies was conflated with “needs,” but “myriads of deeply felt needs exist in the world, any one of which constitutes a potential market for some product, yet only a small subset of these potential demands are fulfilled” (Mowery and 9 10

Jean-Baptiste Say, a nineteenth-century French economist, believed that supply creates its own demand. Monopsony markets such as these, like monopoly markets, are highly distorted by asymmetric pricing power.

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Rosenberg 1979, 109). Moreover, when Mowery and Rosenberg actually examined the results of these studies, they found that “supply-side factors” were often at least as, and typically more, important than “need” in generating innovation. In fact, there was some confusion in the literature as to the meaning of the basic categories, supply-push, demand-pull. Often it seemed that supplypush was defined as the claim that if a product exists and government tries to “push” it onto consumers it will fail, and only “demand-pull” consumer products – ones consumers want – can succeed (Marchant 2009). But this confuses two issues: the origin of an invention and its successful innovation as a commercially viable product are mainly supply-side issues. On the other hand, diffusion of a technology obviously does depend on demand. In looking at the origin of invention and innovation, the supply side explains far more than demand. Studies reportedly showing innovation emerging from “market needs” have in fact revealed that “technological complementarities” were the most important variables in innovation. “Technological opportunity,” the essence of supply-side development, according to Mowery and Rosenberg, appears repeatedly as an “unambiguous” driver of the rate of innovation. In other words, technological advance is largely exogenous, occurring quite apart from any pull of market demand. Thus, there are reasons to doubt the efficacy of any attempt to demand innovation; government cannot conjure it by passing a law saying it must take place – within five or fifty years. One problem with analyzing factors governing innovation is timing. In demand-side studies, “lags” have been said to delay commercial entry or diffusion of innovative products. But exactly how long does a “lag” have to be before it is seen as a technical or scientific problem that prevents an invention or innovation from reaching commercialization? It can be argued, for example, that fully electric cars are only waiting for the catch-up development of energy storage, which has been lagging. This is actually in some sense true, but then the lag has persisted (and electric car production has been waiting) for around a hundred years with no solution yet in sight. In general, claims that the demand side is the cause of innovation are either too vague and indeterminate, or apparently wrong; and so the first premise of the government’s Apollo model is probably incorrect. Just because there is a product that people need and want does not mean that it can be or should be developed. Nor does it mean if it is developed, it will be commercially successful. This point is treated later in this chapter, but it bears mentioning here because the fact of demand and market potential tells us little about actual market performance.

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b. Technology Forcing With cases such as synfuels and solar, government policy has specified a clear technological and market goal, albeit without initially fixing on specific technological details. So, for example, while the Carter administration specified that appropriations were intended to create the capacity to produce the energy equivalent of more than 2 million barrels of oil per day (or 2 MBD oil equivalent or MBDOE) of synfuels, particularly from the liquefaction and gasification of coal, it did not exactly determine the specific technology that would ultimately be employed. The answer to this would come from demonstration plants, using a few promising processes, from which the technological winner would be determined. This was not far from Apollo in which there was a clear goal and a general understanding of the path, but there were various designs of spacecraft and concepts related to mission plans from which the most promising ideas were chosen. Government has used a second type of demand-side policy “calling forth” energy innovation. This policy stipulates a mandated regulatory objective without any guidance (technological or process-oriented) as to how to reach it. That is, the government says that car makers must reduce emissions of ozone by x percent within five years, “creating an atmosphere conducive to innovation” (Ashford et al. 1985, 422). Only the outcome is said to matter, often one based on health considerations (La Pierre 1977). Such mandates may “force” industry to develop new technology, and the legislative endeavor is termed “technology-forcing.” Technology-forcing has many proponents, as in theory at least it leads to less bureaucracy and greater efficiency. Producers affected by the mandate will, presumably, seek to do so in the most cost-effective way. Thus, if the rule is properly crafted to “elicit an appropriate technological response” (Ashford et al. 1985, 462), the mandate can be fulfilled and benefits may exceed costs. Exponents note that technology forcing has had some impressive successes with respect to environmental technologies (Ashford et al. 1985). Undoubtedly the most widely used of these is the catalytic converter (Ross and Socolow 1991). Under the 1970 Clean Air Act, automakers had to reduce a number of tailpipe pollutants and do so quickly to improve ambient air quality. No guidance was provided in the law as to how they were to accomplish it, but it had to be accomplished nonetheless. The solution was a device first patented in the 1950s by a French engineer, called the catalytic converter, which alters the chemical composition of car exhaust. Its widespread adoption did require a second technological change, the

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removal of lead from gasoline, because lead coated the catalyst and rendered it ineffective. The converter did not achieve the regulation’s goal in the original time frame, but by the mid-1970s, these devices were standard on all production cars in the United States, and ultimately the amount of reduction in pollutants called for in the act was achieved.11 No doubt in the context of environmental goals, technology forcing can induce some kind of effective (technologically if not necessarily in terms of cost) innovations.12 But can it be applied to energy technology? There are a few important characteristics of environmental rules that make the comparison inexact. Most important, to use the case of the catalytic converter, it was not in competition with some other sort of converter, nor was its employment up to consumers. These regulations are imposed on producers, not consumers. Consumers were not given an array of converter-like devices to choose from. The auto industry picked a device that would improve the emissions characteristics of automobiles, per law, adding something to the price of every car, but because the device was more or less universal (and was relatively inexpensive), it had little bearing on consumer choice. Arguably a type of technology forcing through mandate has had some effects on energy technology; mandated standards have made many conventional technologies more efficient. Revised building codes, as well as energy consumption standards on numerous products from refrigerators to lamps to space heaters, have meant considerable improvement in reducing the energy input for the same output (Nadel 2002).13 But success in this area has not produced an Apollo-like technological spectacular nor has it fundamentally altered either America’s energy resource use or its major energy-using technologies. Standards have only made the conventional work better. In 1990, however, California tried a standards-type mandate on automobile manufacturers that was intended to change auto technology specifically with respect to energy use. The mandate was ostensibly an environmental requirement; the California Air Resources Board, acting under authority 11

12

13

Although some technological development was induced, it has been argued that the goal was achieved by subsequent rule changes that watered down goals or allowed for lax enforcement (Stanfield 2004). Proponents of forcing note the technological changes in coal-burning industries, especially electric utilities, which were developed because of other provisions of the 1970 Clean Air Act. But these also were not in competition with other incumbent pollution-control technologies, and they involved no consumer choice. Herring (2006) has argued that on net, standards do not necessarily reduce energy consumption; in fact, they lower the cost of utilization of cars and appliances and so people use them more.

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of that state’s Low Emissions Vehicle Regulations, mandated that by 1998, 2 percent of all cars sold in California had to be zero emissions vehicles (ZEVs); by 2003, that was to rise to 10 percent.14 Automakers that did not comply were not to be allowed to sell any cars in California. There was no particular stipulation as to what those vehicles would look like or how they would be powered, although given the state of technology at that time, it was essentially a mandate for electric, battery-powered vehicles. There was no regulatory requirement that consumers buy ZEVs, only that manufacturers sell them. But the success of the program depended both on whether automakers could actually produce such cars and whether they would do more than take up space on the dealers’ lots. In that case, it would be a waste of effort and resources. But questions about consumer behavior have been moot. As of this writing, electric vehicle technology has never been cost-competitive or consumer-friendly. The California mandate has been revised (five times by 2008), pushed farther into the future and the requirements revised downward so that the goal stipulated in 2008 was for 7,500 ZEVs on the road by 2012–14 (down from a 2003 revision of 25,000, which was itself about one-fourth of where officials had hoped to be). The mandate has in fact become so fluid as to be meaningless as an actual mandate. It has been argued that the regulation was technologically important nonetheless because it did advance research on a variety of alternative vehicles: hydrogen, fuel cell, hybrids, and electric-powered vehicles (Schot et al. 1994; Calef and Goble 2007). But as the next chapter notes, the same argument was made for the failed Partnership for a New Generation of Vehicles of the Clinton administration, although that one involved direct subsidies, not technology forcing. In any case, it seems a limiting argument that the country was better off because engineers, scientists, and officials learned something through wasted resources. By that measure, all alternative energy technology programs have been a great learning experience. Officials, however, seem not to have learned one lesson: the result is typically failure in the marketplace. Although the ZEV story calls into question the efficacy of technology forcing, that idea is behind a new type of mandate for programs that are intended to be transformative of energy technology. The programs, similar 14

This was basically an air quality, not an energy technology, issue per se. Many locales in California were out of compliance with federal air quality standards. Indeed, the ZEV mandate depended on Sec. 249 of the 1990 amendments to the Clean Air Act of 1970. Otherwise it might well have been deemed an infringement of the exclusive constitutional right of Congress to regulate interstate commerce.

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to one another in intention and scope if not in specific details, are called Renewable Portfolio Standards (RPS), and the implicit goal of these programs is to change radically the technology of electric power generation. An RPS mandates that a certain percentage of electric power must be generated through renewable sources by a certain date. The mix of technologies is often left up to the electricity providers, although the possibilities are generally restricted. California, for example, lists fifteen possible choices, whereas Colorado accepts only ten. As of this writing (early 2012), an RPS is in effect in twenty-nine states, and nearly all list as accepted technological choices common renewable technologies such as wind and solar; most of the choices are not commercially viable.15 They are sustained by both national and state subsidies and by “feed-in tariffs,” which provide renewable power providers with a long-term guarantee of prices for the power they generate, reflecting the cost of production. Because generating costs of renewables are typically higher – sometimes several times higher – than the cost of conventional electricity production, an RPS raises consumer prices. However, because the RPS is mandated, what these programs amount to is less technology forcing and more a redistribution of income from consumers to various favored groups such as wind-energy producers. The producers remain forever concerned, however, that subsidies and feed-in tariffs will be removed, in which case they would be unable to compete on price with conventional producers. RPS mandates are typically ambitious. California has a mandate for 33 percent of its electricity to come from renewable sources by 2020; Colorado’s is 30 percent in the same time frame. Some scholars, as well as many in Congress and in the administration of President Barack Obama, advocate a national RPS (Cooper and Sovacool 2007), and the scale under consideration is enormous. The Obama administration has suggested a variation on the RPS mandate, a Clean Energy Standard (CES), which would include some natural gas–generated electric power and nuclear power.16 But the goal Obama has proposed, 80 percent by 2035, would require massive investments and would be plausible only if most of the new capacity would be gas-fired or if there would be breakthroughs in solar and wind. 15

16

New Mexico, for example, lists: Solar Thermal, Photovoltaics, Landfill Gas, Wind, Biomass, Hydroelectric, Geothermal, Anaerobic Digestion, and Fuel Cells (using Renewable Fuels). Investor-owned utilities must get 20 percent of their renewables each from wind and solar, but all of them are either not cost-effective or are limited (e.g., hydro) in a state like New Mexico. RPS standards are motivated at least in part by an intention to reduce carbon emissions. Nuclear power produces zero CO2 emissions; natural gas produces less than half the carbon emissions of coal.

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Hoping for the latter is a perennial mistake. Henry Kissinger was wrong in 1975; if the United States spends $10 billion, there was no reason then (nor is there reason now) to assume that some sort of breakthrough will happen. Assuming a national RPS (or a CES) would follow state models, it would in all likelihood be met only if very large subsidies are maintained on alternative energy technologies; in fact, RPS mandates seem simply to assume permanence of subsidies and feed-in tariffs (Michaels 2008). Of course, part of the reason for the RPS is environmental – to cut carbon emissions – but there are many reasons to doubt that an RPS is the best solution for dealing with that issue. Indeed, there have been arguments that solar and wind energy have a limited impact on emissions because they require fossil fuel backup and they present environmental problems of their own (Oswald et al. 2008; Zycher 2011). The question of carbon emissions is considered again in Chapter 9, and the RPS model is still relatively new. But achievement of transformative energy technology goals with an RPS is at best dubious.17 With no compelling example of technology-forcing having produced a successful innovation in alternative energy resources or technology, there is no reason to assume that a national RPS/CES would lead to a cost-effective transformation of the U.S. electric power industry.18

3. Picking Losers Many scholars have opined on the dangers of any government effort at “picking winners” among possible technological innovations. Marchant (2009, 836), for example, has argued that “the most important lesson from previous attempts to induce technological change is that government should set performance goals but should avoid as much as possible, which specific technologies should be developed to achieve those goals.” Such efforts are often complete failures or, which may be worse, entail unforeseen consequences such as the case of the gasoline additive methyl tertiary-butyl ether (usually just MTBE), which was used widely due to a congressional mandate to reduce pollution but is now banned for its harmful environmental effects. Cohen and Noll (1991) lay out several examples of mistaken efforts at picking technological winners, including the synfuels and breeder reactor efforts. Japan’s government, famous for its successful (at least in some 17

18

Stover (2011) argues that RPS mandates will require utilization of huge quantities of raw materials including so-called rare earths, which are “rare because they’re found in scattered deposits, rather than in concentrated ores, and are difficult to extract.” She argues that no form of energy is completely renewable or benign. For critiques of RPS assumptions and policies, see Michaels (2008) and Zycher (2011).

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sense) industrial policy, has had notable failures with innovation efforts, particularly with an HDTV design and a new generation of computers.19 Government is for the most part incapable of evaluating the marketability or even the utility of new inventions or subsequent innovations. Nevertheless, it continues to try to pick winners, typically with an invocation of Apollo along the way. There is a theoretical idea behind a government effort to choose technological winners. The idea is, however, tenuous in general and entirely unconvincing in this context. The concept can be seen in a response to a column in the Washington Post by George Will that had attacked tax preferences for electric vehicles. The letter was from Senator Carl Levin (D-MI) and his brother, Representative Sander Levin (D-MI), dated Feb. 5, 2011. They argued that Will “failed to note basic economics: Any product’s first units are expensive to produce; costs fall as the scale of production increases. The tax credits for electric vehicles are intended in part to help automakers reach that higher scale.” The first part of the Levin brothers’ economic claim is correct if there are economies of scale that have not been exploited. But in general, they are making an “infant industry” argument. That is, the industry, or in this case product line, in question cannot stand on its own in the global market without some kind of government support – at least in the short run. The Levin brothers make this explicit later in the letter. “The need to produce advanced-technology vehicles is critical because oil prices are determined by production decisions centered in the Middle East. Other countries recognize this, and they will make investments in their auto industries to produce green vehicles. We can’t cede this important market to China, South Korea or India, whose governments are actively supporting their auto industries.” There are many economic arguments against the basic premise of infant industry support. Most notably, if other governments want to subsidize American consumers, and so raise U.S. standards of living at the expense of their own, let them. To paraphrase a quote attributed to nineteenthcentury French economic theorist Frederic Bastiat, it makes no more sense to subsidize an industry just because other countries do than it would be to block up our harbors because they have rocky coasts. Nevertheless, the infant industry argument persists and has been operationalized in recent years by, among others, the Brazilian government to 19

See Beltz (1993). Also, “ ‘Fifth Generation’ Became Japan’s Lost Generation,” New York Times, June 5, 1992, D1.

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support its nascent computer industry and the Chinese to support their automobile industry. Still, it has roots in the United States. In fact, perhaps the most notable exponent of this concept was Alexander Hamilton. In his 1791 “Report on Manufactures” to Congress, he argued, first, that manufacturing warranted “special and positive encouragement” (U.S. Department of the Treasury [Hamilton] 1791, 4) and, second, that it was difficult for American businesses to compete on equal terms with the British because Britain had a head start in industrial development, and thus the “disparity . . . must necessarily be so considerable, as to forbid a successful rivalship, without the extraordinary aid and protection of government” (p. 19). Such “aid” was expected to be only temporary, until such time as the infant grew up and could go off on its own. The infant industry argument requires a reinterpretation before it can be applied to new energy technologies. Hamilton (as well as the Brazilian government) referred to competition against an existing market leader for products that had vast worldwide demand. There was no question as to whether U.S. cotton textiles (one of Britain’s main exports) in 1791 could have been sold if produced as well and as cheaply as they were in Great Britain. But that is not the argument with electric cars or most other alternative energy products. Although it is correct that there is production in India and China of electric cars and solar panels, these countries have begun such industries to serve almost exclusively heavily subsidized Western markets. In a real sense, there is no viable commercial market for any of these products. It might better be called an Infant Market Argument; not only is government trying to generate a product but demand at the same time. Absent subsidies, mandates, and other kinds of preferences, wind generation is only a niche product with a small market; the same would be the case for electric cars, solar hot water heaters, solar photovoltaics, and so on. Thus, the idea becomes not the protection of a market but the creation (or vast expansion) of one. Still, it is frequently argued – even by those who see government’s abilities with some skepticism – that government is necessary for the commercialization of new energy technologies. Very high capital cost and high risk of failure with commoditized output (synfuels, for example, would have produced a generic substitute for conventional generic petroleum) even when successful make it unlikely that private actors will undertake such investments. This is thought especially important for new technologies that face what is called “the valley of death” in which a demonstrated innovation fails to be turned into a viable business (Weiss and Bonvillian 2009; Anadon et al. 2010). Part of the reason, it is argued, is that there are advantages for existing

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technologies (e.g., infrastructure is in place for gasoline but not for electric cars), and uncertainties as to both regulatory actions and government policy continuity (Anadon et al. 2010, ch. 1). These factors, it is argued, are why “without government support, many advanced technologies will not be tested at a commercial scale” (p. 7), thus limiting their diffusion. But how is this government support supposed to be structured, developed, and maintained? What kind of rules should guide its formulation? Weiss and Bonvillian (2009) argue for “policy packages” that are “technology-neutral” (i.e., not picking winners) and “coherent rather than episodic” (actually arguing for consistency and continuity rather than coherence) and that provide a “level playing field.” Others, for example, Anadon et al. (2010), also argue for a level playing field and add that there needs to be clarity of purpose, transparency of process, absence of political pressure, multiple development plans to avoid “picking winners,” and possibly a separate organizational structure, a separate entity “with the objective of supporting the commercialization of energy technologies by reducing technical uncertainty, capital requirements, market risk, etc.” (Anadon et al. 2010, 21). This latter suggestion sounds much like Ford’s Energy Independence Authority or Carter’s Energy Security Corporation .20 Of course, Ford’s plan and (ultimately) Carter’s were rejected in part because the kind of ideal commercialization programs suggested above are quite unrealistic. More typically, programs do not avoid the “picking winners” problem, or create transparency, a level playing field, or above all else, an apolitical system. The last of these is in any case a contradiction in terms. But it is especially unlikely when a bureaucracy dispenses tens of billions of dollars. It seems extremely naive to believe that somehow all of this money will be dispensed with pure objective scientific rationality – on a level playing field in which no one presumably has more influence than anyone else. Research on rent-seeking behavior and regulatory capture suggest that such activities are all too common. Even in those cases in which agencies seem to have the best interests of society at heart, whenever the views of people with particular agendas are given attentive hearings, there is likely to be an unleveling of the field. Actually, the “level playing field” idea for energy has a couple of different meanings. It is used first to suggest that there needs to be equality between new technologies and incumbent old ones such as oil, gas, and coal. Weiss and Bonvillian (2009) claim that the incumbents benefit from “massive 20

An Energy Technology Corporation (ETC) almost exactly along the lines of the 1970s’ “semi-public organization” has been explicitly proposed by Deutch (2011).

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subsidies” far greater than those afforded new technologies. As noted in Chapter 3, it is true that old fuels, oil especially, have received enormous benefits for a century, and even in the twenty-first century, the annual gross value of the benefits for oil and gas have typically been larger than for most alternatives (except ethanol and, more recently, wind21 ). But if subsidies are considered on a per unit of energy basis – that is cents per million BTUs of energy produced – in the twenty-first century, the subsidies for alternatives have been many times those for oil and especially natural gas. A level playing field also may refer to the opportunity for all alternative ideas to compete equally for funding. Technological neutrality. Technology policy should “identify . . . key goals . . . and then not discriminate against any technologies that can help achieve those . . . objectives” (Marchant 2009, 856). Nearly all who write on this suggest that by giving opportunities (and funding) to multiple innovators, the picking winners problem can be avoided. But from the outset of the process, government officials must make judgments about what to fund and what not to fund. They cannot fund every proposal, and although some may be so absurd as to warrant exclusion, others might simply be less well connected, have fewer lobbyists, and so on. There is no neutral mechanism to determine which ideas government should or should not fund except the judgment of what officials like best. As with any system organized and run by government, as soon as it is established, there will be rent seeking, and the larger the amount of money involved, the more intense the competition for the money will become (Cohen and Noll 1991). Given that a major rationale for government commercialization efforts is that the capital costs are so large, the budgets for such programs have to be large and inevitably attractive to many individuals and organizations. Simply put, a government agency charged with bringing a new (and as yet undetermined) energy technology to mass commercialization cannot avoid the picking winners problem – unless it plans to hand out money randomly. The Synthetic Fuels Corporation created, in 1980 with an initial budget of $20 billion, was a disastrous failure even though its scope was narrow. It intended to fund a number of commercial-size demonstration plants using a few process technologies, as most advocates of government commercialization programs advise. Yet, quickly there were questions about 21

Weiss and Bonvillian (2009), who argue for massive government involvement in an “energy technology revolution,” acknowledge that biofuels represents a case of “unwise or premature” commercialization mandates. But it is precisely this kind of problem, as Jimmy Carter recognized in 1977, that seems practically unavoidable. An apparently promising domestic resource at a time of politically painful high gasoline prices leads to mandates for pain-free panaceas – even when they are wrong.

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its practices and doubt as to the wisdom of its funding. Its decisions to fund projects like the Beulah, North Dakota, gasification plant inevitably meant it was trying to pick a winner; to try not to pick a winner would be an irresponsible use of a few billion dollars of tax money. Had the SFC survived, it would have probably spread out the money a few billion at a time on a handful of projects. Some of these would have been expected to work better than others, but in each case, such vast sums could only have been given to likely winners to the exclusion of those thought losers. That was one reason there was doubt as to the wisdom of this government corporation in the first place. It might seem that forcing regulations or generic tax breaks such as the ones for solar come closest to avoiding winner picking. But the latter, for reasons that will be explored in the next section, have often had little effect. Millions of solar homes did not materialize in the 1980s after the Carter administration introduced tax incentives; nor did they during the Clinton era’s “million solar roofs” program. The fact is that conventional energy technologies have improved – cars and other energy-using technologies are more efficient, and oil and gas extraction techniques are more effective – but the underlying technologies have hardly changed in the last hundred years, regulations and incentives notwithstanding. A great problem for advocates of government energy commercialization programs is, as has been noted, that there is no example of it ever working,22 and most scholars and commentators who write about this suggest the same sort of mechanisms that were tried unsuccessfully before. Proposed policy innovations seem to be arguments that old methods should be more carefully thought out, more integrated, more – something. All of the past efforts were either scrapped (synfuels, the breeder reactor, the super car), or have survived because of ongoing subsidies or mandates (ethanol, solar, wind) although proponents continually maintain that such alternatives are only a few years (or maybe a decade) away from breaking free of subsidies

22

It has been argued that successes include nuclear power and the hybrid car engine. The former is questionable. All nuclear power plants receive subsidies in one form or another (see Jerry Taylor and Peter van Doren, “Hooked on Subsidies,” Forbes, Nov. 26, 2007) and the hybrid engine, although it was an innovation that was fostered in part by government R&D, came to market largely because of risks taken by Japanese car makers. It became a commercial success when gasoline prices reached highs in the middle of the first decade of the twenty-first century. The Levin brothers in their letter to the Washington Post claimed that government tax breaks for hybrids enacted in 2005 led to that commercial success. That is a dubious claim at best. See also, letter from Glen Schleede to Senator Mark Warner, May 28, 2012, posted at: http://www.masterresource.org.

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and achieving viable market commercialization.23 Always. Yes, government regulations have led to the ubiquity of catalytic converters, and an argument can be made that other regulations have led to greater efficiency in, for example, home appliances. But this shows that R&D efforts and standard setting are most effective in making existing technologies better. A new technology that is meant to compete with or completely displace what are often referred to as “incumbent” technologies has always come up short. It has been argued by scholars of technological innovation that governments need a more complex framework for analysis that takes into account the legal, political, and social ramifications as well as the economic and technical ones to judge the viability and desirability of new energy technologies (Stephens et al. 2008). A model that combines “qualitative and quantitative [factors and that] formalizes and guides integrated and interdisciplinary research on a complex array of socio-political factors influencing energy technology deployment” (p. 1241) seems theoretically appealing. But so intricate a model points up the difficulty of applying it. If all such factors are relevant, then what is the metric that actually produces a decision among competing technologies and policies? There is, of course, a role for government in the commercialization process at least with regard to a set of institutions that reward innovation. As North (1990, 1994) and Mokyr (1990) have argued, an established property rights regime, patent laws, recognized measurement and other technical standards, and the free flows of information are some of the important elements of what Mokyr calls “creative societies.” In many respects the market alone does not provide these crucial incentives for innovation. Most scholars would agree that the United States has an institutional structure that is conducive to innovation. “The United States has been a leader in innovation infrastructure [i.e., institutions] and is widely envied by countries that do not have an effective infrastructure” (Deutch 2011). But to the question of a proactive government program to promote commercialization of alternative energy products, there is little reason to believe it can be successful. As Hayek (1945) explained with respect to government generally, the information problem means that officials make choices lacking any real sense of what kind of outcome they will produce, typically leading to ones that are far from optimal. And given the record of failure to achieve commercialization despite forty years of trying, there is little reason to suppose that this 23

New York Times columnist Paul Krugman (“Here Comes the Sun,” Nov. 6, 2011) touted solar photovoltaics as nearly “there” (as Tom Hayden put it in the late 1970s) for large-scale commercialization. He backed off the claim the same day. Grid-scale solar commercialization has been just a few years off for thirty-five years.

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general principle does not apply to current efforts at promoting alternative energy technologies.

4. Diffusion Various governmental bodies – Congress, executives, agency heads, and cabinet secretaries – over the years have had extravagant expectations of consumer response to alternative energy incentives. Apollo-like programs require massive change in relatively short time frames. So, by the mid-1980s, according to the 1978 National Energy Act, 2.5 million homes would have solar water and/or space heating; by 2010 there would be a million “solar roofs”; and by 2015, there will be a million electric cars. Generally, these programs have offered tax incentives or low/no-interest loans for purchases, with the belief that these new technologies would be highly attractive at the price. Other consumer products such as the mostly ethanol-gasoline blend E-85 have been subsidized in production but have also failed to catch on widely – notwithstanding mandates, tariffs, and subsidies. Because E-85 has only about two-thirds of the energy value of gasoline, even with subsidies, the price of E-85 is effectively higher.24 But then politicians have largely ignored the issues and the problems of technology diffusion; whatever technology they authorize is expected simply to diffuse.25 Of course, many alternatives have not been pitched to consumers directly. Wind and most solar energy programs have been aimed at utilities; RPS mandates are predicated on the expectation that consumers will have little choice.26 In these cases, the government will often use mandates, rebates, subsidies, guaranteed price agreements, and other means of explicit or implicit subsidy. The expectation is that once the price/performance characteristics of the new technology improve, the subsidies can be removed. Nevertheless, the expectations and timetables to mass adoption by industry have if anything been even more extravagant than for products aimed at consumers. Through programs over the years, industry was supposed to produce more than 2 MBD of synthetic oil and gas by 1992; provide 24 25

26

Energy-adjusted, it was close to 20 percent higher priced on average as of mid-2011. This is an example of what Koomey (2002) refers to as “The Big Mistake,” in which forecasts “that do not account for the dynamic natures of human behavior and technology adoption are bound to mislead and confound” (p. 517). In some states, consumers have options to purchase “green” (generated by renewable sources) or conventionally generated electric power. It is not actually possible in the transmission process to separate the green and nongreen electricity, but utilities generally will try to purchase or generate the amount of green power demanded by customers, often sold at a higher price or subsidized by taxes.

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20 percent of all energy from solar by 2000; and is expected to produce and sell 36 billion gallons of ethanol by 2022, including more than 20 billion from cellulosic feedstocks, which has never been proven commercially viable.27 Thus, in every case, Apollo depends on mass adoption within the given time frame that the government expects to make happen, through carrots and sticks inducing ongoing technological change. However, to the extent that purchases take place at all, subsidies and mandates maintain the market. If these are removed, there is every likelihood that consumers, industries, and even utilities will switch back to conventional resources because they are significantly cheaper.28 Where decisions are based on costs and benefits, new alternative technologies lose out to conventional technologies and resources. Often, the disparity is enormous. Nevertheless, some proponents of renewable technologies blame not only bottom-line considerations and “not only market failures, but also network and institutional failures . . . [for] blocking the evolution of a new technological system” (Jacobsson and Johnson 1998, 638). The implication being that but for these impediments, new technologies such as wind would be widely adopted and diffusion would be extensive – even though it is acknowledged that demand is often “linked to public procurement policies or subsidies.” With favored technologies of the early twenty-first century – particularly for wind and biofuels – there seems little chance that the subsidies or mandates can end without ending the hope that widespread adoption will take place. Most of the time, government program goals of mass diffusion of consumer products are made without reference to the literature on technological diffusion. But much of that literature suggests that government programs will not achieve their diffusion goals unless the mandates behind them are largely coercive. If gas or electric water heaters are made illegal, solar systems will become widespread. But most of the innovations in energy are intended to reach the market and out-compete incumbent technologies – and do so quickly. Time frames are often ten years or fewer. But that is not generally how consumer adoption and diffusion take place. “[Diffusion] is a process in which an innovation is communicated through certain channels over time among the members of a social 27

28

A recent report suggested that commercial production of cellulosic ethanol could not be expected before 2020, despite a mandate that 20 billion gallons of it be available two years later. Available at http://www.biofueldaily.com/reports/Second generation ethanol processing is cost prohibitive 999.html. Then again, utility rates are determined by political bodies, which can continue to subsidize renewables in ways that leave utilities profitable but consumers worse off.

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system . . . a process in which participants create and share information with one another in order to reach a mutual understanding” (Rogers 1995, 35). But this process, Rogers notes, is filled with uncertainty if for no other reason than the newness of the innovation and the lack of clarity of its implications – implications that go beyond technology and in fact may represent social change. This would certainly be a component of mass adoptions of new energy technologies. The “time” factor is a key variable. Although theoretically government policy could hasten technological adoption and diffusion, it is not clear that just offering incentives provides much impetus. Rogers notes a few important attributes of innovations that will affect the speed, or likelihood, of widespread diffusion and consumer adoption. First, the innovation must be perceived to have a “relative advantage” over the technology it is supposed to displace. This may be cost but will also include convenience, prestige, and utility in the economic sense of derived satisfaction. Obviously, the more attributes of an innovation that are seen to exceed those of the conventional technology, the faster it will be adopted. This has bedeviled alternative energy technologies. They are often more expensive, even with subsidies and tax preferences; less convenient, if for no other reason than incumbent technologies have a vast infrastructure behind them; and only of greater prestige and utility if they provide some kinds of amenities that are highly subjective and not readily created by government backing. For example, if a solar roof gives the owner a sense of satisfaction for doing something good for the environment, then he might choose solar despite its cost and convenience, but it is hard to translate that feeling into widespread adoption by any specific policy. An innovation’s progress to diffusion will also depend on its complexity. If it is difficult to understand and use, adoptions will at least be slow. Although some energy innovations require little technical understanding to utilize – one does not need to know how coal is liquefied to use synfuels in a car – others may be more perplexing. So-called smart grid components that provide consumers with real-time information on electric power usage are technically sophisticated; nuclear power plant operations have confused many who have come simply to fear them. Plug-in hybrids and electric cars have different characteristics from conventional automobiles and require some willingness to gain new knowledge. But with innovations such as electric cars, the issue slowing adoptions is probably less complexity than “observability and trialability.” Because these technologies are new, people want to get some sense before making a commitment of just how they work and what characteristics and

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Figure 6.3. The Diffusion Process. [Adapted from Rogers 1995.]

problems they exhibit over time. There needs to be some kind of standardized measurements, ways to judge reliability and long-term performance. One of the major problems for solar hot water heating in the 1980s was that there were few recognized standards and ratings; vendors were not well known and not always reliable, and longevity of equipment still had to be demonstrated, a particular problem with respect to water heating systems because conventional units can last for twenty years or longer, often with long-term warranties behind them. Trialability is basically an estimation of whether a technology will work well and be convenient for the purchaser. If given a chance for a longterm test – a trial period – potential buyers would be more inclined to buy assuming the product passed that test. To use Rogers’s idea of diffusion as communication, most people will wait to see what kind of experiences users have. If a new technology breaks down frequently, it is unreliable in hot or cold weather, or there is widespread dissatisfaction of one form or another, they will not commit. Diffusion benefits from early adopters – a category of people who like technology and to be thought of as trendsetters who will put up solar panels because they are in some sense “cool” – and their experiences communicate the costs and benefits of the product over time. The adoption process may best be depicted as an S-curve (Figure 6.3), in which the percent of market penetration is on the y-axis, time in years on the x-axis. The early adopters are the small wedge on the far left of the graph. They are the people who like to be seen as technologically advanced and are often wealthy and well educated so that they both can understand the technology and bear the cost. That is, early adopters are likely to be from

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a particular socioeconomic class and also exhibit a particular personality trait (Cassedy and Grossman 1998). The followers wait to observe the experience of these early adopters. Assuming that the experiences of the early adopters are positive, followers will begin to buy, and the kind of social communication process described by Rogers unfolds. There is, after a period of years, which has varied greatly depending on the innovation, a period of exponential growth, a “takeoff” according to Rogers, leading to a leveling off as market saturation is achieved and the innovation has become a mature technology, in which innovations are incremental and replacement and improvement purchases are more likely than new adoptions. In recent years, there have been examples of widespread, in fact global, diffusion of new technologies, some of which have occurred relatively quickly. Cellular telephones have become so ubiquitous that they are outpacing landline service in many parts of the world. The period of saturation took roughly thirty years,29 but exponential growth was observable after about twenty years. There were no subsidies and sometimes hostility from governmental agencies because those agencies controlled domestic telephony and cell phone use was expanding rapidly, often outside their jurisdictional reach. But the cell phone case does not give much insight into the adoption of new energy technologies. Cell phones were and are relatively cheap. They possess relative advantages, especially of convenience, with features that provide additional satisfaction over conventional telephones. New energy technologies have not demonstrated significant relative advantages over the conventional technologies they have been meant to replace. Consider electric cars: they are far more costly than conventional cars of the same size and appointments. Indeed, they cost more, a large tax subsidy that is available to purchasers notwithstanding. Because the investment is large, even those who hear positive reports from the trendsetters may prefer not to buy. An electric car is not inherently more comfortable, more powerful, or more reliable than one that is gasoline powered with a conventional engine. The range of electric cars is limited; there is some question as to how they will perform in cold or hot weather; and there is little operating experience to know how they will perform after 10,000 or 50,000 miles. Battery packs are expensive, and should they need replacement, it could exceed the cost of many new conventionally powered vehicles. Most 29

The invention year of the cell phone was 1973 (Comin and Hobijn 2010). Perhaps the fastest invention to mass diffusion was the Internet, invented in 1983, ubiquitous by the late 1990s.

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potential buyers will want to know repair histories, warranty rules, ratings, and standards compared with conventional automobiles. This is not to say that government incentives cannot ever play a role and will never have an impact on sales. No doubt current sales reflect the fact that some demanders have a reservation price for an electric or plug-in vehicle that is met by factoring in the tax preferences. Furthermore, information by government agencies facilitates the observational component of the diffusion process. But there are no tax preferences or other policies short of coercion that will necessarily induce widespread, and especially rapid, diffusion. There actually is one factor that might induce more purchases of electric and plug-in automobiles: very high gasoline prices. Then again, even this is unlikely to lead to rapid diffusion of electrics. High prices, as Europe demonstrates, more often lead to conservation (high-mileage conventional vehicles) than to the adoption of new innovations, which still face questions of relative advantage and trialability – factors that cannot be settled simply by a legislated tax benefit. Thus, the problem with Apollo: widespread diffusion of new energy technologies is not accomplished by politicians setting goals or appropriating a lot of money. Broad diffusion depends on technologies meeting the requirements of purchasers, of providing a reason for people to pay for the new over the conventional, and the process unfolds over time, maybe decades. In fact, a historical study of diffusion found that the average time from invention to diffusion was forty-five years (Comin and Hobijn 2010). Of course, most of the energy technologies noted in this chapter, and in this book as a whole, have already been invented; some, like liquefied coal, are a hundred years past their invention but are nowhere near diffusion. The fact of a bill being passed and date given for diffusion does not make it happen. Even basic commercial feasibility cannot be simply ordered by an act of Congress or the demand of a U.S. president. People may wish for it; scientists may work toward that end; entrepreneurs might think of potential markets. But diffusion is a social process, convincing perhaps millions of people to change, and markets to shift. And that is, in fact, a great deal more difficult, unplannable, and unpredictable than a one-time round-trip to the moon.

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Venezuela 1979: “Someday soon, Americans will be driving cars built by our workers in our modern factories, with bumpers made from our aluminum, and gasoline from our oil. And we will look like you.” – Interview with Venezuela President Carlos Andr´es P´erez, cited in Karl (1999) Venezuela 1986: “Venezuela plans to go ahead with a $21.2 billion debt rescheduling with its bank creditors, but the oil price slump has cast doubt on its ability to meet payments . . . the former [Venezuelan]energy minister, Humberto Calderon Berti, said . . . that Venezuela would be lucky to earn $10 billion in oil export income this year.” – Reuters

1. Introduction In the waning days of the Carter administration, the Department of Energy forecast oil prices for the next twenty years. For 1986, oil was expected to be selling for a nominal price of around $50/bbl. There was some skepticism about that price. It seemed too low. Some models projected nominal prices quintupling by 2000, which meant about a 9 percent increase on average per year, and a price in 1986 of about $67/bbl; even a 10 percent average annual increase (albeit at “irregular intervals”) was thought possible (Fesharaki 1981). There was reason to fear that even this was too conservative. After all, from early 1979 through the first half of 1980, the price had more than doubled, and it had increased more than tenfold since 1970. In fact, in November 1980, the U.S. secretary of state, Edmund Muskie, received a briefing paper that argued that if the Iran-Iraq War continued, (which it did), the price of oil would “likely break the $50 per barrel level” in 1981 (U.S. Department of State 2012, 902). Moreover, in 1981, price controls 245

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were finally removed, and there appeared to be no limit to how high the price would go or how quickly they would get there. OPEC would surely raise the price by far more than 10 percent. As a major 1980–1 study, the Energy Modeling Forum, concluded, “While there remains a high degree of uncertainty about future world oil prices, our analysis suggests that most of this uncertainty concerns not whether real prices will rise in the next several decades but rather how rapidly they will rise.” In other words, the forecast for 1986 of $50/bbl seemed impossibly optimistic. In fact, it was wrong. It was too high. More than 250 percent higher than the actual average price in 1986. That year, the price of oil, which had trended downward steadily from 1981, collapsed, reaching a low of $12/bbl in the first half of 1986, and finishing the year with an average price of $14/bbl. In real terms, the price was about where it had been in 1973 – before the embargo. The world was drenched in oil. Twelve years later in 1998, after a long period of relatively low but stable prices (briefly interrupted by two price spikes), the price crashed again. This time, in real terms, it was lower than it had been at any time since World War II. The world, it seemed, had turned upside down. One part of the 1970s narrative had Organization of Petroleum Exporting Countries (OPEC) owning the world; during the second crisis period, the World Bank had forecast that OPEC would have a surplus of $1.2 trillion so-called petrodollars by 1985 (Amuzegar 1998). Instead, that year the exporting countries faced a combined current account deficit (more money went out than came in), and for the next fourteen years, exporting country finances deteriorated further. Overall, from 1980 to 2000, their combined economic performance was abysmal. Beginning in the mid-1980s and continuing through the rest of the century, there were regular predictions that so far from taking over the world, OPEC would fall apart completely. Big Oil was struggling, too. Instead of the massive windfall profits envisioned in 1980, the “windfall” tax take for 1986 was exactly $0. Even the New York Times (1987) thought the tax should be repealed (which it was). Few Americans shed any tears of sympathy for the woes of OPEC and Big Oil. But some officials were alarmed about the domestic implications of an oil price collapse. In Texas, the collapse crippled the state’s economy and left the government budget deeply in deficit. The oil companies were lobbying frantically for a floor price of oil or (what in effect would be the same thing) an import fee that would equalize the world oil price to the domestic production cost. That was not provided, but officials were plainly worried, if for no other reason than the political impact of economic problems in the southwest. The Reagan administration was anxious enough to dispatch

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Vice President George Bush to Saudi Arabia to plead with the Saudis to cut oil production to raise prices.1 It came as a surprise to policy makers, but it should not have been. From the beginning of the twentieth century, times of doom and gloom about the future of oil, times of apparent shortages, either present or said to be just over the horizon, were followed by a glut. Unless the neo-Malthusians had been correct that this time was truly different and energy resources were reaching the point of exhaustion, a glut was especially likely some time in the 1980s. The price increases in 1979–80 represented a speculative “up-cheating” bubble2 and were plainly unsustainable. Very high prices led to (a) conservation and fuel switching among consumers and (b) expanded exploration for, and production of, oil throughout the world. But for OPEC nations, certain that oil would provide unending prosperity, the oil market’s turn was disastrous. OPEC producers had not only spent their petrodollars freely but borrowed from banks that were also certain that high oil prices would continue (Karl 1997, 1999). Nation after nation fell into arrears on its debt, and austerity followed, pushing several oil exporters into economic depression. From 1980 through 2000, Venezuela, for example, experienced negative economic growth overall (Easterly 2001). Curiously, through all of this, the underlying U.S. energy narrative did not change much. America was still said to be in peril because of an “intolerable” dependence on imported oil, and during two 1990s price spikes, the energy crisis was said to have returned or never left. Although prices were falling, officials cautioned that the United States needed to recognize that dependence could mean oil blackmail and shortages. Carter’s successor, Ronald Reagan, made reference to the problem of dependence. Even in the midst of falling oil prices and huge supplies, there were predictions of new crises ahead. The president who followed Reagan, George H.W. Bush, hit that point in the nomination speech in 1988, when oil prices were still only around $15 per barrel (bbl) and the U.S. economy was robust. Sure enough, on his watch, a new “energy crisis” was declared after Iraq invaded fellow OPEC member Kuwait, leading to a larger war in the Persian Gulf that disrupted world oil markets. Oil prices rose quickly.3 Bush’s successor, Bill Clinton, called U.S. dependence America’s “Achilles heel” even as oil prices were plunging once again. 1

2 3

Saudi Arabia did not, in fact, face the same kinds of problems that beset many of its fellow OPEC members. In fact, the Saudis continued to produce large quantities of oil, in effect aiding the glut and keeping prices low. Kreutzer and Lee (1989); see also Chapter 1. Although in real terms they did not come near the levels of 1980.

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The remarkably favorable price picture notwithstanding, each year, experts could be counted on to predict a new near-term crisis. In the early 1980s, one business leader (Lindsay 1981, 153) polled various policy experts informally and reported that all thought there was a high probability – at least 50 percent but more than 90 percent according to “many” – of another embargo and energy crisis in the 1980s. Much of the discussion of energy was quite detached from reality. But the trepidation over a next crisis lingered in the background. Without price and allocation controls, the only effect of an oil market disruption would be temporarily higher prices. But a poll showed the majority of Americans feared a new energy crisis and new gas lines,4 and politicians of both parties harped continuously on America’s dependence. In their rhetoric, they typically modified the word “dependence” with the adjective “dangerous.” Pundits and experts saw gloom in the midst of plenty. “Shortages seem to be inevitable by the late 1990s,” wrote one expert in 1989,5 a view echoed in the early 1990s by Senator Gary Hart (D-CO).6 James Schlesinger lamented in 1996, “At the moment we are just letting things drift when we should be alert to finding possible contingencies.”7 As the new century loomed, there were claims of an imminent supply-demand gap8 and a belief that “90 percent” of the world’s crude oil had already been discovered (Campbell and Laherr`ere 1998). A Carter-era State Department official warned that China would soon demand energy equal to all of OPEC’s output.9 While the lesson that the oil crisis had hurt the exporters most of all appeared lost on American experts, politicians, and the general public, it had not been lost on oil producers themselves. Once upon a time, they seemingly had the power to extort endless rents, but when they initiated price spikes, when they used the oil weapon, they succeeded mostly in spurring conservation and production outside of OPEC. The worst effect was perhaps tipping the developed world into a recession, which reduced demand (and

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“Americans Foresee an Energy Crisis,” St. Petersburg Times (FL), July 7, 1991, 11. This quote is from Colin Campbell in the trade publication Noroil, 1989 (December), cited in an online article by Michael C. Lynch, “Crying Wolf: Warnings about Oil Supply,” available at http://sepwww.stanford.edu/sep/jon/world-oil.dir/lynch/worldoil .html. Op-ed, “Ill Equipped for the Crises of the 90’s,” New York Times, Aug. 8, 1990, A19. Quoted in “Odds of Another Oil Crisis: Saudi Stability Plays a Large Role,” New York Times, Jan. 30, 1996, D6. Op-ed, Gregg Easterbrook, “Running on Empty,” Houston Chronicle, June 14, 1999, 1C. Op-ed, David D. Newsom, “99-Cent-Per-Gallon Illusions,” Christian Science Monitor, Apr. 8, 1998, 19.

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exporter revenues) all the more. In other words, when exporters used the oil weapon, they wounded themselves. As the twenty-first century approached, the price of oil began finally to rise back to where it had been (inflation-adjusted) in the early 1990s. It raised old fears, and, after 2001, fears that came in slightly new packages. Again, we had to do something about energy. But from 1990 onward, what was proposed seemed a repeat of policies that had been tried ten, twenty, thirty years before, restated in some new ways perhaps but just as flawed as the old ideas had been. And like them designed for failure.

2. The Institutional Origins of the Oil Price Collapse (or Why OPEC Nearly Died) Government price setting, as Chapter 1 noted, can lead to shortages when the price is set below that which would prevail in a mostly free market. But as the same chapters in Economics 101 textbooks explain, when the price is set above the market-clearing price, there is another distortion, a surplus. A government-induced surplus, which occurs because of government price guarantees to producers, typically leads to one of two outcomes: a government may simply purchase the surplus at the set price and store it, maybe to resell later (often at a loss). Alternatively, it may subsidize the producers who then can sell at the lower market price (benefitting consumers) while the subsidy provides producers with the benefits of the guaranteed higher price. The United States and other developed countries have created agricultural surpluses for decades; the policy has been considered necessary to provide incentives for farmers to produce sufficient (although actually to overproduce) quantities of food and for politicians to win the votes of agricultural regions. But when producers have to sell a product in a market where government does not agree to buy at a higher price, even if the price is supposed to be fixed, sellers will have to lower the sale price. Otherwise, they will be stuck with the surplus product, with no buyers and often considerable storage costs. In the 1979–80 period, OPEC countries had been setting prices, often raising them in large percentage leaps. Each country in the period set its own price, although often in reference to the “official” price, which was the one Saudi Arabia, the largest producer, established and followed. Over the period in question, the market price had tripled (doubled in real terms) – after it had quadrupled earlier in the decade. OPEC seemed to have such absolute control of the market that forecasts of ever-rising prices appeared solidly grounded.

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Yet, such large hikes were unsustainable unless the so-called supplydemand gap really did exist, but it did not. Oil consumption fell every year from 1981 through 1983; at first, it fell partly because of a recession in the developed world, which reduced demand. But by 1983, there was appreciable economic recovery, yet for a while demand for oil continued to fall. Oil consumption did increase over the next couple of years from the 1983 low, but as of 1986, daily world oil demand was more than 1 million barrels lower than it had been in 1980. High prices also provided an incentive for the search for more oil worldwide, with a large increase in production coming from non-OPEC producers such as Mexico, Norway, and Brazil. OPEC’s share of oil production shrank noticeably from 1979. Even when its share rose somewhat in the late 1980s, it remained far below the peak in 1979. OPEC’s troubles stemmed from the fact that its own narrative was flawed. The exporters believed that oil was by definition an appreciating asset, which as Adelman (1986, 274) noted “is a fiction,” and their own ability to control the market. It had seemed correct in the late 1970s, especially because many buyers also believed it. At the time, crude oil supply contracts were written at sky-high prices because refiners and wholesalers did not want to get caught with low inventories when the next price spike occurred. Some of the buying was purely speculative; some was based on the belief that available resources were beginning an inexorable decline. But there appeared to be one more solid reason to worry about prices: many oil-producing countries were unstable politically, and so frequent supply disruptions appeared likely. After all, regime change in Iran in 1979 had set off world oil market chaos, and political disruptions continued in the early 1980s as well. In September 1980, in fact, Iraq invaded Iran, disrupting production in both countries. The war would continue into 1982. But in reality, oil supply was growing, and a glut began to appear by late 1980 that only grew in subsequent years. The market problem can be illustrated by Figure 7.1a. Low demand and supply elasticities in the short run mean that, as the figure shows, if prices are set above the market-clearing price, there will be a relatively small surplus. But elasticities increase over time as high prices induce both greater availability of supply and substitution away from oil – effectively flattening the curves, increasing the extent of a surplus, as in Figure 7.1b. This occurs even in the absence of shifts in the curves themselves. Because supply especially was expanding rapidly (the curve itself was shifting down and to the right), the surplus would only grow and the revenue losses to oil exporters could only grow as well. To

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Figure 7.1 (a) Relatively inelastic curves allow prices to rise creating a small surplus in the short run. (b) Over time, even if prices do not rise further, the surplus grows larger as curves become more elastic.

have maintained high prices, OPEC would have had to curtail production substantially, which would have meant significantly cutting the countries’ own revenues. But exporters, OPEC in particular, faced a fundamental dilemma: their economies were based almost entirely on oil wealth. By the end of the 1970s, Nigeria, for example, relied on oil for more than 90 percent of its export revenue and four-fifths of all government revenue (Gelb et al. 1988). Nigeria, like most of the other members of the organization, had begun to plan vast development schemes based on ever-increasing oil revenues and financed by banks. OPEC countries had opportunities to borrow a great deal at first, because bankers believed that rising, or at least constant, oil prices guaranteed repayment.10 A relatively conservative estimate of the average growth of OPEC economies was 5.1 percent for the remainder of the century (Hafele and Anderer 1981). Gross national product (GNP) and revenue predictions were far out of line with the subsequent reality. GNP per capita in many OPEC countries was lower in the 1980s and 1990s than it had been in the 1960s (Karl 1999). Iraq’s per capita GNP was about where it had been in the 1940s. Nigeria, which at one time was the thirty-third richest nation, was, by the late 1990s, ranked thirteenth from the bottom (Amuzegar 1998). In other words, the 10

The 1980–1 Energy Modeling Forum examined ten forecasting models of the oil market, nine of which assumed constant or rising prices (noted in Gately 1986).

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economic consequences of the great oil boom of the 1970s were disastrous to many oil exporters. But the problem for OPEC was in its members’ institutions. Institutions, what North (1990) refers to as the “rules of the game,” are the formal legal rules and informal social norms that structure social and economic interactions and define the incentive systems of societies. Modern economic systems require the reliability of long-term, impersonal exchange. This in turn depends on reasonably well-defined and enforced property rights, contractual enforcement, and most fundamentally, the rule of law. Developed countries have these institutions; most nations do not.11 OPEC members, for the most part, were what North, Wallis, and Weingast (2009) characterize as “natural states” in which the bulk of transactions are based not on the rule of law but rather on personal patronclient relationships.12 In natural states, the rules are set by elites who maintain their base of power primarily through the distribution of rents. Given the tremendous oil windfall, ruling organizations had overwhelming incentives to acquire the spoils and distribute them to their supporters. These societies lacked the institutions that would have enabled absorption of petro-dollars and their effective utilization in economic development. In fact, the alternative, a truly open political and economic competition, might have lost these elites both enormous wealth and the political leverage to use it. The incentive system did not favor investment for long-term growth. Most OPEC countries were autocracies of one sort or another, and access to power was synonymous with access to oil wealth. But when the rents diminished, those who were now seeing their distributions substantially diminished often sought change. In these states, however, there was no mechanism for an orderly evolution. Instead, the result was often violence. Even the OPEC members with nominally democratic institutions, such as Venezuela, simply could not resist the degree of control that such rents provided and often faced the same kind of internal clashes as the autocracies. As Karl (1999, 36) argued, “the stakes are simply too high. Not only are billions of dollars up for grabs but they generally circulate in the context of weak administrative structures, insecure property rights, nonexistent judicial restraints, deep divisions and strong political ambitions. This is not 11 12

Nearly all countries have written constitutions that codify the rule of law, but often it is not applied. These involve what North (1990) calls informal institutions – customs, social norms, for example – institutions that may well continue to structure economic interactions in natural states even if nominally superseded by codified law.

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the formula for economic efficiency.” In fact, it was a formula for corruption, and when things turned bad, extensive capital flight as recipients of the oil wealth sought to get out with their wealth and lives intact.13 From the outset, although oil exporters claimed that they would use the money for development – the shah of Iran had predicted that his country would be one of the richest developed countries by 2000 – the aforesaid development programs failed. As a group, although different in many respects, OPEC members embarked on similar types of development efforts to adapt to postpetroleum economies. They concentrated on large-scale industrial projects, “energy-intensive megaprojects. . . . [or] ‘resource-based industrialization’ . . . ” (Amuzegar 1998, 101) – based on an idea of what a postoil industrial economy should look like rather than on the country’s areas of comparative advantage (besides oil) and planned by elites who controlled the oil wealth. But given the patron-client nature of the state, “development” funds were distributed to supporters in the form of direct subsidies as well as uncompetitive contracts. What rose most dramatically during the 1970s was not business formation in OPEC countries but personal consumption. With apparently endless sums of money coming in without much effort – countries contracted with major oil companies to extract the oil while paying royalties to the national treasury – there was little incentive for anyone with the ability to acquire such rents directly to attempt to alter existing institutions.14 Add all of this together, and it was now the petro-economies, particularly those in OPEC, that were suffering most from oil. Although the United States had endured a period of high inflation and recession in the early 1980s, for the rest of decade, growth was robust, inflation was low, and unemployment was falling; there were no significant lingering effects of the energy crisis period. Amuzegar (1998, 99) observed, “The impact of higher oil prices on Western economies was limited, short-lived and not altogether negative since the oil crisis drew greater attention to conservation and environmental issues.” OPEC countries could not say the same. They were on the whole, according to Amuzegar, “badly bruised.” The autocratic patron-client states of OPEC could not adapt easily to the traumatic loss of those rents in the mid-1980s and mid-1990s. They lacked, Karl (1999, 36) has argued, “the 13 14

In general, as Keefer and Knack (1997) argue, weak institutions are determinative of the ability of any developing country to “catch up” to the developed world. This is also referred to as “the resource curse,” about which there is a large literature (e.g., Gelb et al. 1988; Ross 1999). Mehlum et al. (2006) have linked the “curse” specifically to weak institutions. Robinson et al. (2006) argue that whether or not it constitutes a curse depends on the “political incentives” of the nation.

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flexibility essential to successful development.”15 Instead, the end of the oil boom led to revolution in Iran, wars in Iraq, and coups in Nigeria, Qatar, and Venezuela, as well as cases of high inflation, increasing budget shortfalls, and high unemployment. Debt defaults seemed inevitable. According to some experts, OPEC’s demise was only a matter of time (Akacem 1988). The lesson of the 1970s was not lost on Saudi Arabia, OPEC’s largest producer; in particular, the Saudis learned that “very high prices only encourage the development of lower cost oil elsewhere” (Morse 1999, 22). But low oil prices were, according to some American politicians committed to the old narrative, dangerous, especially with imports now topping 50 percent. Said Senator Pete Domenici (R-NM) in 1991, low gasoline prices were masking “what remains a very serious issue of dependence.”

3. The Ways of the Oil Market: Ideology and Reality In 1980, Ronald Reagan campaigned on a promise to end price and quantity controls on oil immediately, to hasten the decontrol of natural gas, and to allow markets to decide energy policy. He was ideologically committed to markets, he made clear. Or at least, he made it clear most of the time. When it came to nuclear power, he had an inexplicable soft spot and felt the government had to intervene on its behalf. Reagan and his administration did bring a new rhetorical perspective to energy policy, but except for decontrolling oil more quickly than Carter had intended and defunding programs that were soon to lose any economic rationale, it is not clear what else he accomplished. Reagan had extravagant hopes for decontrol of oil. He believed that decontrol would radically transform energy markets in the 1980s. But the changes that occurred owed more to OPEC’s policies in the 1970s than to the 1980s policies of the Reagan administration. For the most part, Reagan’s instinct about markets was right, but the market also produced unexpected results – results not always to his, or his supporters’, liking. In the end, Reagan never did change the energy narrative. The United States was termed dangerously dependent when he took office and, the near collapse of OPEC notwithstanding, still dangerously dependent when he left. In the next decade, when the price rose again, the American people would demand his successor and Congress do something – and they would oblige by touting the same ideas that had failed in the 1970s. 15

North (1994) termed this “adaptive efficiency,” the ability of institutional structures to incorporate major changes in technology and relative prices (shocks). In his view, it is the overriding requirement for sustained long-term economic growth.

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Reagan regarded decontrol as a cure-all policy. He expected it would lead to a significant degree of energy independence by 1985, arguing that there was “more oil in Alaska than Saudi Arabia.”16 His Democratic predecessor, Jimmy Carter, had already started the process of decontrol of oil, which was to be completed by the fall of 1981. Carter also started the process of decontrol of natural gas; price controls on “new” gas production would be eliminated by 1985. Reagan wanted to do both more quickly. Of the major candidates in the 1980 presidential race, only Carter’s main intraparty rival, Senator Edward Kennedy (D-MA), touted an even more interventionist energy policy than the one in place. Kennedy wanted mandatory gasoline rationing and a reimposition of oil price controls. But in the final contest, it was Carter’s slower and sometimes only partial decontrol plans versus Reagan’s more abrupt and general ones. Reagan delivered on his promise to accelerate decontrol of oil soon after his inauguration. On January 28, 1981, all price controls on crude oil, gasoline, and propane were lifted, and the entitlement allocation system, a legacy from the early days of the Ford administration, ended as well. Outside of the administration, policy makers believed that while this was inevitable (and given the difficult bureaucratic problems controls had caused, desirable), American consumers would be hit hard by soaring energy prices. In announcing decontrol, Reagan’s energy secretary, James Edwards, claimed it would save 50,000 to 100,000 barrels per day (bbl/d), while dismissing the idea of a price shock to consumers. He claimed that prices would go up modestly and perhaps not at all. This pronouncement, supported by Council of Economic Advisors (CEA) Chairman Murray Weidenbaum, was met with considerable skepticism by the reporters in the room. Consumer advocates dismissed the assertion that decontrol would reduce consumption and stressed only that the price of gasoline would go up considerably (which had actually been the point for Carter and James Schlesinger). According to “some experts” cited by the Washington Post (Jan. 31, 1981), the price would probably rise 17 percent in six months; but estimates were as high as 38 percent. The price rose by six cents (4.5 percent) immediately after the announcement and by four cents more a month later. In Congress, Democrats regarded Reagan’s moves with “dismay, chagrin and disappointment,” to quote Senator Dale Bumpers (D-AR). Immediate decontrol, Bumpers argued, would increase inflation, hurt consumers, and leave oil pricing not to a “market” but rather “a rapacious oil cartel.” Much of the opposition was couched in terms of decontrol’s effect on the 16

Quoted in the Detroit Free Press, Mar. 23, 1980.

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economy as a whole. Senator Kennedy read into the record a lengthy report from Wharton Magazine (summer 1979) suggesting that decontrol would negatively affect not only inflation but also GNP and the unemployment rate. Senator Patrick Leahy (D-VT) doubted that it would induce any new production (“[decontrol] will not produce even one barrel of additional oil”), and Senator Henry Jackson (D-WA) foresaw oil prices at $50 per barrel if the Iran-Iraq war continued; without price controls, he said, Reagan was leaving Americans “without protection.”17 Not surprisingly, the most vociferous criticism came from the leading consumerist legislators, Senator Howard Metzenbaum (D-OH) and Representative Toby Moffett (D-CT). Metzenbaum said that decontrol was a step that the “people of this country and the President are certainly soon to have cause to deeply regret.” He believed that there was more at stake than inflation and unemployment. “[D]econtrol means we are signing away our economic sovereignty. . . . We are saying to those leaders of the OPEC nations, ‘We sit at your feet. . . . ’ We have abandoned all hope of having an American energy policy.”18 Metzenbaum and Moffett were outraged enough to join in a legal suit to block Reagan’s effort. The suit failed, although the judge did agree that “injury to consumers ‘clearly appears to exist.’”19 There were also resolutions and bills introduced to forestall decontrol of (really to recontrol) oil prices. Almost immediately Representative Moffett offered a condemnatory resolution in the House, but it was defeated. Later, in May, Representative John Conyers, Jr. (D-MI) introduced the “Oil Fair Pricing Act” that called for ceiling prices on oil and formulae for adjusting them. Some efforts had more narrow purposes – recontrolling oil for favored groups. Senator Mark Andrews (R-ND), to give one example, introduced a resolution to ensure that farmer-owned refining cooperatives and small independent refiners continued to have access to crude oil “at reasonable prices.”20 But probably, because the current decontrol process had been started by a Democratic president, the opposition never gained any momentum, and there was no large-scale effort to reimpose oil price controls.21 Controls ended with loud rhetoric but no congressional action, 17 18 19 20 21

Quotes are from CR, 97th, 1249–1262, Jan. 28–9, 1981. CR, 97th, 1250, Jan. 28, 1981. Op-ed by David L. Greenberg and Ann K. Lower, “Crude Decontrol by Reagan,” New York Times, Mar. 19, 1981, A23. S. Res, 139. Congress did give Reagan standby authority to return to controls – a bill was passed to that effect in March 1982 – just in case the energy crisis returned, as many (e.g., James Schlesinger) believed. But it was authority Reagan had no intention of exercising; he vetoed it.

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especially because the price not only stabilized, it soon began to fall. Weidenbaum and Edwards had been too pessimistic. For the year 1981, the uncontrolled price of world oil fell by 4.5 percent; the next year, it fell by 11 percent more. According to scholars of the period, Reagan ascendance represented a paradigm shift in American energy policy (Barkenbus 1982; Katz 1984), from a top-down “energy policy” model to a “free-market” model. Katz (1984, 135) argued that Reagan was returning to the pre–energy crisis “system of organization.” This line of reasoning, however, would be hard to justify, because before the energy crisis, there was intensive government intervention in U.S. energy markets. In fact, as this book has argued, there was a good deal of government management at the state as well as federal level going back to at least the 1930s. Nevertheless, Reagan certainly saw a far more central role for the market than had any of his immediate predecessors. His belief in the power of the market to solve energy dilemmas was, at least rhetorically, quite absolute. As he stated in a September 1981 address to the nation in which he advocated eliminating the DOE, “Now, we don’t need an Energy Department to solve our basic energy problem. As long as we let the forces of the marketplace work without undue interference, the ingenuity of consumers, business, producers, and inventors will do that for us.”22 This perspective was to be applied not only to decontrol but to most 1970s energy programs. R&D funding requests for conservation programs were slashed by 97 percent from fiscal year 1980 to FY 1983, and solar R&D funding was reduced by 85 percent. The Carter plan for 20 percent solar by 2000 was renounced, and the White House solar panels were taken down.23 Because Carter’s programs were predicated on ever-diminishing oil and gas supplies and ever-rising prices, pursuit of these programs at a time when prices were continually falling would soon have been hard to defend. As the New York Times reported in 1988, solar had simply been “outpriced by oil.” Nonetheless, this sort of budget cutting predictably outraged many on Capitol Hill. Representative Richard Ottinger (D-NY) said it was based 22 23

Reagan speech, Sept. 24, 1981, available at http://www.reagan.utexas.edu/archives. Residential solar tax credits remained until expiration at the end of 1985. Although some industry officials believed solar was “on the verge of a marketing breakthrough” and drawing close to competitive viability, it clearly was not the case. It should be noted that business investment tax credits for renewables – solar, wind, and others – were preserved in the 1986 tax reform and were again reinforced in the 1992 Energy Policy Act. Discussed in “Solar Power’s Future Unclear as Tax Credit Faces End,” New York Times, Dec. 30, 1985, A10. Cuts were made relative to large expansions in Carter’s last year in office. In real terms solar photovoltaics R&D was actually higher in 1988 than it had been in 1978.

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on “ignorance with respect to both the free market system and the energy conditions of the United States” (quoted in Katz 1984). Reagan’s high hopes for a free energy market actually seemed inconsistent. At various times, Reagan himself or others in his administration suggested the following: marketization of oil and natural gas would lead to energy independence or at least reduced dependence because there was a lot more oil out there and high prices would spur drilling. High prices would lead to greater conservation and efficiency as well, and maybe even to the private development of alternative technologies. In 1981, Reagan’s DOE projected a nominal price range for oil of between $50 to $100/bbl by 1990, with reduced imports. By 2000, imports were projected to be low, perhaps zero. The DOE did aver that these were “projections not predictions,” but the idea was that high prices in a free market would lead to something like American energy independence.24 This scenario was all plausible but only if high prices stayed high. That is, decontrol would spur increased production in the United States because the market price was high, creating producer incentives. High prices were also needed to create incentives for consumers to lower consumption and seek greater efficiency.25 But with all the new drilling and conservation, unless the neo-Malthusians were actually right (in which case no one was going to find new supply, as Senator Leahy argued), economic analysis would predict that prices would fall, which carried to the next step would reduce production, discourage conservation and obviate the need for new technologies. The Reagan administration sometimes said this, too; that is, the free market would lead to lower prices. Moreover, this process was likely to lead to greater dependence on imports, not independence. Reagan envisioned finding most of this new American oil is places where drilling was not then permitted, especially in the Alaskan wilderness, and offshore including the Outer Continental Shelf (OCS). There was indeed more oil in those places, but the OCS especially would be a costly area for field development. It was far more expensive to produce oil miles offshore than it was in Saudi Arabia. If prices stayed high there was incentive to drill out on the OCS. But if prices fell, the incentive would be gone. Then, higher cost U.S. production would be competing with 24

25

From the July 1981 National Energy Policy Plan, the DOE’s biennial report to Congress. In terms of price, the projection was far above the actual. By 2000, imports were over 50 percent of consumption. Energy consumption per dollar of GNP had been falling for several years. A Carter-era study by the DOE found that only 5 percent of that efficiency improvement was attributable to government conservation programs. Most of it was due to higher energy prices.

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lower cost – often much lower cost – imported oil. Thus, the contradiction: high prices would lead to self-sufficiency and to low prices, which would lead to greater dependency. In fairness to Reagan and his advisors, the argument that decontrol could lead to both lower prices and self-sufficiency had support from at least one economic analysis. A study of price decontrol in 1977 (Phelps and Smith) argued that controls had had no effect on world prices and actually had led to more imports. The first part of the analysis was clearly correct and the second part correct up to a point because the distortionary effects of controls – the entitlement system as well as price controls – gave advantages to refiners to import more, not less, crude oil. But it was misleading to believe that longer-term decontrol would lead to a reduction in imports. The authors came to their conclusion because the government had based controlled prices on the average cost of refinery inputs; controls forced firms to do this. But this, as the authors noted, represented yet another (simple) economic error. In actual markets, according to economic theory (and much empirical research), firms will price based on the marginal cost of production – the cost of producing the next unit of output. Because costs are assumed to be rising as output rises, the next unit would be more expensive than the last. Output prices would have to at least equal marginal costs or else the refiner would be operating at a loss. So, the authors of the 1977 study reasoned, because OPEC oil during the period 1973–8026 was more expensive than domestic oil, with decontrol, lower-priced domestic oil would be preferred by refiners. Costs would fall, prices would fall as well, and dependence would be reduced. But that analysis was only true because OPEC had market power and could set prices well above the marginal cost of production in most OPEC countries. Thus, the conclusion, that with a free market refiners would buy U.S. oil instead of imports, was wrong. If there was an actual competitive market, the cheapest oil would be from the producers with the lowest marginal cost of production – namely, OPEC, especially Saudi Arabia. At that point, imports would increase, and the United States would depend more on foreign oil. In fact, Reagan’s policies virtually guaranteed that the United States would eventually import more oil, not less. Whether this was really as bad as politicians made it out to be was a different question. But as long as the U.S. relied on market forces, the chances were that dependence would grow in the years ahead. Although decontrol was itself long overdue, 26

And artificially increased by a $0.21/bbl import fee that was in effect when the study was undertaken.

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Reagan did not apparently appreciate the ramifications of his own position. If the market really would decide and direct resources, it would do so in ways that were sometimes unexpected and politically undesirable. Like virtually every politician since 1973, Reagan had adopted the selfsufficiency theme, but in 1983, the administration officially admitted that energy independence was not an attainable goal even in the medium term. According to the administration’s 1983 report to Congress,27 America would have to rely “to some extent” on Mideast oil for at least twenty more years. Reagan’s supporters argued in later years that congressional refusal to allow more offshore and Alaskan exploration and development was the problem; throughout the 1980s, Congress barred the expansion of drilling that the administration requested. But in fact by the mid-1980s, with oil below 1973 prices in real terms, drilling in the places like the OCS where officials thought most likely to yield significant quantities of domestic oil and gas would have been a money loser, and no driller would have undertaken it. For the Reagan administration, the problem lay in the inherent inconsistency between the goal of self-sufficiency and the likely outcome of decontrol. Notwithstanding the fact that it meant more imports, in 1986, the Reagan administration took credit for the collapse of oil prices, which actually resulted from OPEC’s loss of market power. The price of oil would have fallen in the United States even without decontrol.28 That is, although the Reagan administration considered decontrol a catalyst for U.S. economic growth, that step really had little consequence throughout Reagan’s time in office. The test of whether decontrol and marketization actually were significant in some fundamental way would require a market disruption like the one in 1979 and that would not happen until 1990. Reagan’s free market impulse did not apply to nuclear power; to a degree, his policies merely shifted the preferred rent seekers from the solar industry to the nuclear industry. His first report to Congress, the DOE’s “National Energy Policy Plan” submitted in the summer of 1981 declared that “The Administration is committed to reversing past Federal Government excesses [against nuclear power] . . . thus allowing nuclear power to compete fairly in the marketplace” (p. 7). Administration policy sought to speed up nuclear licensing and even to revive the Clinch River Breeder Reactor (CRBR) program that Carter had killed. The proposal was met by some derision in Congress. Senator Kennedy read into the record a letter from a Michigan 27 28

As noted earlier, such reports were required biennially by the enabling legislation that created the DOE. Decontrol probably did eliminate allocation issues that might well have caused some problems in a rapidly declining market but would have hardly mattered with respect to price.

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Republican who was in the House during the Carter years, David Stockman. Stockman, who was now the head of Reagan’s Office of Management and Budget, had charged that there was no economic rationale for the CRBR and that a vote against it was a “test of whether as Republicans we consistently adhere to . . . free market views on energy policy.”29 Funding was restored briefly to the CRBR, but it was finally killed for good in 1983. If the administration was really serious about nuclear power competing “fairly” in the marketplace, there was no rationale to give government support to any nuclear power program, much less the CRBR. Beginning in the early 1980s, it was observed that nuclear power was simply not costcompetitive (Komanoff 1982; Cassedy and Grossman 1990). Life-cycle costs for nuclear power – costs per kilowatt-hour of electricity generated – were far in excess of those for coal, which was nuclear’s main competition for base load30 electric generation. Nuclear power was a technology that had been rushed to market to prove a moral point, not one about energy and certainly not one about energy costs and market competition. As Morone and Woodhouse (1989) asked: “How did decades of development, several hundred billion dollars invested, and the lifelong commitment of thousands of scientists and engineers produce a technological white elephant that the American public does not want?” It was an example of hasty implementation/rising costs government failure (see Chapter 2). It has been argued that there was not then (nor since) an example of nuclear power that was truly market-competitive and that had not been subsidized in some fashion.31 In the end, despite Reagan’s support, the nuclear industry’s efforts came to nothing, and no new nuclear power plants were ordered for the rest of the century.32 Decontrol of oil prices, achieved with a wave of hand and pen, was Reagan’s most important contribution to energy policy. He had a few other items on his policy agenda: primarily, he sought to abolish the DOE, deregulate natural gas wellhead prices,33 and expand areas offshore and in 29 30 31 32

33

CR, 97th, 3308, Feb. 27, 1981. The minimum amount of power that a utility or distribution company must make available to its customers during a day. See Jerry Taylor and Peter van Doren, “Nuclear Power in the Dock,” the Cato Institute, April 2011, available at http://www.cato.org/publications/commentary/nuclear-power-dock. It has been claimed (Katz 1984) that the Reagan administration believed its foes among consumer advocates and environmentalists had caused the nuclear industry to be unfairly burdened by regulations and so came to its aid. Although it is true that nuclear power faced opposition from such groups, there is no credible claim that nuclear power was economically cost-competitive in 1985. Congress was not willing to amend the 1978 Natural Gas Act to speed up even “new” gas decontrol. Senate and House resolutions reinforced this, one of the former saying the act had been “sound policy” and “should not be altered” (S. Res. 331).

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wilderness areas for oil and gas development. None of these efforts were successful. His administration took credit for increased conservation, but this was due mainly to the high price of oil that persisted in the early 1980s and was expected to last well into the future.34 Officials also touted the widespread conversion of oil to coal power plants, which was actually a program of the Carter administration. Under Reagan, there was one change in the electric power fuel mix: Carter had sought conversion of both oil and natural gas-fired generation to coal-fired. In the 1980s, it was clear that the United States was not running out of natural gas, which began to take an increasing share even of base load electric power generation, through efficient combined-cycle systems.35 The bill (the Powerplant and Industrial Fuel Use Act of 1978) that had restricted the use of natural gas was partially repealed in 1987.36 Reagan also supported the Synthetic Fuels Corporation (SFC) at first, and appointed a board of supporters to run it. The new board did an abysmal job. By 1983, the SFC’s president, John Schroeder, quit under pressure and threat of an investigation, and his replacement, Victor Thompson, lasted only a year before he was forced to resign. Meanwhile, companies that had originally agreed to participate in the synfuels program lost interest as prices fell for conventional oil and gas and as projections of the costs of synfuels rose. Synfuels had supporters in Congress – especially representatives from coal states who saw coal gasification and liquefaction boosting their local economies. But by 1982, there were repeated attempts by legislators of both parties and from both sides of the political spectrum to abolish the SFC, or at least reduce its funding significantly. Funding was first cut back from the original $20 billion authorization to $5 billion, but then in 1985, Congress abolished the SFC as part of the Consolidated Omnibus Budget Resolution. The move was not surprising; a separate resolution to severely reduce funding to the SFC had already passed the House by a vote of almost 3 to 1. For the most part, however, throughout Reagan’s two terms as president, there was a kind of stalemate between his administration and Congress with respect to energy. Congressional Democrats introduced dozens of bills to 34

35

36

In March 1987, Reagan did sign one new piece of energy-related legislation (that he had previously vetoed); it established energy efficiency standards for twelve types of home appliances. “Combined cycle” refers to the fact that electricity is generated through a gas-fired turbine but the heat from that is used to boil water to generate power through a steam turbine as well. In fact, the partial repeal was in the 1987 Natural Gas Utilization Act.

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further the Carter-era agenda, but these got nowhere. Reagan’s alternatives were in turn thwarted by Congress. It was clear that Congress did not agree that markets were the best long-run approach to energy policy, but Democrats could not introduce new interventions, and policy was largely left to the market. It was low prices for oil and gas that produced one last look at energy policy during the Reagan administration. The price collapse in 1986 left America’s oil-producing states desperate for relief as wells were capped and abandoned; state unemployment levels rose, and government budgets deteriorated. State governors asked the federal government to impose tariffs on imported oil to bring the price back to a point where independent oil companies could make a profit. Some in the oil industry supported this; others did not. One independent producer was blunt. “God knows it’s hypocritical of us to say [to the government to] stay out of our business until we get our tail in a crack.” Major oil companies asked for relief in the form of a repeal of the windfall profits tax, which was done, and decontrol of natural gas, which was not. Most dramatically, Vice President George H. W. Bush went on a trip to Saudi Arabia in 1986. Bush, who had many Texas oil connections (including two sons who worked in the business), made comments before he left that suggested he was going to ask the Saudis to cut production to “stabilize” or even increase prices. Cheap oil, he claimed, threatened U.S. national security.37 Oil prices did rebound. In 1987, they rose more than 20 percent, although since they had fallen by almost 50 percent the year before, in real terms, they were still below the average for 1974, and they fell again in 1988 almost reaching the lows of 1986. That pattern notwithstanding, George Bush declared on the day he was nominated for president in August 1988, “There is no security for the United States in further dependence on foreign oil.” Although Reagan had opted for different rhetoric on energy, he had not changed America’s energy narrative – even within his own party.

4. Next “Energy Crisis” Two days after George H. W. Bush was inaugurated president in January 1989, the following headline appeared in the New York Times: “Get Ready for Longer Gasoline Lines” 37

“Bush Sees Glut Undermining U.S.,” Chicago Tribune, Apr. 8, 1986, at http://articles .chicagotribune.com.

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The headline was actually not precisely reflective of the article, an opinion piece written by Richard J. Stegmeier, president and CEO of Unocal, a leading oil company. But it did not completely misrepresent Stegmeier either. “Have we seen the last of gasoline lines?” he wrote. “With inventories swollen recently and some members of OPEC in disagreement, one might think so. I don’t and petroleum is my game.” This view, that we might see more gas lines, clashed with those of economists who by this time blamed price controls, not OPEC, for 1970s gas lines. But according to Stegmeier, the United States was simply “playing into OPEC’s hands” and would see those lines again unless America could come up with “a comprehensive national energy policy” composed mainly of incentives for companies like his to do more exploration and drilling. Of course, Stegmeier’s concern was self-serving, but some government policy makers shared his view of impending disaster. Still, proof of whether gas lines were past would have to wait for a market disruption. It would arrive in eighteen months, and Stegmeier would be proven wrong. The first major act of the Bush administration was Reagan-esque, finally ending wellhead price controls on natural gas,38 but Bush quickly showed he would be pursuing a different path, the more typical one of the previous two decades. Whereas some in his administration sought to cut alternative energy R&D further, Bush instead decided to boost such funding (Sklar 1990). Indeed, he began moving back in the direction of new major government-directed energy initiatives. There would be two parts to this new initiative. The first, begun in the summer of 1989, was the development of a new National Energy Strategy, a project that in Bush’s initial charge seemed like a rerun of Project Independence. The plan, he declared, would achieve “balance among our increasing need for energy at reasonable prices” along with a better environment, economic growth, and reduced dependence on “potentially unreliable energy suppliers.” In August, secretary of energy Admiral James Watkins began a study that would not be completed for another year and a half. But in the fall of 1989, the second Bush initiative was begun as specific legislation, Amendments to the Clean Air Act.39 These amendments were 38

39

The bill passed overwhelmingly in Congress though Senator Howard Metzenbaum (DOH) gave a speech that was a throwback to his admonition against the removal of oil price controls in 1981. Addressing proponents of the decontrol measure (June 14, 1989), he said, “I am certain as I stand here that passage of this bill will come back to haunt you.” Actually because of new gas deregulation and other measures, prices of most gas production had already been decontrolled. Introduced in the Senate, S. 1630.

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described by the DOE’s Deputy Under Secretary of Energy for Policy as “the most profound energy legislation Congress considers this session.” Representative Philip Sharp (D-IN) termed it “energy policy on a grand scale.” The amendments were novel mainly for the intention to create a market for tradable sulfur-dioxide (SO2 ) emissions permits. That is, the government sought to regulate sulfur dioxide pollution (mainly from coal-burning power plants) by issuing allowance for electric power companies to emit a certain quantity of pollutants. Those who could abate pollution cheaply could cut pollution by more than their allowance and then sell the remainder to companies for which emissions reduction would be more costly than buying the permits. The goal of the program was to get a specific amount of emissions reduction at the lowest cost. This system, often referred to as cap and trade (that is, a mandated cap on emissions with tradable rights to emit), was a great success with respect to SO2 but created the impression that all pollution problems could be handled with the same kind of system. As Cole and Grossman (1999) argue, the government could monitor SO2 emissions in real time and depended only on compliance within the United States. These technical and institutional arrangements often are not present with respect to other sorts of pollution, and as a result, cap and trade might not be as effective. Nevertheless, because of the success of the SO2 program, cap and trade is often the first option that policy makers think of for pollution abatement – regardless of the circumstances. A second aspect of the amendments that also related to energy was the mandate to alter automotive fuel composition to make it burn more cleanly. This was to be accomplished by requiring a small percentage of oxygenates in regular gasoline. One of these compounds was corn-derived ethanol. Of course, Carter had promoted ethanol as a substitute fuel, mainly as a blend of gasoline and ethanol, which in the 1970s was called gasohol.40 This legislation would make ethanol use more general, but the Bush administration goal was more extensive than that. Ultimately, administration policy makers sought to create an automobile fleet that could run on alternative fuels – methanol, ethanol, and compressed natural gas. Yet, ethanol was a major focus because the political benefits of a program for a derivative of corn were obvious to all. The oxygenate requirement had a great deal of support in Congress; many legislators in fact wanted to make an even greater commitment to ethanol. In the summer of 1989, Representative Bill Alexander (D-AR) read into the record a Washington 40

As an oxygenate, the ethanol concentration would be lower than the amount the Carter administration intended as a partial substitute for imported oil.

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Post article, “Alcohol Fuel: The One for the Road” (by Harry P. Gregor, July 9, 1989) that claimed ethanol would reduce air pollution and would “ultimately . . . supply a major fraction of our national [energy] demand.” In the article, the author noted that the current technology of ethanol utilized food stocks, but he pointed out that research was proceeding on the use of non-food plant materials; instead of corn, ethanol of the near future would be distilled from “cellulose from trees.” The author suggested such cellulosic ethanol would soon be available at roughly $0.43/gallon. Interest in ethanol fit into the accepted energy narrative, especially if adopted on a larger scale. Despite the relatively low price of (abundant) oil, there were those still seeing a black cloud hovering around any silver lining. Representative John Murtha (D-PA) saw an energy crisis in August 1989 starting “as early as next week.”41 Actually, Murtha indicated that it had never ended. “We must remember the energy crisis remains.” Remarks by James Schlesinger, speaking to the World Energy Conference in Montreal, argued that the United States was rapidly becoming more dependent on OPEC than ever before; it represented, he thought, a grave danger to the country.42 In truth, in 1989, the United States did rely on OPEC for a considerable amount of its imports, but except for Saudi Arabia, the main OPEC suppliers were Nigeria and Venezuela; non-OPEC producers Canada and Mexico had also become two of America’s biggest suppliers. In fact, although it was true that the United States did import from virtually all OPEC countries, it now counted about thirty non-OPEC nations as suppliers as well. If anything, the dependence on OPEC was diminishing. Against this backdrop of congressional anxiety about a new energy crisis, southwest legislators were still worried about oil prices being too low. Representative Wes Watkins (D-OK) introduced a measure to establish a floor price of $18/bbl for domestic crude oil. However, through the winter of 1989–90, these initiatives did not advance. It would take a perceived energy crisis to change that. Late in May 1990, Iraq’s leader, Saddam Hussein, accused fellow OPEC member Kuwait of “economic warfare” – warfare through excessive production of oil, which was keeping prices too low in Hussein’s estimation. Later he accused Kuwait of draining an oil field along their common border, essentially pumping out Iraq’s share of the field. On August 2, 1990, the Iraqi army invaded Kuwait and within hours was in complete control of the country. 41 42

CR, 101st, Aug. 3, 1989. Read into the Congressional Record by Senator Lloyd Bentsen (D-TX), “Energy and Geopolitics in the 21st Century,” Nov. 7, 1989.

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The United Nations met and immediately imposed an embargo against any oil from Iraq or Kuwait – as long as Iraq was in control of the latter. This took about 4 MBD from the market, a loss of around 6 percent of total world production. Oil prices rose instantly and steeply. As the United States prepared to send a large armed force to the region, first to protect Saudi Arabia from attack and then later to liberate Kuwait, suddenly energy was in the forefront of the policy agenda. Officials and commentators began using the term “energy crisis” again, some calling it America’s “Third Energy Crisis.”43 There were fears of shortages, and the International Energy Agency soon predicted a production shortfall of 100,000 bbl/d for September. Experts were convinced that there would be shortages by October or maybe the end of the year. Prices were said to have risen rapidly, according to Representative Philip Sharp (D-IN) because speculators were buying “on the expectation that a shortage will develop.”44 But wait. What would shortages actually have meant in 1990? The fear, of course, was that shortages would lead to gas lines, a fear that was felt acutely by politicians. “If [Iraq’s invasion] leads to gas lines in the country,” declared Representative Jerry Lewis (R-CA) on August 4, “that will create a revolution in each of our districts in terms of citizen attitudes.” After all, an oil executive had said that a disruption would lead to longer lines; a leading oil geologist, in July, had echoed that sentiment. The nightmare of a decade before was not forgotten. But did that seem likely in 1990? In the 1970s, the gas lines, the shortages, were created by price and allocation controls. Presumably what the 100,000 bbl/d shortfall meant was that demand projected for the month of September would not be met by projected supply. But in that case, given a relatively free market, the result would be no shortage at all, only higher prices. Even if the turmoil ended up disrupting Saudi Arabian production, there was no logical reason to expect shortages as most consumers would have defined them. Of course, the price would have gone much higher than it did (with attendant economic disruption) if Saudi Arabian production had been attacked. But even talking about gas lines in 1990 revealed a thought process that was stuck in the 1970s. Then again, even without the gas lines the entire policy process was stuck in the 1970s as well. Rising prices alone – there were occasional references to this as an “oil price crisis” – led to demands, as CEA chair Michael Boskin 43 44

It was termed this especially by environmental groups, although many people – for example, Frank Zarb – grouped this “crisis” with the two in the 1970s. Various New York Times, Washington Post reports; also, op-ed, Representative Philip Sharp, USA Today, Aug. 9, 1990.

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would put it later, for government to “do something about it.”45 What ensued in Congress was both predictable and in a sense also dismayingly out of touch with reality. The debate became almost a parody of the debates of the 1970s, complete with the same tropes about dependence, security, and new Apollo projects. There was enormous melodrama that really did not reflect what was happening in the country. True, prices were relatively high through the end of 1990, but then they fell. In real terms, the average price of oil in 1991 was about the same as it had been in 1989. There were no other perceptible effects. As the “do something” model would predict, there was, at the start of the crisis, considerable blame rhetoric, directed by Democrats at the two recent Republican presidents, Reagan and Bush. As Representative Harold Volkmer (D-MO) argued, with a mangled turn of phrase, the Reagan administration “agreed with the big oil companies” when it came into office in 1981 and “over the next three years the guts of alternative fuels programs ground to a halt.” He called the policy since Reagan’s inauguration in 1981 “inaction and neglect.” Republicans had targets as well. Representative Michael Oxley (R-OH) read into the Congressional Record an editorial by Frank Zarb, energy czar under Ford, who essentially blamed the Iraq-Kuwait crisis on the overwhelmingly Democratic 94th Congress because of its failure to pass Ford’s energy legislation, including, he implied, the Energy Independence Authority. Zarb claimed that had Congress done so, “we would not be sending troops to the Gulf in 1990.”46 The number one target was, of course, the oil companies. In September, Senator Joseph Lieberman (D-CT) launched a scathing attack on the petroleum industry. “The more we learn about oil prices,” he claimed, “the more we realize how much the American public was taken advantage of by the big oil companies.” Along with Senator Larry Pressler (R-SD) he introduced the “National Emergency Anti-Profiteering Act of 1990” which proposed five-year jail terms for “price gouging” during any “abnormal market condition.” What that meant was never really defined, but Pressler indicated that price gouging was occurring “again and again.” Added Lieberman: “Oil industry profiteering makes us angry.” Clearly. This legislative initiative was almost beside the point given that the Department of Justice had announced an antitrust investigation of oil companies in August. What seemed more apparent in the mood of Congress was a near panic because of the anger of constituents. As the New York Times reported, 45 46

BPL, Speech on Energy and the US Economy, Sununu, Nov. 19, 1991. CR, 101st, Sept. 10, 1990.

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gasoline price increases – they rose about 14 cents per gallon almost immediately (almost 20 percent) and continued to rise through August – were taking a “psychological toll” on voters. “The motorist,” a spokesman for the Automobile Association of America said, was like the Senate, “angry.” One angry driver told a Washington Times reporter that gas prices were “a rip off,” and a CBS News Poll showed that 84 percent of the American people agreed. Representative Philip Sharp along with Senator Lieberman demanded that the Bush administration release oil from the Strategic Petroleum Reserve (SPR) to reduce prices – a step the administration declined to take unless there seemed a more compelling reason than a jump in the price of gasoline. But officials did seem to respond to the plea from Representative Frank Annunzio (D-IL) to use the power of the presidency “to obtain from the oil companies a rollback.” The administration urged oil companies to cut prices, and several at least froze them temporarily. Said the CEO of Chevron, his company would increase prices “only when it becomes absolutely necessary.”47 Pundits, editorialists, experts, and commentators also quickly added to the policy debate. Many replayed the demand for something like energy independence, directed from the top down. As a New York Times columnist argued, oil could not be “left to the ‘invisible hand’ alone.”48 There were predictions of a “long and deep recession” and hand wringing over the failure of policy to prevent these sorts of crises. Punditry repeated other tropes of the 1970s. As a leading environmentalist wrote, “The Era of Cheap Energy Is Over.”49 Of course, whenever “the era of cheap oil/energy” was declared “over,” the United States was in an energy crisis. And if the process stayed true to form, it also meant that soon enough prices would be going down. Still, with the United States building its forces in the Gulf region, it was clear that the situation would last for a while longer, and so the next step of the “do something” process was in order. Legislative proposals and indeed legislation, in addition to the Lieberman-Pressler blast at the oil companies, emerged. Many legislators felt there was a need for a goal, and the obvious default goal was energy independence. Harold Volkmer, in addition to his attack on Reagan and Bush, proposed a goal of energy independence by 2000, to be achieved with his “Commercialization of Alternative Energy Sources and Energy Technology Act of 1990,” which was intended to “put back . . . the 47 48 49

Quoted in “Some Oil Companies Cut Prices,” New York Times, Aug. 10, 1990, D6. Flora Lewis, ”Oil Is the Trouble,” Dec. 19, 1990, A25. Jessica Tuchman Mathews, director of research for the World Resources Institute; Washington Post, Aug. 30, 1990, A23.

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programs started in 1979 and 1980.” Representative Peter DeFazio (D-OR) introduced his own legislation and reminded everyone that in the 1960s, the United States had set “an ambitious goal to put a man on the moon.” Energy independence would be attainable “if we make it a national priority.”50 An amendment was also added to the defense authorization bill that the United States could not import more than 50 percent of its oil. There were also bills to expand the SPR, to increase CAFE standards, and another bill introduced by Senator Lieberman to require alternative energy technologies and/or highly efficient technology throughout the federal government. None of this legislation went anywhere, and in truth many in Congress seemed to be waiting for the administration to “do something.” It had been working on a national energy program – its “strategy” – for more than a year, but unlike Nixon in 1973, Bush made no dramatic pronouncements. In fact, he gave no hint as to what energy policy he would propose. By October, many legislators had become exasperated. Representative Mary Oakar (D-OH) introduced a resolution demanding that the Bush Administration come up with a national energy policy proposal by December 31. “Congress and the public are totally in the dark because President Bush is not telling the American people what he thinks about energy security,” she declared.51 The administration was working on it. In late August, Secretary Watkins had outlined some short-term measures such as speeded approvals of pipeline connections, but the larger policy, the National Energy Strategy, was not forthcoming. Within the Bush administration, there were familiar problems with the process itself; as in the past, there were too many people working at cross-purposes with an unclear structure of authority – the DOE notwithstanding. EPA head William Reilly made a statement to the press that the Clean Air Act Amendments – which still had not passed – would have a major impact on oil dependency. This angered the DOE, which sent a memo to Bush’s chief of staff, John Sununu, declaring that there was clearly an “inability of the White House decision process to function fairly.” The memo declared that senior DOE officials would no longer work with the White House Economic Policy Committee (which was supposed to devise the “strategy”) unless some conditions were met. These included a retraction by Reilly.52 The Clean Air Act Amendments were in fact passed and signed in November, a positive development for the environment, but they had little impact 50 51 52

CR, 101st, Sept. 11, 1990. CR, 101st, Nov. 26, 1990. BPL, memo Ede Holiday to Sununu, Sununu, Box 35, Sept. 18, 1990.

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on energy. Indeed, to the extent that the bill encouraged more use of ethanol, as we see in the next chapter, it was to be more of a problem than a solution. The energy policy process continued at the White House with a determination to release the strategy early in 1991. Bush made a relatively brief mention of his plans in general terms in his State of the Union speech, declaring the need for “A comprehensive national energy strategy that calls for energy conservation and efficiency, increased development and greater use of alternative fuels.” When the National Energy Strategy (NES) was released at the end of February 1991, the United States had just liberated Kuwait, and Bush was at the peak of his popularity; his approval rating reached 86 percent. One might have assumed, therefore, that he would be able to prevail in gaining quick assent to his energy plans. The NES was long, 214 pages, and involved – even the Executive Summary ran to 31 pages – but so far from quick acceptance, it was widely denigrated (Rossi 1995). The measure was thought to put too much emphasis on oil and gas development as well as nuclear power and too little on conservation. Several provisions were controversial. Foremost, its call for “environmentally sensitive” oil and gas production in the Arctic National Wildlife Refuge (ANWR) as well as expanded offshore production including on the OCS generated widespread criticism. The main goal of the NES was said to be energy security; according to one analysis, it would achieve this by substituting domestic oil for foreign oil, not in reducing the demand for oil as conservationists thought necessary (van Orman 1992). The NES did call for more alternative energy development, with $3.5 billion devoted to such technologies as advanced batteries for effective electric vehicles with “ranges in excess of 150 miles.” Funding was to include a program for a working fusion electric demonstration plant by “about 2025.” But these provisions seemed subordinate to a goal of more production of conventional resources. In Congress, it was quickly attacked by Democrats; Representative DeFazio called it “an oil and nuclear industry wish list. . . . The President’s plan is not an energy strategy, it’s an energy tragedy.” Representative David Price (D-NC) wondered on the basis of what Bush proposed “whether we learned anything [from the Gulf War] at all.” But then Congress finally had not waited for Bush to act; before the NES had been presented, Representative Sharp and Senator Bennett Johnston (D-LA) had already introduced competing measures. Johnston’s bill, cosponsored by Republican Senator Malcolm Wallop (R-WY), had been sent to committee two weeks before the NES was published and hearings were underway before NES legislation was formally introduced. In the House, Representative Sharp had introduced

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five different energy bills53 a few days before Johnston. By the time the NES appeared, it was not just defeated; it was regarded as largely irrelevant. That summer, the administration essentially gave up on its own legislative proposals and became backers of Johnston’s effort instead. Then again, by this time, it was not clear that any energy policy was relevant. Although Congress was still talking about “our energy crisis” as Senator Al Gore, Jr. did in March, and floor speeches still were laced with calls for energy independence,54 what was most apparent about the 1990 energy crisis was that nothing much had happened. There were only temporarily higher prices, but that mainly signified that the market, through the price mechanism, had worked. It was true that the economy was slowing and while some analysts believed oil prices had caused it, it would not last long or cause lasting economic harm. People had been angry; Congress echoed their anger. And then it was over. By early spring the price of oil was about $18/bbl, far below the autumn peak of $40, below in fact what it had been before Iraq had invaded Kuwait. Gasoline, the focus of consumer attention, averaged $1.17, about 30 cents below its highest level. Indeed, for 1991, prices were moderate and supplies were abundant. By the next winter, natural gas prices also had fallen. Despite the lack of urgency, the legislative process continued and soon resembled the two-year route that had led to the Energy Policy and Conservation Act and the National Energy Act. The great distress that produced a much more sweeping program in 1979–80 dissipated quickly this time. Congress would eventually pass a bill that had a few noteworthy features but was even more notable for the significant features that never made it to the final vote. As Rossi (1995) explains, the bill nearly died several times, and at times survived only because congressional leaders manipulated the rules to keep some form of energy legislation alive. As in 1977–8, there was just enough impetus left over from the events of the recent past – impetus that had sparked some of these proposals in the first place – to motivate the policy process and to encourage interest groups to press their issues forward. It was probably also true that congressional Democrats, having taken the initiative from the Bush administration in early 1991, saw some partisan advantage in pressing ahead. Throughout the Bush presidency, Democrats held both houses of Congress. That gave them an opportunity to control the agenda to the benefit of some of their core supporters, particularly environmental and consumer groups. 53 54

Johnston’s bill was S. 341, later renumbered S. 1220; Sharp’s H.R. 776–780. In June, Senator James Jeffords (R-VT), a moderate Republican, gave a speech calling for a Declaration of Energy Independence, CR, 102nd, June 21, 1991.

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There were several contentious issues that, especially absent a crisis atmosphere, prevented any bill from passing during 1991. Johnston’s bill, like the NES, had included drilling in the ANWR, a provision that led to a filibuster in the fall. The filibuster was to some extent a fight of Democrat against Democrat as Senator Timothy Wirth (D-CO) and Senator Bennett Johnston engaged in a combative exchange on the floor on October 31. But then the ANWR issue was never strictly partisan. Nor were two other features of Johnston’s bill (S. 1220): First, there was a vague plan to increase Corporate Average Fuel Economy (CAFE) standards, but with no specific fleet average efficiency goal. Second, there was a plan to amend both the Public Utility Holding Company Act (PUHCA) and the Federal Power Act (FPA) to begin a new era in electric power. The provision would require that monopoly utilities open their lines to power generated independently. The provision of access, called “wheeling,” meant essentially the creation of a free wholesale market in electric power. This reversed nearly a century in which the natural monopoly character (and therefore the inability of there to be a free market) of electric generation had been assumed. Both engendered opposition, the imprecise CAFE provision most of all. It became a sore point among environmentalists. In March 1990, Senator Richard Bryan (D-NV) submitted a bill to raise CAFE standards specifically by 40 percent by the end of the century. But the bill was filibustered, and proponents fell three votes short of invoking cloture. It was opposed by automakers, the Bush administration, and Senator Johnston, a point Senator Wirth made clear in his defense of his own filibuster with respect to ANWR. Wirth did not oppose the bill simply to get back at Johnston, but it did seem that he took special pleasure in chiding Johnston on his right to filibuster as well. What the two filibusters did mainly was delay any action on energy. This prompted Senator Don Nickels (R-OK) to speak in Metzenbaum-like hyperbole, predicting that by 2000, his colleagues would regret their decision to put ANWR and more stringent CAFE standards ahead of the country’s good. The real losers in this fight were not Johnston or Bush or S. 1220, he said. “The real losers will be our country.”55 The Bush administration concurred, not only calling S. 1220 “a balanced bipartisan comprehensive energy bill,” but also using the “jobs” rationale against opponents. “S. 1220 would create 315,000 more jobs in the U.S. by the year 2000,” a letter from Bush to Senate Majority Leader George Mitchell (D-ME) claimed, “and approximately 485,000 jobs by 2005.”56 55 56

CR, 102nd, Nov. 1, 1991. BPL, draft Bush to Mitchell, Sununu, Box 9, Nov. 13, 1991.

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Early in 1992, Johnston tried again. He presented more or less the same bill but with a new number and without either ANWR or any CAFE provision. Its prospects seemed much better. Although there were still objections to the PUHCA revisions – Senator Nancy Kassebaum (R-KS) promised that such a change “would come back to haunt us” – there was general agreement on the basic outline of the bill.57 This time the senators quickly agreed to limit debate, and with a few amendments added, passed it by a vote of 94 to 4 in mid-February. The Bush administration expressed disappointment that ANWR drilling was left out of the package but, overall, endorsed it. The House, too, was moving forward with Representative Sharp’s five bills consolidated into one: H.R. 776. The bill contained a few important differences from Johnston’s, including aid for independent oil and gas producers and tighter restrictions on offshore leasing. Proponents in the House also made use of the rules to prevent opponents from using delaying tactics (Rossi 1995). Debate over nuclear power provisions and committee authority delayed the bill for a time anyway, but it finally passed the House late in May, 381 to 37. The Senate took up the House version, and indeed the final bill was designated with the House number and named finally (and grandly) the Comprehensive National Energy Policy Act (EPAct) of 1992. Perhaps the most controversial difference between the Senate and House versions was the designation of Yucca Mountain, Nevada, as a high-level nuclear waste repository – an addition that led Senator Bryan of Nevada to threaten a filibuster on more than one occasion.58 An important measure was added, an amendment to increase tax incentives for ethanol production. This change was heavily supported by farm lobbies, supported by farm state legislators and opposed by oil producers. But it had gained attention in July when Illinois farmers (along with their representatives) rallied in Peoria in support of it. Bush himself was quick to take credit for boosting ethanol beginning with the Clean Air Act. As he wrote in a letter to the head of the National Corn Association on August 28, “ethanol use will increase significantly in the years ahead.”59 57 58

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CR, 102nd, Feb. 7, 1992. “Nevada has been shafted,” he would say later. The final bill did require the Environmental Protection Agency to devise standards for a waste repository at Yucca Mountain but did not finally authorize it to be the nation’s waste repository. BPL, letter Bush to Tim Trotter, Brady, Box 10, Aug. 28, 1992. Bush gave ethanol further support in October when he authorized a partial waiver (a 1psi waiver) from the Clean Air Act that would boost ethanol sales. Bush had tried to avoid making the decision it seemed because it pitted oil producers and therefore oil states against corn growers and agricultural states. Charles DiBona, head of the American Petroleum Institute, dismissed it

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Although the path to final passage was halting with numerous disputes in conference, EPAct of 1992 – by this time 1,000 pages long – reached Bush’s desk on October 15 in the midst of the presidential campaign. Given the apparent closeness of the race between himself and Arkansas Governor Bill Clinton, Bush was, according to sources, “increasingly desperate” to take some credit for passage of a new energy bill before voters went to the polls, and he signed it. Some in Congress congratulated themselves on “a legislative miracle” and “an admirable job . . . that will constitute the next step toward our goal of energy independence.”60 DOE Secretary Watkins said that the bill “could reduce oil imports by 4.7 MBD by 2010.” That was 3 MBD more that what other “backers of the bill” were saying. In fact, few seemed happy with the result. Although the new law offered a little something for everyone, it “fell well short of environmentalist and energy producer wish lists”(Rossi 1995, 218). ANWR was not in it; explicit CAFE standards were missing. It was hardly comprehensive and was called “watered-down” and “lethargic.” Said Senator John Chafee (R-RI), “[EPAct] has been characterized as a major rewrite of our Nation’s energy policy. . . . These characterizations make great press but they are not based on the facts. . . . This bill is, in short, a bill that promotes the status quo in energy policy.”61 Even George Bush, who appeared to have the most to gain by portraying this bill in the best possible fashion, had reservations. Although claiming that his signature “will place America on a clear path toward a more prosperous, energy efficient, environmentally sensitive, and economically secure future,” he nonetheless took issue with several provisions, which he doubted were constitutional.62 The main features of EPAct were: expansion of the Strategic Petroleum Reserve (SPR) to 1 billion barrels; tax breaks for independent oil producers; more funding for alternative energy technologies, including a production tax credit for electricity generated from wind and biomass; more money also for efficiency gains in buildings particularly federal buildings; efficiency standards for light bulbs and appliances; R&D funding for “clean coal” and other coal-based technologies; reporting requirements with respect to CO2 emissions (given a growing concern about climate change); streamlined

60 61 62

as a “politically motivated decision [that] does absolutely nothing to improve air quality” (Oil & Gas Journal Oct. 12, 1992, 36). “Miracle,” Senator Johnston quoted in the Dallas Morning News Oct. 9, 1992; “step,” Representative Harris Fawell (R-IL), CR, 102nd, Oct. 5, 1992. CR, 102nd, Oct. 8, 1992. Bush signing statement 10, 24, 1992, available at www.presidency.ucsb.edu.

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licensing of nuclear power plants; and the creation of a government corporation for uranium enrichment. Probably the parts that seemed most consequential were, first, the provision to allow competition in electric power generation; and second, efforts to boost alternative-fuel63 vehicles. This latter feature included requirements that by 1999, vehicle fleets of the government (state and local as well as federal), and indeed intracity fleets generally, would run mostly on alternative fuels; according to Representative Sharp, the implicit goal was that by 2010, 30 percent of all vehicles would run not just on alternative fuels, but renewable ones – goals that were never met. But the limits of EPAct 1992 can best be understood by reference to the provision that was often noted in the aftermath of passage: toilets that used more than 1.6 gallons per flush were banned. The act, two years in the making, did not have much effect on energy markets. Not then or ever. The SPR has never reached 1 billion barrels; since its inception in 1975, it has played a very minor part in energy policy. There have been exactly four draw-downs including one in January 1991, comprising a total amount of around 80 million barrels, four days worth of U.S. consumption. One of the draw-downs in the mid-1990s had nothing to do with oil supplies or prices or for that matter energy policy; it was undertaken as a revenue-raising measure. Although it still acted as an insurance policy against a major disruption, there seemed little reason why it needed to be expanded. As for some of the other measures, no nuclear power plants were commissioned in the 1990s. Alternative fuels and fueled vehicles have failed to fulfill the hope and hype surrounding them and, as of early 2012, represent a small fraction of all vehicles. Indeed, in the 1990s, oil prices sunk to all-time lows, and consequently few Americans were buying even fuel-efficient conventional small cars much less electric or methanol/ethanol-fueled vehicles. So far, from saving millions of barrels of imported oil per day as EPAct was expected to do, imports rose every year after EPAct was passed for the rest of the decade; the total increase was 43 percent. The opening of electricity markets was still the most significant aspect of EPAct, although the shape of these markets was to be left to the states. As we will see, although the idea of deregulation was correct, the execution was, at least in one highly publicized case, astoundingly inept. After placing his signature on the bill, Bush went back to the campaign trail and was defeated by Bill Clinton. EPAct was perhaps, as Rossi (1995, 196) claimed, “one of the most significant bills to come out of the 102nd 63

Alternative fuels were mainly ethanol, methanol, compressed natural gas, and electricity.

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Congress.” Unfortunately, in retrospect that can be seen more as an ironic comment on the work of the 102nd than as a valid judgment of the significance of energy policy during the George H. W. Bush administration.

5. Climate, Not Energy, Policy Bill Clinton and his vice president, Al Gore, did not seem to have much interest in an energy policy per se. They were concerned about environmental policy, especially about climate change. Gore advocated a carbon tax on all fossil fuels, but Clinton seemed to have less enthusiasm for the idea and argued that a large gasoline tax would be bad because it would be too regressive – not to mention politically awkward. His main campaign advisor on energy, Jim Hoecker, indicated that Clinton mainly wanted to go beyond the Bush strategy of “cheap foreign oil,” but it was not clear what Clinton would do to make oil more domestic or more expensive. During the campaign Clinton advocated a return to the 1970s policy of conservation, as well as a boost in CAFE standards to 40 mpg and the development and commercialization of alternative energy technologies. In fact, his statements, and those of Hoecker, were like those of Reagan and Bush at times, fundamentally inconsistent. He opposed “cheap oil,” but his policy ideas would likely have made oil cheaper. If conservation was successful, demand would fall; if oil use was partly replaced by alternatives demand would fall – in either case, lowering the price. Moreover, he also called for development of enhanced oil recovery technology.64 This would mean more domestic oil, but unless he was willing to tax imports heavily, they would still be cheaper than domestic oil. In fact, enhanced recovery was by definition more expensive than drilling in the Arabian desert. None of Clinton’s pronouncements made much sense politically. Clinton was saying, in effect, he would “do something” about a problem relating to the fact that oil was cheap. But low pump prices were extremely popular, and those prices were falling again. In fact, in 1993, the year Clinton took office, the real price of oil on world markets was lower than it had been in 1986. Over the next several years, it would go lower still. Initially, Clinton tried to do something to change that. Less than a month after taking office, he proposed an energy tax – although it was sold as a way mainly to boost government revenues. The tax was to be based on the 64

Enhanced oil recovery is the use of technology to “extract additional resources from already discovered and exploited oil fields,” for example, through pumping steam into the well to thin the remaining petroleum so that it can be pumped out (Cassedy and Grossman 1998, 378–9).

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energy content (measured in British Thermal Units, BTUs) of all fuels. At the same time, it would not hit any one region harder than another, because the tax would apply to every conventional form of energy, including nuclear and even hydropower.65 The tax was relatively modest; it was estimated that it would raise an average family’s annual energy bill by 4.5 percent.66 Gasoline, if the tax had been fully implemented, would have risen by an estimated 7.5 cents per gallon. The BTU tax was denounced by legislators, especially Republicans. Representative Jay Kim (R-CA) called it a “complete sham,” and his fellow Californian Representative Ron Packard listed all the people it would hurt, which was essentially everyone. Senator Robert Dole (R-KS) fell back on the inevitable and unprovable claim that it would cost 400,000 to 600,000 jobs, and opinion polls showed a large majority of Americans opposed. As Representative Cass Ballenger (R-NC) parodied, “[T]o Btu or not to Btu. That is the question; whether tis nobler in the wallet to suffer the slings and arrows of outrageous tax proposals or to take arms against a sea of troubles, and by opposing to end them?” Congress chose the latter course and killed the tax plan in the summer, although legislators agreed to a small increase (4.3 cents per gallon) in the gasoline tax to reduce the federal budget deficit.67 The administration got farther with its emphasis on renewables and began in the fall of 1993 a major new technology program, called initially the Clean Car Initiative and later the Partnership for a New Generation of Vehicles, or PNGV. If the EPAct debate had seemed a throwback to the 1970s, this technology program was even more so. The PNGV embodied just about every flaw and misconception that had appeared in every previous new government energy technology program – with just one difference: although previous programs envisioned public-private collaboration, this one was predicated on it.68 The three major American automobile companies, General Motors, Ford, and Chrysler had already formed a collaborative research group called the United States Council for Automotive Research (USCAR), which had sought federal support for an effort to develop fully electric cars. The Advanced Battery Consortium, as this program was called, was mainly a response to a 1990 ZEV (zero emissions vehicle) rule in California described in Chapter 6. The ZEV 65 66 67 68

This despite the fact that nuclear and hydro produce no CO2 emissions, one of the administration’s chief concerns. It was to be imposed on producers of energy, but it was assumed the tax would be passed on to consumers. The money from this tax was later directed to the national highway fund. The authority for such partnerships was codified in EPAct, Title VI.

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mandate was not identical to the PNGV program. The former essentially meant that all automakers needed to produce cars that ran on batteries; the PNGV had no distinct emissions goal but rather a miles-per-gallon goal and so could in theory have used any technology. In August, Hazel O’Leary, Clinton’s secretary of energy, met with the presidents of the three automakers and found them “reluctant to commit to specific targeted results,” especially because government support in the past had been inconsistent. But by September, the companies had agreed to join the government PNGV effort. The president of Ford Motors emphasized in his statement that a key issue was “trust in our abilities to work together.” In September, Clinton launched the PNGV with a mandate to produce a commercially viable “super car” by 2004 that would have the size, style, price, and safety of a typical family car but would get 80 miles per gallon, about four times the fleet average fuel economy at the time. The administration called this challenge greater than the one to put a man on the moon, and Clinton invoked a market failure argument, noting that “there are a lot of things we need to be working on that market forces alone can’t do.”69 What was this market failure? According to a report to Congress in 1996, the failure was in market foresight. Prices of gasoline were too low to encourage development of high-mileage cars even though many people believed that someday prices would go back up. “Cheap and plentiful oil has lulled Americans into a false sense of security,” the DOE reported to the White House. And O’Leary was quoted as saying, “I do believe the price [of oil] is too low.” The PNGV would get about $1.5 billion of public funding over the next eight years.70 Because the PNGV was not a ZEV, it would ironically not have been acceptable under the California mandate. Senator Barbara Boxer (D-CA) suggested a second federal vehicle program to put the United States on the same path as California, an idea she termed “EV America” to “build a sustainable market for electric vehicles (EVs) in the United States.” In two Senate speeches on electric vehicles, the first on November 20, 1993, the second on May 23, 1994, she managed to include nearly all of the clich´es of energy policy: consumers were going to buy EVs if Congress provided “the right incentives”; the program would save 1 million barrels of oil per day; it would create “hundreds of thousands of jobs in the United States”; 69 70

William J. Clinton, “Remarks Announcing Clean Car Initiative,” Sept. 29, 1993, available at http://www.presidency.ucsb.edu. WCPL, A History of the U.S. Department of Energy during the Clinton Administration, Clinton Administration History Project, 2000.

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it would protect the environment; it would be “the equivalent of President Kennedy’s pledge to put a man on the moon in a decade.”71 Boxer pointed out that, when asked, consumers said they would consider electric cars; no doubt an abstract question (i.e., “would you buy a car that cost the same price as your current car, is safe, roomy and gets 80 mpg, or uses no gas at all?”) about EVs or 80-mpg “super cars” would have gained a positive response. But although they would have liked these products in the abstract, consumers really did not demand either product. Gas was cheap; conventional cars were becoming more reliable; what was the point of an EV? As noted in Chapter 6 carmakers were unable to build market-viable EVs; California was unable to build a market for EVs in that state and backed off the mandate. But rather than abandoning it as untenable, the California Air Resources Board just kept pushing it forward in time. Although there were those who believed there was a conspiracy against electric cars and that was why the original mandate was never met,72 the EVs that were developed in the 1990s had limited range, cost too much, and were impractical. General Motors’ electric vehicle, the EV-1, the main focus of the conspiracy theory, was dominated by an enormous battery, had room for only two people, and was never a commercially desirable product. Similarly, the PNGV failed to meet the mandated goal and was eventually scrapped. Although there were reports of progress (one columnist claimed that the program was on the verge of success)73 and although there were claims of some technological advances, the automakers never came close to meeting the PNGV’s affordable 80-mpg challenge. A study by the National Research Council in 1997 had argued that the project might succeed with more funding. But subsequently (2002), the NRC concluded, “The Committee believes that no reasonable amount of funding would ensure achievement of the [80-mpg] goal. . . . Breakthrough ideas and talented people are more stringent constraints than money to achieving this goal.”74 That was the end of the PNGV. But, of course, the report had identified the problem of all technology mandates. Passing a bill, creating a program, authorizing and appropriating 71 72

73 74

CR, 103rd, Nov. 20, 1993 and May 23, 1994. A movie, “Who Killed the Electric Car?” suggested that Big Oil and others acted to kill an increasingly viable technology. There is really little evidence that the technology has ever been viable. This is discussed further in Chapter 8. Robert Kuttner, “Don’t Thank the Free Market for Eco-Friendly Cars,” Business Week, Feb. 16, 1998, 24. “A Brief Summary of Relevant Findings and Comments from the NRC PNGV Review Committee,” Congressional Testimony, June 6, 2002.

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funds for it did not in any sense mean success. In fact, it presaged failure because there was no evidence of any market need except for one perceived by various government officials and those political entrepreneurs who stood to benefit directly. Government in no way was in a position to pick winning technologies, yet Congress and presidents continued to act with a belief that they could achieve certain technological goals with the right legislation. After launching the PNGV, the Clinton administration moved back to its real interest – climate and environmental policy. In October 1993, Clinton and Gore announced the Climate Change Action Plan, a relatively low-cost program ($1.9 billion over 8 years) that entailed fifty separate initiatives, including voluntary emissions reductions by business as well as a program of tree planting for carbon offsets. The DOE’s R&D funding was shifted from such areas as nuclear power development back to efficiency and renewables. By 1995, however, an aggressive Republican-majority Congress curtailed funding for conservation and alternative energy, and opposed such initiatives as increased CAFE requirements and higher efficiency requirements for appliances. As Joskow (2001, 19) points out, the PNGV program notwithstanding, Clinton never sought to return to 1970s centralized control of energy and “demonstrated a commitment to relying primarily on market forces to allocate energy resources.” But then Clinton was an astute politician, facing a Republican Congress for most of his time in office, and with the prices of energy exceptionally (and for most voters, happily) low, there was little possibility or rationale for doing otherwise.75 In the spring of 1996, there was a mini-energy crisis with a sudden surge in world oil prices. The causes were varied. A cold winter had strained refinery stocks, and an expected deal to allow Iraq to sell oil again on world markets fell through, causing futures traders to bid up prices from $17/bbl in January to $24 in early May. Gasoline prices rose by 10 percent and were expected to go higher. Drivers, as the New York Times reported, were angry and “looking to place the blame.” Congress was, of course, doing the same. Republicans were incongruously blaming Clinton’s 4.3 cents per gallon increase in the gasoline tax; that is, a tax of 3 percent of the price was supposedly responsible for an increase of 10 percent. The math was unexplained.

75

At one point in late 1994, the Clinton administration, in an effort to show officials “were serious about downsizing government,” considered abolishing the DOE. Secretary O’Leary first appeared willing to consider it, then opposed it, promising to make the DOE “a smaller more effective department . . . leaner, more efficient that [the now Republican] Congress will find harder to kill.”

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Democrats blamed the oil companies and called for yet another investigation of their behavior. Representative Ed Markey (D-MA) wanted to revive the windfall profits tax to counteract the “naked greed of the oil companies.” The Justice Department began an investigation. President Clinton, for his part, saw the political danger and planned to sell several million barrels from the SPR to bring the market price down. In most cases, the oil had been acquired in the 1980s at prices around $30/bbl and would now be sold for quite a bit less. Eventually twenty-eight million barrels from the SPR were sold, and Clinton was reelected. But then the price of oil came down, the tax was not repealed, and the investigation of the oil companies produced nothing of consequence. For the year, the price of oil was on average just over $20/bbl. For the next several years, energy policy generated little interest among government officials. Still, Clinton did opt for one technology extravaganza in 1998, calling for “a million solar roofs” by 2010. The initiative was intended to boost the PV side of the solar industry but was not funded by the DOE and never came close to the goal. The same year as the million solar roofs initiative, the price of oil hit its (inflation-adjusted) postwar low, and the United States was importing close to sixty percent of consumption. Vehicle efficiency fell. Although there were still prophecies of energy crises to come, most people did not notice. Until the beginning of Clinton’s last year in office, energy policy was quiescent. A 1997 report called for more applied energy R&D, and the Clinton administration’s required biennial energy plan in 1998 was full of policy boilerplate – “promote production . . . in ways that respect health and environmental values,” “increase efficiency,” and so on – advocating nothing that was dramatic, costly or drastic. But as the last year of the twentieth century – 2000 – arrived, there was suddenly an energy crisis once again. At least that was what many members of Congress called it. From Democrat Charles Schumer (NY) to Republican Larry Craig (ID), there were again speeches on the floor of Congress laying blame for an energy crisis. Oil prices had in fact risen because of production cuts by OPEC and unexpectedly high demand for heating oil in the winter of 1999–2000. And importantly, there was a robust world economy, raising demand generally. Still, rising prices of gasoline and heating oil (and natural gas as well) were distressing consumers, and, especially because it was an election year, members of Congress began to take heed. In March, with oil now $27/bbl, Senator John Ashcroft (R-MO) introduced a resolution in the Senate calling on OPEC to pump more oil to lower prices. It was a purely symbolic action because it had no force behind it whatsoever, and it passed

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unanimously. More direct actions were also considered. Schumer had called for release of oil from the SPR during the winter when prices of heating oil were rising. Now others, notably Vice President Al Gore, who was launching his bid for the presidency, called for the same action. Schumer also sought the creation of a National Energy Commission to study the national energy picture and make recommendations on new policy directions. Northeast legislators wanted to create a regional heating oil reserve that presumably would function like the SPR – with releases to occur in political as well as energy emergencies. The market had prevailed as policy drifted, but now that prices were rising, there was a resurgence in demands to “do something” on energy, and a supply of “somethings” was forthcoming. At the same time, there was another energy crisis, although this one was largely limited to California. This crisis arose in part because of what was probably the most important provision of EPAct: competition in electric power generation. In 1996, the California state legislature had passed the Electric Utility Industry Restructuring Act (Assembly Bill 1890). It was called a bill that would “deregulate” the market for electric power. Actually the bill was an ultimate political free lunch that promised something for everyone with no costs to anyone. First, the bill guaranteed (or at least claimed to) that the existing electric power utilities, who were now to be distribution companies, could recoup their so-called stranded costs. (The point was that they had made investments as regulated monopolies that were now obsolete or redundant in a competitive power market.) Second, A.B. 1890 guaranteed consumers falling prices, and, third, it promised a robust wholesale power market for new entrepreneurial generating firms. The new law, which among other features banned long-term contracting for electric power, was actually more intrusive in the market than the old regulated monopoly system had been (Grossman 2003c) but was touted as the arrival of a free market in electric power. Of course, any bill that had only benefits was sure to fail, and A.B. 1890 did in the winter of 2000–1. Because natural gas prices rose, the cost of generating rose, and so the market price of power set in a spot market had to rise, otherwise no one could afford to produce it. The distribution companies had to pay the wholesale market price or else they would have to curtail service. But they could only charge customers the prescribed (favorable) retail price that was in the bill. That meant distribution companies either had to violate the law or go bankrupt. But in the effort to do neither, the companies curtailed service; there were blackouts all across the state. California’s governor, Gray Davis, reacted vehemently and erratically – for example, he threatened to prevent firms from selling California power outside of

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the state, in violation of the Commerce Clause of the U.S. Constitution.76 The distribution companies asked the Federal Energy Regulatory Commission to force the generating companies to accept more “reasonable” prices (i.e., much lower), and in late December, the DOE issued an emergency order that required generating companies to make power available to the distributors. The market stabilized; the law was repealed, and the state returned to a system of direct price regulation. Many thought this proved that electric power could not be deregulated. It proved nothing of the kind, but it did drastically slow a movement for truly competitive electric generating markets across the country.77 One more major component of EPAct, the one seemingly significant policy act of the 1990s, was now reduced in importance.78 And that along with ethanol seemed about all that was left of EPAct. On the afternoon of September 11, 2001, the day of the most horrific terrorist attack in U.S. history, I was running an errand when I saw a line of cars stretching far into the distance along a busy street in Indianapolis. I wondered about the cause. An accident? I saw no emergency vehicles. Fortunately, there was room enough to get by on the outside of the line without encroaching on the oncoming lane. I drove along and then I realized why there was a line: motorists were lined up at a gas station to get gas before it was . . . what? Embargoed? Attacked? There was in fact not the slightest factual reason for this line (and I was grateful that I had enough fuel). It was driven by emotion. It seemed that the rationale was this: a few terrorists with Middle Eastern roots had caused 9/11; Middle East Arab countries had embargoed oil back in the 1970s; somehow the murder of thousands of people in America had to be tied up with oil and that could not be good news; better get some fuel now and not be shut down later. Even though the lines of the 1970s were due to U.S. policy not the actions of Arab countries, a majority of Americans were expecting that at some point the gas lines would return. Polls taken a few years later showed that 55 percent of the population expected at some point 76 77

78

Gray Davis was recalled in 2003, only the second governor in U.S. history to lose office in that fashion. Markets for electric power were more successfully developed in other states, notably Texas and Pennsylvania. See the Electric Power Supply Association website, http://www.epsa.org. Joskow (2005) gives a balanced view of competitive electric power development. According to a 2007 Study by the Alliance for Retail Choice, markets in a few states were slowly continuing to develop. May 30, 2007, PR Newswire, Energy Central News, available at http://www.energycentral.com.

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to wait on gas lines again. But the baby boomers and Gen-Xers on this line on 9/11 remembered the time when there was a national trauma over oil; now there was another trauma, and somehow these very different events had to be connected – even though they were not. Whatever the reality, the 1970s energy crises remained alive in the American imagination.

EIGHT

Crisis 2.0

What has been will be again, what has been done will be done again; there is nothing new under the sun. 10 Is there anything of which one can say, “Look! This is something new”? It was here already, long ago; it was here before our time. 11 No one remembers the former generations, and even those yet to come will not be remembered by those who follow them. – Ecclesiastes 1 (New International Version)

1. Introduction When Republican George W. Bush was finally declared the forty-third president of the United States in December 2000, he faced an energy crisis. When he left office, eight years later, the United States was in the midst of an energy crisis. Soon after Democrat Barack Obama became the fortyfourth president, there was, according to most Americans, even more of an energy crisis.1 Three years into his presidency, there was still said to be an American energy crisis. In fact, for virtually the entire twenty-first century, there has been an energy crisis. The crisis label has been invoked so often that 1

In March 2009, the Gallup Poll found that 93 percent of Americans considered the “energy situation” very serious or fairly serious. “Very serious responses” (42 percent) were up 5 percent from March 2007 and 11 percent over 2005. In 2010, the number of people who considered energy a “very serious” problem had risen to 55 percent. By 2012, over 90 percent still considered the energy situation very or fairly serious. Available at http: //www.gallup.com/poll/2167/energy.aspx.

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a concept with little meaning to begin with has become almost completely empty. Just what constitutes a twenty-first-century energy crisis? First and foremost, high gasoline prices. Rising prices, from whatever base, mean discomforted constituents, and so there is at least a political crisis. Yet, high oil prices also have prompted broader economic concerns. From the 1970s to 2001, there seemed to be a definite link between rising energy prices and economic downturns, and scholars argued over whether oil prices drove the business cycle – at least in a downward direction. But even if it were true that high oil prices caused recessions, as has been noted often in this book, these declines have been transitory, typically short downturns that were quickly reversed. The record of the period from 1981 to 2000 was one overall of substantial U.S. economic growth. The linkage of rising oil prices and recessions did not seem to hold in the new century. Despite warnings that high oil prices could wreck the U.S. economy, surging prices from 2004 to 2007 had little general impact. In fact the U.S. economy grew in real terms in every quarter from January 2004 through December 2007, even though the average price of oil nearly doubled. When recession did hit in late 2008, few officials laid the blame on energy prices. The end of the housing bubble and the near-collapse of the financial system seemed far more compelling causes. Yet at the same time, politicians, pundits, and some experts argued that there were other reasons to make the claim that the United States faced an energy crisis in the new century. For example, according to several forecasts, peak oil was near, predicted in one case with apocalyptic precision by a geologist for Thanksgiving 2005.2 That same year, a peak oil advocacy group claimed that by 2010, world daily production would fall from the then-current 84 MBD to only 80 MBD (Vodra 2005). Although the peak did not apparently arrive, because reserves continued to rise, and production in 2010 was actually more than 87 MBD, the imminence of a catastrophe from falling oil production was, and still is, touted on numerous websites and in articles and books (e.g., Deffeyes 2006; Ruppert 2009; Worth 2010). Even in Congress there have been concerns about exhaustion of oil. The “Peak Oil Caucus” led by Representative Roscoe Bartlett (R-MD) introduced a 2005 House Resolution that argued the United States needed “a comprehensive plan to address the challenges presented by Peak Oil” comparable in size 2

Kenneth S. Deffeyes made the prediction in January 2004. See Frank Kaminski, “Review: When Oil Peaked by Ken Deffeyes,” Energy Bulletin, available at http://www.energybulletin .net/stories/2010–10-14/review-when-oil-peaked-ken-deffeyes.

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and scope to the “‘Man on the Moon’ project.”3 The resolution did not pass, but Bartlett had twenty-three cosponsors, including legislators from both parties. Evidence of a changing climate also heightened the sense of unending crisis in the early twenty-first century. In fact, since the 1980s, climate and energy policy had been linked by many legislators and presidents.4 In 1989, legislative proposals from both Representative Philip Sharp (D-IN) and Senator Tim Wirth (D-CO) directly connected the two. Even the George H. W. Bush administration made reference to global warming as an energyrelated issue. But in 2009, the Democratic majority in Congress sought to address the connection in sweeping legislation. The climate bill introduced in the House by Representatives Henry Waxman (D-CA) and Ed Markey (D-MA) actually was as much about energy as it was about the buildup of atmospheric greenhouse gases and global warming. Titled the “American Clean Energy and Security Act of 2009,” Waxman’s and Markey’s bill reads like a compendium of forty years of energy legislation along with an answer to climate change. The bill was intended simultaneously to “create clean energy jobs, achieve energy independence, reduce global warming pollution and transition to a clean energy economy.” When George W. Bush took office, there were actually said to be two energy crises in progress: one related to rising oil prices, the other to the California electricity debacle. Bush made clear that one of the first priorities of his new administration would be energy, and he wanted to demonstrate a take-charge approach by announcing late in 2000 that his administration would have a major energy policy proposal by spring. But the process of policy development almost immediately became mired in controversy, and his legislative proposals did not pass. However, when the price of oil began to rise inexorably in the middle of the decade, Bush, as well as members from both parties in Congress, once again searched for new energy “solutions.” What finally emerged over Bush’s eight years in office were two oversized pieces of energy legislation and policy rhetoric that was notable for its lack of coherence. But the 3 4

H.R. 507, 109th, Oct. 24, 2005. Global warming and other climate-related issues came up often in energy policy discussions even in the 1970s, especially during the Carter administration. In 1978, the National Climate Program Act was passed, calling for research, assessment, and forecasting with respect to global warming and climate change. Legislation focused on more serious action with respect to climate issues began with Senator Joe Biden’s (D-DE) Climate Protection Act of 1986, which did not pass. In 1988, there were six bills addressing climate change. In the next Congress, the 101st, there were twenty-six. By the 111th (2009–10), 276 different bills made some reference to climate change.

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result was perhaps the most pernicious energy panacea ever, a result made possible by the combined efforts of the Republican White House and the Democratic Congress. It was named the Renewable Fuels Standard (RFS) or, more commonly, the ethanol mandate. This policy was touted by leaders of both political parties as a boon to the environment that would create jobs and lead to much greater energy self-sufficiency. Instead, the RFS had so many negative aspects that by 2011, even in the face of powerful interest groups (the farm lobby, especially), there was a strong movement to abandon it. Opponents included livestock lobbies (corn-derived ethanol raised the price of animal feed) as well as environmentalists who had changed their views on the efficacy of biofuels. According to long-standing policy, government interventions in the market are, of course, supposed to require the justification of market failure. For all energy endeavors since 2000, the only plausible failure would be externalities – pollution in the form of excess CO2 and other gases thought to advance anthropogenic global warming.5 But this was not the justification for the two Bush-era energy bills; Bush himself never indicated what sort of market failure he thought rationalized these interventions. There was more a sense of political emergency, an emergency that actually worsened after passage of both the 2005 and 2007 legislation. The political problem for officials was that the price of energy and particularly oil continued to rise; in 2008, it reached an all-time high of $147 per barrel (bbl), the highest ever both nominally and in real terms, briefly surpassing the previous peak of 1980.6 Consequently, there were demands to do something more, but Bush did not act, and while several energy bills were rushed onto the docket in Congress, none ever passed. By fall 2008, the price of oil had fallen dramatically, and the sense of energy crisis had ended. Barack Obama was elected to succeed Bush, and with the price of gasoline at record levels during his campaign, he pledged a far-reaching energy agenda if elected. He made reference to the Apollo program in articulating a list of energy goals that were in some ways more extravagant than any made before him – which in itself was remarkable given how outsized proposals have been since Nixon. Within a few weeks of taking office, Obama began his energy project, and he did not wait for an actual energy bill to begin. Rather a significant portion of the $787 billion stimulus package that Congress passed to fight the deep recession of 2008–9 was designated to fund his 5 6

Some non-climate-related externalities from electric power generation – for example, ambient mercury levels – have also received attention. In fact, for the entire year 2008, the average price of oil was 7 percent lower (inflationadjusted) than it had been in 1980.

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energy program. More than $40 billion was assigned to energy projects and the creation of what he said would be millions of “green jobs.”7 Although there was a sense in government pronouncements that the absence of those jobs in the economy represented some kind of market failure, exactly what that failure was, was unclear. But by the end of 2011, not only did Obama’s goals seem unachievable, but also the process itself was tainted by scandal. Moreover, a vast federal budget deficit was leading to calls for scaling back many of the energy programs his administration had begun. The wisdom of vast expenditures on energy alternatives also began to be questioned in light of major changes in U.S. reserves of fossil fuels, especially natural gas. Even as the Obama administration pressed ahead with solar and wind projects and electric car development, improved drilling technologies greatly expanded the reserves of gas; the price fell dramatically. By the end of 2011, gas prices inflation-adjusted were about half what they had been in 1978, when Carter’s Natural Gas Policy Act was passed. Oil production also increased; imports fell to around 45 percent of consumption. But overall, there has been a common theme to energy policy in the first eleven years of the twenty-first century: the answer to our energy dilemmas is to be found in the same kinds of programs that were tried and had failed before: enormous (unattainable) mandates; programs to achieve selfsufficiency; panacea technologies that will resolve the policy conundrum. The only difference this time was that they would be bigger and more spectacular than anything since Project Independence. Why anyone would expect these sorts of programs to lead to a positive outcome is a mystery. But perhaps no one really does. In a period of an endless energy crisis, it has been necessary for officials to seem endlessly engaged. That efforts have all failed, providing little or no benefit, can hardly be surprising. When there is a perceived crisis, the goal has to be, as Carter’s aide wrote in 1979, that the government must be seen as doing something, anything, “even if it is wrong.”

2. Energy and the Macroeconomy It was often taken as a given in the 1970s that large oil price hikes as well as the more dramatic supply disruptions were a main reason, if not the reason, for recessions, inflation, and the other negative macroeconomic developments. Consequently, a justification of energy market intervention was that there was a macro-market failure, a recession, requiring government countercyclical economic policies. As a theoretical argument, if large oil price 7

During the campaign, he specified 5 million (speech in Toledo, Ohio, Oct. 13, 2008).

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Spot Oil Price: West Texas Intermediate (OILPRICE) Source: Dow Jones & Company 140

(Dollars per Barrel)

120 100 80 60 40 20 0 1940

1950

1960 1970 1980 1990 2000 Shaded areas indicate US recessions. 2012 research.stlouisfed.org

2010

2020

Figure 8.1. Spot oil price: West Texas intermediate (OILPRICE). Source: Compiled by the Federal Reserve Bank of St. Louis, Federal Reserve Economic Data using data obtained from Dow Jones & Company.

hikes or disruptions in supply – often termed “price and supply shocks” – are responsible for later economic recessions, then their appearance suggests the need for government monetary or fiscal measures to counter them. Tax cuts, interest rate cuts, government spending are some of the obvious (Keynesian) policies that come to mind. For most of the period from 1973 to 2005, the link between oil shocks and major economic impacts was widely assumed by both experts and politicians. Legislators claimed that policy steps that would lead to higher energy prices – for instance, domestic oil price decontrol – were likely to have widespread negative effects on the economy. The Congressional Budget Office, in a 1975 study, estimated that decontrol would increase inflation and unemployment for at least the next two years and could in general “retard or even abort” the then-current economic recovery. Senator Edward Kennedy (D-MA), during the decontrol debate on the Senate floor, cited a study by Chase Econometrics arguing that decontrol would have adverse effects on prices, unemployment, and output for a few years at least. A casual glance at the first half of Figure 8.1, showing spikes in oil prices and declines in GNP (or GDP) from the end of World War II through the 1970s, would appear to confirm some sort of link between oil shocks and recessions (Hamilton 1983, 229). The recession in 1974–5 was, of course, preceded by a major oil shock; the one in the early 1980s also followed closely

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a jump in oil prices. A number of scholarly papers beginning in the late 1970s sought to test (using econometric methods) whether the casual perception of a link between oil price and supply shocks and recessions was borne out empirically, and whether correlation was also causation. In fact, the first question was answered convincingly. A 1983 paper by James D. Hamilton in the Journal of Political Economy showed that not just in the 1970s but that from the end of World War II to the early 1980s, every U.S. recession but one was preceded by at least a small uptick in the price of oil. Other works such as Burbidge and Harrison (1984) and Gisser and Goodwin (1986) confirmed that the correlation between oil prices and economic performance was not a statistical coincidence due to some third factor Hamilton had left out of his model.8 At the same time, another strand of the literature (e.g., Bruno and Sachs 1982) sought to give a theoretical underpinning to the relationship of oil and the larger macroeconomy; the authors hypothesized on the channels that would lead from an oil shock to a recession. Other work (for example, Atkeson and Kehoe 1999) was a later attempt at this kind of theorizing. But to say that there was a correlation between oil market shocks and recession, and that there were in theory ways that would lead from shocks to recession, did not in fact prove causation. Moreover, the primary role of energy shocks in the post–World War II business cycle was not accepted by all economists. An important article (Kydland and Prescott 1982) that appeared just before Hamilton’s paper argued that business cycles could be explained largely by looking at large changes in economy-wide productivity. The 1970s energy crises in fact coincided with a notable decline in total factor productivity (TFP). Because TFP is the percentage of output that cannot simply be explained by additional inputs of labor or capital, it is generally ascribed to technology, and large shifts are sometimes referred to as technology shocks. TFP is an important concept, but it is difficult to measure. Typically, it is inferred rather than measured directly; it is the residual output once the effects of additions of more labor and capital are accounted for. It may be affected by various factors including energy prices, but subsequent research (Kim and Loungani 1992) that included energy prices seemed largely to confirm the Kydland and Prescott result. Although many other scholars maintained that oil shocks were more important drivers of the postwar business cycle than these studies suggested, there remained important questions about how to include 8

Hamilton did not claim that oil prices were the only causative factor, and because there was one recession without a price spike, clearly that suggested other factors could influence the business cycle. But he has argued that oil prices have played a, and perhaps the, central role in the unfolding of the business cycle.

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oil shocks in macro-models, because those models inevitably simplify the enormous number of interactions in a complex modern economy. New questions about the place of oil in the business cycle emerged after 1986. That year (as Figure 8.1 indicates), oil prices collapsed and scholars wondered, if there was indeed such a strong negative response of the macroeconomy to large sudden upward shifts in oil prices, big declines should be expected to produce robust increases in economic growth. That is, if sudden increases in oil prices lead to recessions, then sudden declines should produce booms. With collapsing oil prices in 1986, real GNP growth was positive, but it was largely unchanged from the year before and in fact was lower than it had been in 1984. This fact led to studies, notably Mork (1989), which suggested why macroeconomic responses to positive and negative oil shocks would be asymmetric: price declines would in his model have little impact, whereas adjustments to price increases would be quite strong.9 Given that an oil shock preceded the next recession in 1991, the argument appeared to have some support. Policy implications were often ignored in many of these studies, but the question – did oil shocks lead inevitably to economic downturns? – invited scrutiny from a policy standpoint. Of course, because “shocks” are by definition exogenous and unanticipated, it would seem that policy can only be reactive. But careful scrutiny of macro policy revealed that before every postwar recession, along with rising oil prices, the Federal Reserve had tightened monetary policy. Which factors – oil prices or monetary policy – mattered more? And as a corollary, could monetary policy quickly mitigate an oil price shock despite its exogeneity? That is, if tight monetary policy and oil shocks both contributed to a recession, then presumably countercyclical monetary policy might prevent or lessen the effects of higher oil prices. A 1997 paper by Bernanke, Gertler, and Watson (BGW) argued that Federal Reserve monetary policy could in fact have prevented the oil shocks of the 1970s from leading to recession. This point was heatedly argued in journal articles for the next few years; Hamilton and Herrera (2004) published a vigorous rebuttal claiming that the policies considered by BGW “would not have succeeded in averting a downturn” (p. 266). But the oil market was in the process of providing another test. Between 2003 and 2005, the average price of oil practically doubled. This trend was noted as a danger sign at the time. Federal Reserve Chairman Alan Greenspan thought that it would, as the Associated Press put it, “crimp” 9

A paper by Kilian and Vigfusson (2011) argued that Mork’s methodology was wrong and, in redoing the results, found that a positive response to falling prices should be symmetrical to the negative response to a price spike. This debate is obviously far from finished.

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growth but not lead to recession.10 Indeed, growth was slower in the first quarter of 2005 than it had been in the last quarter of 2004, but it was still over 3 percent, and the unemployment rate was falling. Such positive numbers were not what the price shock theory suggested should have occurred. The expected response, given the results of earlier studies, was in fact a small decline in economic growth for 2005 of about 0.6 percent (Dhawan and Jeske 2006). But so far from producing even a mild recession, U.S. gross domestic product (GDP) growth remained strong into 2006. A number of ideas were advanced for the apparent lack of a response to this latest oil shock. One suggestion was that the U.S. economy had become much less energy-intensive in the 2000s than it had been in the 1970s. Machinery had become more efficient, and a larger percentage of American output was low-energy intensity knowledge and service-based, rather than high-energy heavy manufacturing. In terms of energy consumption per (inflation adjusted) dollar of GDP, the United States was using about half as much energy in 2005 as it did in 1980. Such changes meant fewer structural channels through which an oil shock would reverberate through the economy. Another plausible explanation was that the run-up in oil prices in the mid-2000s was fundamentally different from that of the 1970s. The earlier price hikes emerged from shocks to supply – the embargo, the Iranian Revolution, the Iraqi invasion – which forced up the price. In the 2000s, the price had soared more because of increases in demand, particularly as a result of robust economic growth in China and India. Kilian (2009) has shown how a different trigger for price hikes can lead to varying effects on the economy. This shift from supply to demand factors certainly appeared to have some validity in light of world economic growth, but at the same time, the 2000s were hardly free from supply disruptions. The second war against Iraq shut down that country’s oil production (4 percent of world output) for much of the decade. Instability in many other exporting countries, as well as inefficient government policies in places such as Iran and Venezuela, reduced world output. But whatever the cause, the price surge seemed to have little impact on the business cycle.11 Dhawan and Jeske (2006) proposed a very different hypothesis as to why oil market shocks seemed causative of recession in the 1970s but not so 10 11

“Fed Chief Weighs Effects of Oil,” New York Times, July 19, 2005, C3. According to Bhar and Malliaris (2011), an important role in the price rise was the weakness of the U.S. dollar, although their analysis suggests only that this was a factor until recession struck in 2007.

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thirty years later. They argued that in effect, the observations in Hamilton’s paper as well as ones in Kydland’s and Prescott’s were both correct: the business cycles of the 1970s were driven by a fall in TPF and by the oil shocks. The claim that Dhawan and Jeske make is that policies in the 1970s, notably oil price and allocation controls, had “negative effects on productivity . . . [because controls led to] idled resources and misallocation of energy [resulting in] less productive use of energy which shows up as lower productivity” (p. 31). Of course, the disruption of supply also shows up as an oil shock. In other words, because of 1970s controls on oil and gas, shocks led to negative consequences to the economy overall; in 2005, with controls gone, an oil market shock only had the effect of raising oil prices. Then again, controls had been lifted before 1991 and 2001, but price shocks were followed by recessions, albeit much milder ones than in 1981. This debate is far from settled. Nor even if it were settled that oil shocks cause recessions, is it clear what kind of policies the Fed or the federal government should pursue in response to an oil price shock. Economic policy would need to be considered in the context of the overall economy. Still, as oil prices rose in 2011, questions about oil and the macroeconomy returned.12 Fed officials including Chairman Ben Bernanke (a coauthor of the BGW paper) argued that high prices would have little impact on economic growth, although Bernanke hardly convinced everyone. One economist argued that at best the Fed could only mitigate the problem. “[N]othing central bankers can do will prevent an increase in world oil prices from harming an oilimporting economy.”13 But with oil prices, or more particularly gasoline prices rising, politicians suggested an urgent need to respond. Representative Marcy Kaptur (D-OH), for example, in remarks on May 3, 2011, noted the historical link between oil prices and recession and (apparently omitting the 2005 case) pointed out that “every spike of gas price increase creates a path to high unemployment that follows.” She mentioned the recent case of 2008. But her concern was that rising oil prices in 2011 forecast the next recession. Her policy solution was predictable, familiar, and irrelevant: [E]nergy independence here at home. . . . 14 12 13 14

Hamilton (2009) has argued that the oil price spike of 2008 was a major cause of the subsequent recession. Ed Dolan, “Oil Shocks and Monetary Policy,” Mar. 28, 2011, available at http://oilprice .com. CR, 112th, May 3, 2011.

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3. The Seventy-Five Percent of Twenty-Five Percent Solution As a candidate, George W. Bush published a nineteen-page position paper called “A Comprehensive National Energy Policy.” But besides the predictable attack on perceived failures of the Clinton-Gore administration, the paper could probably have been reduced to one paragraph or even one sentence. The sentence would have read, “We need to pass a bill like the one my father, President George H. W. Bush, proposed in 1991.” The new energy proposal included expanded supply to be undertaken in an “environmentally sensitive way” (including development of oil in the Arctic National Wildlife Refuge [ANWR]), conservation and efficiency measures, some money for alternatives, some mention of utility greenhouse gas emissions reductions, renewal of nuclear power, money for energy assistance to low-income households, and more deregulation of electric power markets. In fact, this proposal not only seemed like Bush Sr.’s but bore some resemblance to Gerald Ford’s Energy Independence Act and Jimmy Carter’s 1978 National Energy Act. The only things missing were considerations of a new coal liquefaction program, energy price decontrol, and windfall profits taxes. Actually, although none of these were ideas Bush entertained, the latter two were not absent from the debate that followed Bush’s election. Wholesale electric power price caps had been imposed in California, and an executive order in Clinton’s last weeks in office essentially enforced allocation controls as well; suppliers of electricity and natural gas were required to sell to California distributors, a measure designed to end continuing blackouts that so disrupted the lives of California’s consumers. Bush, in the face of much criticism, appeared ready to back off from these policies of his predecessor. Democrats in Congress hoped to legislate price caps on wholesale electricity, rebuking Bush for, as Representative Jay Inslee (D-WA) argued, his unwillingness “even to consider” such caps. Other bills sought to prevent gouging both by electric companies and by oil companies, with stiff penalties for charging anything other than “reasonable” prices. Senator Barbara Boxer (D-CA) wanted to impose a windfall profits tax on electric power companies in California, whereas Representative Dennis Kucinich (D-OH) called for taxes on “the windfall profit” of sales of any oil or natural gas product.15 Natural gas prices were, in fact, a source of some distress, reaching an all-time high (at the time) of around $10 per thousand cubic feet; 15

S. 173, Consumer Utilities Turnback Trust Fund Act, Jan. 24, 2001; H.R. 1967, The Gas Price Spike Act of 2001, May 23, 2001. Neither bill made it out of committee.

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in fact, high natural gas prices were one factor that had made California’s electricity regime untenable. With energy policy at the forefront of public concern when he took office in January 2001, Bush announced formation of a commission, the National Energy Policy Development Group, to be led by Vice President Dick Cheney. By putting Cheney, who had been CEO of Halliburton Inc., a leading energy services company, in charge, Bush immediately raised suspicions that the group would advocate policies primarily to increase production of oil and gas, in the process sacrificing environmental and other regulatory barriers to expanded output. The benefits, Democrats charged, would accrue to energy companies at the expense of the rest of society. Many Democrats saw the Bush administration as inherently and slavishly a creature of the oil industry. As Representative Sherrod Brown (D-OH) said, “When big oil talks, this administration listens.”16 While Cheney’s group was working on its report, there was a tremendous surge of energy-related activity in Congress. The 107th Congress, in fact, produced about 1,000 bills that had at least some energy component and several that were intended to be major pieces of energy legislation. This included the Energy Independence Act of 2001 (and reintroduced the next year as the Energy Independence Act of 2002), proposed by two Connecticut Democratic legislators, Representative John Larson and Senator Christopher Dodd, which called for a commitment to energy independence in the usual ten years. But probably the two most notable energy bills were the Energy Policy Act, an effort by Democrats to offer an alternative to what were expected to be Bush’s energy proposals, and the Energy Security Act, a three-hundred-page bill that was introduced in February 2001 by Republican Senator Frank Murkowski of Alaska. This bill, which emphasized expanded production including ANWR (in fact some called it the “ANWR Bill”), had some bipartisan support (especially from Democrats representing oil-producing states) and also did contain standard themes of energy policy legislation: conservation, nuclear power, and alternative technologies all to be accomplished with the utmost environmental regard.17 The issue would not really be engaged, however, until Cheney’s group reported and Bush laid out his plans for energy policy, which he did in May. By that time, opinion polls put energy near the top of public concerns, especially with some experts predicting that gasoline would soon be $3 per gallon, up from around $2, which many consumers already thought too 16 17

CR, 107th, Apr. 26, 2001. CR 107th, Feb. 26, 2001.

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high. The apparent wish of voters was for the president and Congress to do something to make gasoline less costly. In fact, Bush said he had a plan for consumer relief. Consumers would get a break not with lower energy prices but with lower income tax rates. Democrats viewed this idea as a wealth transfer to the major energy companies. That is, Bush would cut people’s taxes so they could pay more of it to businesses that seemed to need it least. Democrats argued that this was a “do-nothing response” but not unexpected because they believed Bush was too beholden to the energy industries. Politically, it was considered a “huge winning issue” for the Democrats, and Republicans were alarmed by the ramifications. “Politically, [Bush] has got an absolute nightmare,” said South Dakota’s Republican governor.18 In Congress and around the country, there was much discussion of America’s energy crisis or crises – given the problems in California. But as the Economist asked, just what was this crisis? “There is no embargo by a hostile cartel, no war or revolution disrupting supplies.” Actually, the crisis was bad policy in California and temporarily high oil prices. Still, an energy crisis is perception, and perception in this case was driving policy in the way it always had. On May 17, 2001, Bush unveiled his plans for new energy legislation in a speech at a power plant that used turkey manure to generate electricity. By choosing a place that linked agricultural output with energy, it presaged the connection that would culminate in the ethanol mandate of 2007. Indeed, the program he announced pointed to large subsidies for using agricultural products – that is, biomass fuels – to generate power and produce substitutes for conventional transportation fuels. Yet, the decision to tie agriculture to energy policy appears to have been largely political. In the days immediately before the speech, which was to coincide with release of the Cheney Commission’s energy report, officials at the Department of Energy (DOE) had sought to deflect attention away from increased oil and gas production – the heart of Cheney’s report – by urging the president to emphasize conservation and alternatives. Biofuels had the political virtue of bipartisan support. In fact, not only did it receive strong support from farm state representatives, it also was applauded by many environmentalists, who thought biofuels would reduce pollution and CO2 emissions. Cheney’s report raised hackles by advocating energy development in the ANWR and offshore and by the standard declaration of the need to get 18

“The Price of Gasoline May Pose Problem for White House,” New York Times, May 10, 2001, A1.

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back to utilizing nuclear power. Although the report contained 105 recommendations, some concerning programs for conservation and alternatives, Cheney himself emphasized conventional supply development. He declared in a speech on April 30 that conservation should be considered a “personal virtue” not a “sufficient basis” for a realistic energy policy (Cheney 2001, 455). Cheney’s view was colored by forecasts of future demand, which were contained in the report, but which, as with most such forecasts, were to prove wrong very quickly. The report argued that over the next 20 years, U.S. oil consumption would rise by a third, natural gas by 50 percent and electricity by about that much as well. This would lead to an “ever-increasing gap” between domestic supply and domestic demand.19 As of 2011, however, the United States was not on a pace to come close to these projections. Natural gas consumption had increased the most, but only about 10 percent over consumption in 2001. Oil consumption was actually lower than it had been in 2001, and electricity demand was up less than 10 percent. Cheney was, as many expected he would be, influenced by energy industry arguments. Congressional Democrats as well as reporters wanted to know just who gave advice to Cheney’s committee, but Cheney refused to divulge the names.20 A release of heavily redacted e-mails and other documents by the DOE the following year showed that as the New York Times headlined, “Review Shows Energy Industry’s Recommendations to Bush Ended Up Being National Policy.”21 In any event, the administration’s legislative proposals, introduced by Representative Billy Tauzin (R-LA) in July, were called the Securing America’s Future Energy (SAFE) Act of 2001; the bill was 510 pages long, ushering in an era of legislative gigantism. Many bills, and not just ones on energy, became so long few, if any, members of Congress could actually read them. The SAFE Act covered a large number of energy-related issues, but the main thrust was toward the development of conventional supplies. According 19 20

21

This gap was only between domestic production and consumption, not a gap in the entire world market as had been argued in the 1970s. In 2002, it became clearer who had met with the committee. Cheney’s group did meet with officials of many leading energy companies including officials of Enron Corp., notably its CEO Kenneth Lay. Lay had worked for past Republican administrations and was a large donor to the Bush campaign, but by the summer of 2001, Enron was suspected of having manipulated the California energy market leading to the crisis that developed over the previous winter. Over the next couple years, as Enron went bankrupt and Lay was indicted for criminal activities, any association with Enron was tainted. At the same time, records showed that Cheney’s committee had met with representatives of twenty-two labor unions and thirteen environmental groups. This headline referenced an executive order about the effect of regulations on supply and distribution, Executive Order 13211, May 18, 2001.

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to Representative Peter DeFazio (D-OR), it was all about “dig, drill, burn everywhere and anywhere.”22 Republicans meanwhile argued that SAFE would create jobs and further the goal of energy independence. Democrats, however, thought the weakness of the Bush proposal was an opening for them to propose something more popular. Senator Tom Daschle (D-SD) quipped that the letters GOP stood for “gas, oil and plutonium,” and Democrats from both chambers of Congress belittled Bush’s intentions. They were especially dismayed by what they saw as a lack of any provisions to help consumers cope immediately with high energy bills. “American motorists are spending too much on gasoline,” declared Representative Frank Pallone (D-NJ). “They want a solution now.”23 But the Democrats did not appear to have any idea of how to achieve it. Democrats in Congress talked about tax credits for weatherization and purchase of more efficient products. But these kinds of measures would not have lowered gasoline prices or produced any other immediate benefits. Only one suggestion – a plea actually – to release oil from the Strategic Petroleum Reserve (SPR) would have had any effect on gasoline prices, but even if Bush had heeded their appeal, it was unclear whether there would have been a significant impact on prices or whether any impact would have been sustainable. As for alternatives to SAFE, in reality, the Democrats could not produce anything particularly new either. Congressional Democrats wanted price caps on electricity with rebates to consumers who had been gouged – whatever that meant. Of course, Democrats also wanted to shine “a spotlight” on oil industry pricing; they introduced a Senate Resolution (S. Res 87) that called for a joint committee to investigate “the dramatic increases in energy prices.” They also demanded greater efforts at conservation, a commitment to curb CO2 emissions, and more money for alternative renewable energy technologies, especially ethanol. Many of these features, along with a mandated federal renewable portfolio standard (RPS) for electric power,24 appeared in the Democrats’ major policy proposal, the Energy Policy Act of 2002, which was introduced by Senator Daschle in December 2001. It bested the Republican bill by twenty pages (530 total), but it, too, was a grab bag of longstanding Democratic positions. Many provisions were in fact efforts to extend and expand past programs, some of which dated back to the 1970s, others from the EPAct of 1992. That to date such programs had accomplished little was not noted. 22 23 24

CR 107th, Aug. 1, 2001. CR 107th, May 15, 2001. Discussed in Chapter 6.

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With the Republicans in control of the House, SAFE was surely going to pass, but with only a one-vote Senate majority, it was equally obvious that it would have a much harder time in the Senate. Indeed, SAFE was conceived in a crisis – “do something” – atmosphere, but by summer the crisis was clearly abating. Whereas retail gasoline prices had been as high as $1.70 per gallon in May, by July, they had fallen to around $1.30 and were under $1.10 by the end of the year. Natural gas prices fell steadily and precipitously, closing in early October 2001 almost 80 percent off the record winter high. California, portrayed early in 2001 by its congressional representatives as verging on penury and perpetual darkness, reported in July a large electric power surplus and a wholesale price of power at its lowest level in a year. This became a problem in itself because during the winter panic, the state had altered the rules to allow long-term contracting. The state’s Department of Water Resources had signed long-term agreements to buy power at $133 per megawatt-hour. This was about nine times the wholesale spot price in July. Because of the surpluses, at times the state found itself with excess supplies, and because electricity cannot be stored, it sold its power back to distributors at a huge loss. But as always with the pressure of crisis removed, the impetus for an energy bill of any kind was dissipated. Attention to energy fell further after the 9/11 terrorist attacks. Looming recession dampened demand, so prices kept falling. When legislators turned back to energy in the last quarter of 2001, the events of 9/11 were used as an argument for renewed commitment to energy independence – or at least independence as it was embodied in their respective party’s legislation. But the connection between oil supply and terrorism was tenuous: the logic was if al-Qaeda took over Saudi Arabia or if it disrupted the flow of oil from the Persian Gulf, the United States would have a major crisis, so for America’s security, energy independence was imperative. Senator Larry Craig (R-ID) read into the record letters from veterans groups urging passage of the SAFE Act “to reverse our growing dependence on Middle East oil” (which was reversing on its own; in 2002, imports from the Persian Gulf were 20 percent lower than they had been in 2001). As for the Democrats’ Energy Policy Act, Senator Tim Johnson (D-SD) called it “a critical piece of legislation which directs our attention . . . to the energy independence and energy security that during these troubling times we all understand now more profoundly than ever is so badly needed.”25 25

CR 107th, Dec. 6, 2001.

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Johnson was especially gratified that the Democrats’ bill contained provisions to increase the production of ethanol and biodiesel. The bill would have expanded ethanol output from 1.8 billion gallons, the production in 2001, to 5 billion gallons by 2012. Even the latter amount represented but a small fraction of transportation fuels overall, less than 5 percent; nevertheless, because it would be distilled mostly from corn, it would clearly benefit farm economies like South Dakota’s, as Johnson noted. In the House, Representative Marcy Kaptur (D-OH) offered a bill with grander implications, the Biofuels Energy Independence Act of 2001. On closer inspection, however, the bill was more modest than its title seemed. It was intended mainly to replace 100 million gallons of oil in the SPR with ethanol, as well as support expansion of the ethanol industry. But soon the idea of replacing most U.S. oil imports with ethanol would capture the imaginations of politicians of both parties. The battle over rival programs continued intermittently for another year. In the end, neither bill passed, although expiring tax preferences for various new technologies including electric and other “clean fuel” vehicles were extended through a rider to another bill in March 2002. There were still efforts to pass some version of a “comprehensive” energy bill, with legislators trying various arguments (jobs, antiterrorism, etc.) to get a bill passed. By autumn 2002, it appeared that a much-reduced bill might make it through – one without ANWR development and with limited incentives for all renewables except ethanol, which would be doubled by mandate. But by the end of the year, there was no new energy bill, nor any compelling reason for there to be one. In the late afternoon of August 14, 2003, an energy problem provided a new reason. The electricity went out through much of the Midwest and Northeast and a large portion of Canada, the largest blackout in North American history, affecting 50 million people. It was unpleasant to be sure; the outage lasted two days in some places, although most areas had power restored that evening. The estimated cost was $6 billion in damages and lost output (Minkel 2008).26 This event was a cause for concern but hardly a disaster. Nonetheless, it had two consequences: first, it gave Bush a chance to chastise Democrats for not passing his energy bill because it contained electric grid upgrades, and, second, it gave impetus for more energy legislation including seventeen bills that dealt with electric system reliability. No matter what legislation would have been passed, however, blackouts are inevitable; outages will occur because of equipment failure and/or 26

Equal to about five hours of U.S. gross domestic product.

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human error, and the probability of one or the other causing an outage can never be reduced to zero (Cassedy and Grossman 1998). In fact, because there are great benefits to a large-scale interconnected transmission network, problems developing in one corner of the grid can propagate throughout the system, so that the probability of a large-scale outage is also positive. But members of Congress sought to use it for political advantage and to blame someone for causing what Representative Billy Tauzin argued threatened “our way of life.” Broader energy legislation was brought to the fore again. President Bush had tried to revive interest even before the blackout when he called for U.S. energy independence and passage of an energy bill in his State of the Union address in January. He also announced somewhat out of the blue a $1.2 billion initiative to create a car powered by hydrogen fuel cells. This idea was entirely quixotic, given that there were enormous technical problems to overcome to make such a vehicle commercially viable; experts argued that commercialization would take decades (Anthrop 2004). But bills similar to the ones that had been stymied in the 107th Congress reappeared in the 108th with ultimately the same result. Versions of the 2001 legislation had continued to grow; they were now 1,200 pages long and contained so many preferences, subsidies, and benefits that Senator John McCain (RAZ) claimed energy legislation generally should be called “No Lobbyist Left Behind.” Nevertheless, energy legislation again failed to pass. Because 2004 was a presidential election year, it consequently seemed an unlikely time to pass any dramatic new energy legislation. Still, Bush and congressional Democrats plugged away at versions of the same bills they had offered in 2001, and with gasoline prices beginning to rise again and articles in the press and online warning of possible energy shortages,27 congressional rhetoric became more shrill, each party accusing the other of preventing measures to reduce voter anxieties. Several new bills were labeled energy independence acts; several hundred floor statements demanded it. Representative Bob Filner (D-CA) offered an especially inane version called “Putting the Pedal to the Metal: Accelerating the Energy Independence of America Act.” Floor speeches recapitulated all of the clich´es and tropes of past energy arguments. The Democratic candidate for president, Senator John Kerry, made a campaign commercial calling for oil independence in, of course, ten years. And Representative Jay Inslee (D-WA) along with 27

For example, “The U.S. Is Running Out of Energy,” July 21, 2003, available at http: //www.time.com/time/magazine/article/0,9171,1005239,00.html, and “Energy: The Big Squeeze,” May 17, 2004, Bloomberg Businessweek, available at http://www.businessweek .com/stories/2004-05-16/energy-the-big-squeeze.

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forty-three cosponsors introduced the New Apollo Energy Act, a plan that was implausible on every conceivable margin. Most notably, according to the bill, this new Apollo project would achieve energy independence and not cost taxpayers anything, because all the money would come from closing tax loopholes for oil companies. The price of gasoline was what really drove the debate. In May 2004, the national average price briefly went above $2 per gallon, fell back, and remained in the $1.70 to $1.90 range for much of the rest of the year; natural gas prices also rose. Senator Ron Wyden (D-OR) expressed concern that this would lead to a recession, and he and fellow Democrats blamed the Bush administration for not taking action to force down the price. But the lights remained on, and the economy was robust; growth even picked up as the year went on. In the months following Bush’s reelection, however, the price of oil – and more pertinently, the price of gasoline – kept rising. By March, the national average was more than $2 per gallon, and it would not fall below that mark for the next four years. In the 109th Congress, which convened in 2005, legislators made approximately 2,000 references to energy in floor debates and speeches. A common line of attack was to call the other side a “do nothing” party. In his State of the Union speech on February 2, 2005, Bush criticized Congress for just sitting on energy legislation for four years. Republicans held small majorities in both houses as they had for most of the decade, but this time, there was sufficient sense of a crisis – which merely meant uncomfortably high prices – so that the latest incarnation of comprehensive legislation, the Energy Policy Act of 2005 (H.R. 6), could move forward in Congress. It took a bit less than four months from the time it was introduced by Representative Joe Barton (R-TX) in April to its final codification as Public Law 109-58, a second EPAct to be distinguished from Bush’s father’s by the year. EPAct of 2005 was, by the time it passed, a true monstrosity of a bill, 1,724 pages long. But for all its length, the law did not appear to have changed much. It did not have a mechanism to reduce prices;28 it did not have a means to increase supply soon; it did not promise much in the way of reduced demand. What EPAct did have was an estimated $85 billion in subsidies for just about every form of energy production, including oil and gas and, a favorite of several administrations, “clean coal.” It included as well a seemingly uncontroversial loan guarantee program to encourage private 28

In Hawaii, the state legislature tried price caps on gasoline both at the retail and wholesale levels. It was predictably a mess with shortages and prices that were actually higher than they would have been otherwise. It was soon repealed.

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investment in innovative technologies. This program would not really be exploited until Bush’s successor took office in 2009, at which time, there would be an explosion of energy loans. But the most visible program at the time, one termed “a gigantic transfer of wealth” by the Wall Street Journal, was directed to the production of biofuels, mainly ethanol. Refiners were required by 2012 to blend 7.5 billion gallons of renewable fuel, mainly ethanol, into regular gasoline. This biofuels program, called the Renewable Fuel Standard, prompted economist Lynne Kiesling to ask on her blog, “Is the Energy Bill Really a Farm Bill?” The final bill also included funds for Bush’s hydrogen project but nothing about ANWR or exemptions from clean air standards made the final version. There was little drama in the process, and the final vote in the Senate was 74 to 26. Said Bush in his signing statement, “The legislation promotes dependable, affordable and environmentally sound production and distribution of energy for America’s future.”29 Within a couple of months after the law went into effect, Democrats in Congress were arguing that the country needed another energy bill. Prices were still trending up, and in the wake of Hurricane Katrina, legislators from both parties demanded both expansion of refinery capacity and punishment of price gouging.30 In November, Senator Richard Durbin (D-IL) declared that the bill Bush had just signed into law was as nothing; the United States, he said, did not really have an energy policy. He asked, “What did we have in the so-called energy bill signed by the President just in August of this year?”31 His answer: tax preferences for oil and gas companies. Strangely enough, President Bush at least partly agreed with him that the energy bill had not been enough, and he even suggested it had been wrong. In his next State of the Union speech, Bush seemed to contradict not just the intentions of the August law, but also arguably the thrust of his energy policy since 2001. Now, he suddenly scolded the American people, saying they were “addicted to oil” and that new technology was needed to break that addiction. There were two possible reasons for this apparent change of heart, both of which might have been partly right. First, there was a fundamental problem with Bush’s energy policy: it was never clear what his goal was. That is, it never seemed clear that he had any idea of what energy 29 30

31

Aug. 8, 2005, available at http://www.coherentbabble.com/ss2005.htm#a200504. One of the Democrats’ price-gouging bills was called Federal Response to Energy Emergencies (or FREE); the Republicans offered the Energy Price Discipline Act of 2005. Texas Republicans also proposed the Gasoline for America’s Security Act of 2005 to increase refinery capacity. CR 109th, Nov. 16, 2005.

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policy was supposed to accomplish. Others had objectives. Even Cheney seemed to have a clear goal: expanded production. Democrats had one or another goal: make energy affordable or punish oil companies or energy independence. But given his State of the Union speech in 2006, Bush seemed to back away from the Cheney goal and substituted . . . what? Hydrogen cars? If there was any sort of idea, it might have been energy security, but it was certainly not clear what that meant. The second possibility was that in 2006, Bush – as well as most of Congress – had reached the last stage of the “do something” problem. Despite the 2005 EPAct, America was still facing an energy crisis, but one unlike any that had been declared before. This one was protracted, slowly and inexorably getting worse. Bush was under tremendous criticism for doing nothing to produce a solution to continually rising oil prices. But at this stage of the “do something” problem, political logic leads inevitably to a panacea technology solution. And so in his speech, although he talked vaguely about alternative technologies generally, he singled out one: ethanol. The explicit goal was to reduce imports from the Middle East by 75 percent by 2025 and replace them with ethanol. Because at the time of his speech approximately 25 percent of U.S. imports came from the Middle East, his plan was the 75 percent of 25 percent solution. Bush had gone from a supposed tool of the oil industry – “drill, dig, burn,” as Representative Peter DeFazio put it – to a visionary for a biofuels future – or at least a 75-of-25 ethanol future. But it was not really feasible. Although the 75-of-25 goal did not sound very big, Bush actually had proposed a huge undertaking. He was essentially saying America needed to replace 20 percent of its imports or about 12 percent of its total oil consumption with biofuels, about 2.3 MBD of ethanol production (35 billion gallons) per year. If that amount were to be distilled entirely from corn, it would have required the conversion of more than the entire U.S. corn crop.32 Distillation of that much ethanol would also have entailed building a vast infrastructure, including hundreds of new distilleries, and pumps at gas stations to provide fuel that was 85 percent ethanol – 15 percent gasoline (or E85) – the goal of many ethanol proponents. Most cars on the road could not then have used E-85, and so the entire automobile fleet would have had to be transformed. Thirty-five billion gallons of ethanol would also have utilized more than 100 billion gallons of water annually (not including water used to irrigate the crops themselves). 32

A bushel of corn yields about 2.6 gallons of ethanol; 35 billion gallons would require more than 13 billion bushels. See Grossman (2007).

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But Bush argued for an alternative feedstock for the vast quantity of ethanol he envisioned. More than half of the 35 billion gallons would be distilled from fibrous, cellulosic materials like grasses or wood chips instead of sugars like corn. The process for distilling ethanol from cellulose had been demonstrated in the laboratory, but despite talks of breakthroughs for at least twenty years, no process for cellulosic ethanol production was remotely cost-competitive with gasoline or with sugarcane-derived ethanol. In other words, to achieve the 75-of-25 solution, there had to be some radical developments in the science and technology of cellulosic ethanol. How would this be achieved? Apparently, legislated mandate to order innovation, a strategy that likely would produce nothing of value. Despite Bush’s 2006 speech, few legislators had an interest in revisiting energy so soon after the 2005 bill. But the price of oil was rising – intermittently to be sure, although still generally upward; gasoline hit $3 per gallon in the summer, and Democrats campaigned on a promise that if they became the majority party in Congress, they would do something about energy prices. When the new, and now Democratic, Congress reconvened in 2007, the Democrats were ready with a vast initiative on energy. Bush still pushed ethanol, an initiative many Democrats also endorsed. Again in his 2007 State of the Union speech, he offered his 75-of-25 proposal but framed it a bit more tractably as 20-in-10; that is, 20 percent of all transportation fuels would be replaced by renewables by 2017, ten years. The amount, 35 billion gallons, was stated explicitly, which accorded well with Democrats’ plans to quintuple ethanol (36.5 billion gallons) output by 2022. This could not be accomplished cost effectively in 2007, but Bush promised that cellulosic ethanol was on the verge of a breakthrough and that a goal of his legislation was to make that technology “practical and competitive in six years.” This claim was, of course, highly dubious. After all, as noted in Chapter 7, the United States was said to be on the verge of a breakthrough with cellulosic ethanol in 1989, and nearly 20 years later, the country was still only on the same verge. But with the price of gasoline having reached $3 the previous summer and with predictions it would reach that level again, Congress was becoming progressively more panicky about the response of voters from rising prices, the blame rhetoric became increasingly strident,33 and the proposals began to veer even more toward fantastical solutions. Democrats had a new villain to blame, the energy futures speculator, who was accused of manipulating the price of oil ever higher. It was a peculiar 33

As Representative Eliot Engel (D-NY) put it, “gasoline prices are rising and rising and rising to a point of ridiculousness. I want to know what is the [Bush] administration doing to combat this problem?” CR 110th, Apr. 17, 2007.

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charge to anyone who knew anything about the futures markets, because any contract on the buy side (a speculative bet on rising prices) required someone on the sell side (a bet they would fall).34 Nonetheless, there were calls to restrain and regulate, and possibly prosecute, energy futures traders. Almost immediately upon the start of the new 110th Congress, Representative Bart Stupak (D-MI) introduced the “Prevent Unfair Manipulation of Prices Act” aimed directly at energy trading. It never passed but represented part of the peculiar Democratic plan to bring down oil prices. The main components were as follows: the right to sue OPEC for antitrust violations in U.S. courts (almost certainly unenforceable); the breakup of the major oil companies; and, finally, a windfall profits tax. How these were supposed to work to bring down prices is entirely unclear. Because such measures would introduce myriad uncertainties, the plan would appear more likely to have raised prices instead. Nevertheless, some of these ideas were incorporated into the Democrats’ energy bill, first titled the “Creating Long-Term Energy Alternatives for the Nation Act,” or CLEAN Energy Act of 2007, introduced in mid-January by Representative Nick Rahall (D-WV). It had 198 cosponsors in the House and was intended primarily to eliminate some tax breaks for oil and gas companies, to promote renewables, and to require renegotiation of offshore drilling leases. The effect of the last component would be, as one Democratic congressman put it approvingly, that given environmental sensitivity of ocean drilling, it “discourages extraction from offshore oil and gas reserves.”35 Democrats had expectations of passage, especially parts that removed tax breaks from the oil industry. In total, the bill was only sixteen pages. The bill proceeded through committee and onto the floor where it passed, but when it reached the Senate, it was combined with two other bills. One was the Renewable Fuels, Consumer Protection, and Energy Efficiency Act of 2007, and the other, the 10-in-10 Fuel Economy Act, intended to raise the CAFE standard for cars from 25 to 35 mpg by 2017. The bill was now more than four hundred pages and contained the explicit mandate for the expansion of biofuels production (which would be mainly ethanol). It demanded 36 billion gallons by 2022, 21 billion of which would be “advanced biofuels,” 34

35

Of course, futures are used to hedge against the risk of rising and falling prices, and therefore it is misleading to consider them only or mainly as “bets.” But to the extent that activity resembles bets, the bets cover both rising and falling prices. See Irwin et al. (2009) for a discussion of energy market speculation. The basic conclusion of their study is that speculation as the cause of large energy market price swings “simply does not withstand close scrutiny” (p. 377). Representative Alcee Hastings (D-FL), CR 110th, Jan. 19, 2007.

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primarily cellulosic ethanol. The New York Times, in praising these provisions, worried only that there would be a massive uprooting of the nation’s forests to acquire feedstock for cellulosic ethanol production. But the bill had benefits for other kinds of alternative energy technologies. Taxes were to be raised on oil companies and the money – projected to be about $25 billion – would be devoted to alternative energy and conservation projects. Subsidies of about $1 per gallon were to be directed toward cellulosic ethanol. This was, according to anonymous Democrats cited in the New York Times, “payback time,” in which Republican-leaning oil companies would get stuck with the cost of the Democrats’ wish list. The bill, especially its ethanol mandate (and continuation of ethanol tax preferences and subsidies), gained some bipartisan support. But Republicans balked at the inclusion of an RPS – 15 percent of all electric power would have had to be generated by wind, solar, or biomass by 2020. The RPS, like those of many states, was intended both to develop alternative energy technologies and to reduce emissions of CO2 . But there were complaints by some members of Congress that in parts of the country, sun and wind were too weak and intermittent to be reliable sources of electric power; they tried to include nuclear, which like solar and wind produces no CO2 , in the RPS,36 but that effort was defeated. Democrats pushed forward with the RPS. Said Senator Jeff Bingaman (D-NM) and primary author of the renewable fuels component of the bill, the RPS would “reduce our dependence on traditional polluting sources of electricity. It would reduce our dependence on foreign energy sources.” The basis for the second part of this statement was unclear. Little oil was used for electric generation. Virtually all of it was from domestic coal, natural gas, nuclear, and hydro. But the energy independence theme was ascendant. In due course, the bill was renamed the Energy Independence and Security Act of 2007. Its preamble: To move the United States toward greater energy independence and security, to increase the production of clean renewable fuels, to protect consumers, to increase the efficiency of products, buildings, and vehicles, to promote research on and deploy greenhouse gas capture and storage options, and to improve the energy performance of the Federal Government, and for other purposes.

In other words: energy independence, largely through an ethanol/biofuel technological panacea, some conservation, and something toward addressing climate change, especially an advanced technological carbon capture 36

As Senator Bob Menendez (D-NJ) argued, “If we are looking for a clean, reliable, stable, and affordable energy supply, look no further than nuclear energy” (CR, 110th, June 13, 2007).

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and storage program from combustion of coal – a technology that was yet unproven. Except for the last of these, most of the 2007 bill was just the latest try to do the same things energy policy had always tried to do.37 Antigouging provisions and the right to sue OPEC for antitrust violations still remained alive, although the last of these brought a veto threat from President Bush – who was otherwise seemingly absent from much of this process. The gouging and OPEC (nicknamed the NOPEC) provisions along with the 10-in-10 objective held up the bill through the summer. In late June, the Democrats conceded defeat on a national RPS, and a month later, the 10-in-10-plan was gone, at least from the House version, which was now 786 pages long. There was not much urgency to pass the bill because gasoline prices, which were more than $3 per gallon in May, fell into a range of about $2.80 through the rest of the summer and into autumn. House Speaker Nancy Pelosi (D-CA) still described the bill as the “Energy Independence Day” bill. But in the meantime, the Republicans were gleefully calling the Democrats a bunch of “do-nothings” on energy, reversing the charge that Democrats had made for the previous six years. Then, prices started rising again. In October, oil was more than $85/bbl, and soon the price of gasoline was over $3 per gallon. The reasons for the rise, according to analysts, were tensions in the Middle East and increasing demand, especially from China. By November, the price was closer to $95/bbl, and as the New York Times reported, “voter anger” spurred renewed congressional action.38 According to some analysts, the next summer might see $4 per gallon gasoline. The energy bill was back in the forefront of the legislative agenda, and briefly proponents brought the 10-in-10 proposal and the RPS back to the table. After a month of intense activity with an increasing sense of crisis, there was a new energy bill. In the end, the RPS was gone, and so were some of the tax penalties the Democrats sought to impose on oil companies – removed after an eleventh-hour veto threat from Bush. There was an increase in CAFE, a 35-mpg fleet average by 2020. But the real heart of the bill was the expansion of the RFS, a 36-billion-gallon ethanol mandate. It would, its champions claimed, cut oil consumption by 2.8 MBD by 2020 and reduce CO2 emissions. But Representative Bruce Braley (D-IA) focused on what the ethanol mandate was really about: “This investment in hometown crops will create American jobs” – especially in his state.39 37

38 39

A little-noted provision did effectively mean that by 2012 standard 100-watt incandescent lightbulbs would be banned. This part of the package gained increasing publicity as 2012 approached. “Voter Anger May Free Up Energy Bills,” New York Times, Nov. 13, 2007, C1. CR, 110th, Dec. 5, 2007.

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He claimed that it would protect the environment as well, but there were already many experts ready to dispute that. In fact, the new bill’s ethanol mandate exemplified just about every problem with U.S. energy policy. First, it was only passed under “do something” pressure – a pervading crisis atmosphere that had built for seven years, and then had accelerated so that after ten months of little action, it was passed in seven weeks of frantic reaction and fear of voter anger. Reading the debates in Congress suggests that little thought was given to scientific evidence about a major commitment to ethanol. Investigation would have revealed uncertainty at best, and some studies were already suggesting that (a) ethanol is not benign environmentally (Crutzen et al. 2007; Reitze 2007); (b) ethanol’s energy balance was possibly negative – that is, more energy was needed to create ethanol than it would yield (actually something that had been argued as far back as 1978, see Chapter 5 as well as Pimentel 2003); (c) cellulosic ethanol was not close to commercial viability (Avery 200640 ); (d) ethanol would probably not be cheap because massive production would put pressure on the price of corn (Taylor and van Doren 2007); and (e) the mandate could potentially have impacts on the cost of food throughout the world (Runge and Senauer 200741 ). Instead, there was much talk in Congress about how it would save consumers money and make the nation more energy independent. Senator Charles Grassley (R-IA) put it simply – and simplemindedly – a couple of months before passage of the Energy Independence and Security Act, “Everything about ethanol is good, good, good.”42 The other major element was the increase in CAFE standards. In Chapter 4, I argued that the impact of CAFE standards has been limited, much less effective than high gas prices in inducing automobile buyers to look for fuel efficiency. To be sure, while the handwringing over high prices continued in Congress, Americans began buying more fuel-efficient cars. Sales of gaselectric hybrids, such as the Toyota Prius, rose from about 4,000 per month in 2004 to 30,000 per month from the spring of 2007 through the summer of 2008 – falling off to below 20,000 per month only when oil plunged in late 40

41

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Representative Collin Peterson (D-MN), chair of the House Agriculture Committee, admitted a month after the 2007 bill was passed that he believed cellulosic ethanol was at least ten years from commercialization. In fact, he told Reuters, “I’m not sure cellulosic ethanol will ever get off the ground” (Jan. 15, 2008, available at http://www.reuters.com/ article/2008/01/15/us-biofuel-summit-cellulosic-idUSN1554889720080115). See also Technology Review, online Feb. 13, 2007, “Ethanol Demand Threatens Food Prices,” available at http://www.technologyreview.com/news/407304/ethanol-demandthreatens-food-prices; and Time, “The Clean Energy Scam,” Mar. 27, 2008. Speech at the opening of an ethanol plant in Corning, IA, Sept. 30, 2007. The Wall Street Journal in 2007 took to labeling Grassley’s party affiliation as R-Ethanol.

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2008 and when the U.S. economy fell into recession. But even in a sluggish economy, hybrid sales picked up, and the running average ranged between 15,000 and 25,000 per month at least through the spring of 2011.43 After passage of the bill, members of Congress and even President Bush hailed their own efforts and called the new law a crucial contribution to America’s energy future. Said Bush when he signed the bill into law, “Today we make a major step with the Energy Independence and Security Act. We make a major step toward reducing our dependence on oil, confronting global climate change, expanding the production of renewable fuels and giving future generations of our country a nation that is stronger, cleaner and more secure.” House Speaker Nancy Pelosi (D-CA) said the bill was “groundbreaking” and represented “a moment of . . . real change.” But actually it represented no real change at all. Indeed, the self-congratulations over the 2007 energy bill did not last long. Gasoline prices continued to rise: $3.20 in March, $3.50 in April, $3.90 in May, and then the dreaded $4+ in June. That same month, CNN reported that a majority of Americans were worried about the return of gas lines – a worry that had no basis in reality, a thirty-four-year-old fear based on a misunderstanding of what caused the lines in the first place. But high prices had convinced most Americans that the United States had an energy crisis; polls showed that 83 percent agreed. In Congress, panic returned. In congressional debates and floor remarks, legislators made literally thousands of references to “intolerable” energy prices and demanded action to reverse those soaring prices. As oil prices reached $147/bbl, there were forecasts of oil at $200/bbl within six months.44 On the presidential campaign trail, Senator Hillary Clinton (D-NY) and Senator John McCain (R-AZ) called for a temporary suspension of all gasoline taxes, about eighteen cents per gallon. Senator Barack Obama (DIL), who had played a prominent part in Senate passage of the 2007 energy bill, opposed this purely political gesture. Instead, he called for Americans to inflate their tires to the rated psi; this suggestion was less a policy idea and more a twenty-first-century version of Jimmy Carter’s long underwear. Once there was an expectation of endlessly rising oil prices, however, history indicated that prices would soon be going down. According to Brown et al. (2008), rising prices were due to increased demand, a weak dollar (for much of the period, the price of oil was stable or falling when translated 43 44

Sales fell in the second half of 2011. Goldman Sachs raised its forecasts for oil prices and put $200 at the high end of the range; members of Congress suggested the price would go to $200 or even $250 if the other party’s proposals were enacted.

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into euros instead of dollars), and worries about turmoil in major oilproducing regions. But these authors argued that there would be a major supply response to such high prices as there had been in the 1980s. Demand, too, would adjust over time. Their conclusion was that a price above $100/bbl “absent supply disruptions” was probably not supportable any time in the next ten years. This forecast was not readily acknowledged in the halls of Congress, where high gas prices were spurring a “do something” process once again. But amid the banal energy statements and blame rhetoric, legislative proposals emerged that were either useless in the short run or likely to do more harm than good. Republicans called for such steps as more offshore drilling (which would take years to bring to market) and nuclear power to provide fuel for plug-in hybrid autos – which at that time did not exist as commercial products. One Republican proposal added $1.2 billion to develop more and better batteries for the plug-ins that did not exist. In fact, none of the Republican proposals would actually have had any impact on energy markets for a long time, if ever. The Democrats’ proposals, however, were potentially harmful. The main Democratic attack on prices, S. 2991, was introduced by Senate Majority Leader Harry Reid (D-NV) in May under the title the “Consumer-First Energy Act of 2008.” The bill revived the ideas the Democrats had sought before to lower prices: anti-price-gouging laws, elimination of oil industry tax benefits, antispeculation provisions, and windfall profits taxes. On just about every count, Reid’s legislation would have had a negative impact (Irwin et al. 2009). One of the worst components, an antigouging provision, was a popular concept in Congress but would also have had many undesirable consequences. In the event of a wholesale price spike, many stations were likely to have closed rather than risk prosecution for higher prices. An outcome like this was probable, because what constituted “gouging” was only an undefined “unconscionably excessive price” – an arbitrary and potentially politicized definition. There was no clear classification of what would constitute gouging, nor in reality could there be.45 Nevertheless, through the summer of 2008, Democrats tried repeatedly to get their bill, or at least portions of it, passed. As Harry Reid lamented, 45

See, for example, Thomas Sowell, “Defining Gasoline Price ‘Gouging’,” Capitalism Magazine, available at http://capitalismmagazine.com/2005/11/defining-gasoline-pricegouging. It should be noted that Congress had asked the Federal Trade Commission to investigate gouging after Hurricane Katrina and report in the spring 2006. When the report was presented, the FTC said that there was little evidence of what they were willing to call gouging. This led one senator to call for an investigation of the FTC.

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he was unable to get a much simpler bill simply to curb speculation. He complained that Republicans continually blocked the effort. Again, presidential candidates called for release from the SPR. Curiously, not only did the Bush administration refrain from a politically popular draw-down, officials actually were buying oil – at very high prices – instead. By mid-May, with the price around $125/bbl, Congress passed a bill that suspended purchases. But efforts to get a release of oil from the SPR failed; Senator Obama, the Democrats’ nominee for president, endorsed such a move, but there was no action by the Bush administration. By fall, the inevitable occurred anyway: the price of oil plummeted from its high of $147/bbl in July to around $90 in October. The market faced the prospect that the United States – in the midst of a financial crisis – would endure a recession and that reduced economic activity would mean lower oil demand. Indeed, a month later, the price of a barrel of oil was only $60, and early in the new year, it would bottom out at about $36/bbl, a level not seen since 2004. The worst recession since the Great Depression had begun. The George W. Bush administration had come to an end. It was marked by eight years of intense activity on energy policy, important references in every one of his State of the Union Addresses, and passage of two large energy bills. But what had been accomplished? What had changed? The United States was importing less oil as a percentage of consumption in 2008 than it had in 2005 (that was the peak year, when more than 60 percent of U.S. consumption was imported), and imports were about what they had been when Bush took office; the real price was much higher; Bush had funded projects such as hydrogen vehicles that had no hope of success; he had an about-face from encouraging drilling to discouraging consumption that did not do much of either. There were only a few policy measures of consequence, notably the 2005 loan program and the ethanol mandate. But the latter resembled every other failed technological mandate – most especially the synfuels program of 1980, which was also supposed to produce 20 percent of transportation fuels in about fifteen years. The ethanol mandate was different in an important way: it was likely to last longer because it was supported by a key lobby (agriculture), would cost far more money, and would do more damage on a variety of margins. Could things get any worse?

4. Nothing Learned As a candidate for president, Barack Obama argued essentially that the problem with U.S. energy policy was that America had not tried hard enough,

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had not spent enough, had not put in place enough mandates and pursued them to a successful conclusion. He invoked the Apollo program as to what America could do and what he would do. No mandate would be too grand: 36 billion gallons of ethanol? Insufficient. He called for 60 billion gallons by 2030. A 15 percent RPS? He argued for a 25-in-25 goal (25 percent in 2025). He called for energy independence, particularly independence from Middle East oil, in 10 years; an 80 percent reduction in carbon emissions by 2050 through a trading regime of cap and trade, the system that, as discussed in Chapter 7, had worked well with respect to sulfur-dioxide emissions; $150 billion for development and commercialization of clean energy technologies; 1 million electric cars on the road by 2015; and a windfall profits tax on oil companies – all of which would lead to the creation of “5 million” new green jobs. Given that he was in the midst of a presidential campaign, it was uncertain whether Obama was simply using popular rhetoric (because gasoline was selling for about $4/gal in August), or if he had a plan. But his intentions remained unclear even after he became president, because in January 2009, the United States was facing difficult economic times. Energy was no longer at the top of the agenda. The Bush era had ended with a financial crisis and rising unemployment; economic turmoil produced a major electoral victory for Democrats. They held large majorities in both houses of Congress, and they passed a massive $787 billion stimulus bill – officially the American Recovery and Reinvestment Act (ARRA) of 2009, to “jump-start” the U.S. economy. That was the clich´ed rationale amid a very definite demand on the part of the American people that their representatives “do something” to respond to (and solve) an economic crisis. Although most Republicans opposed Obama’s stimulus bill, most agreed that something needed to be done. As Senate Minority Leader Mitch McConnell (R-KY) argued, “The Republicans are ready to support a stimulus bill. That really hasn’t been in question.”46 But the legislation that finally passed showed that Obama was indeed serious about his energy plans. About $40 billion was designated for various energy projects, and he used two sections of the EPAct of 2005, one from the 2007 law along with some provisions of the stimulus bill (notably the Section 1603 program47 ) to begin dispensing huge amounts of money for 46 47

CR, 111th, Feb. 6, 2009. “The purpose of the 1603 payment is to reimburse eligible applicants for a portion of the cost of installing specified energy property used in a trade or business or for the production of income. A 1603 payment is made after the energy property is placed in service.” It expired in 2011. The program was touted as a way to create jobs, but a House study in

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alternative energy commercialization projects.48 In a way, it was a backdoor method of enacting the energy policy President Obama had advocated as a candidate without having to bring a new energy bill to a vote. But the goals he had advocated during the campaign if anything increased once he was in office. In his 2011 State of the Union speech, he would call for an RPS of 80 percent by 2035, saying, “[W]e’ll fund the Apollo projects of our time.” Admittedly, it was a revised version of an RPS, one for “clean” energy (termed a CES), not just renewables; he did not exclude nuclear power or even natural gas. Nevertheless, it seemed a policy escalation – an escalation with dubious prospects. His goal of 25-in-25 had seemed to be almost certainly unattainable; 80-in-30 seemed completely out of the question. But Obama persevered with his energy agenda. Through the extant authority, the DOE dispensed $36 billion in loan guarantees, about $21 billion of which went to solar and electric car projects. To achieve Obama’s aim of 1 million electric vehicles, Congress agreed to a $7,500 tax credit for buyers of electric cars, which complemented the DOE provision of almost $5 billion in loans and grants to car and battery companies. Utility-scale solar and wind projects received funding, and in some cases price guarantees, for their output, and a CAFE fleet average projected at 35 mpg by 2020 was moved up four years to 2016. In fact, the administration announced its intention to increase that to 54.2 by 2025 – an extraordinary leap given that no passenger cars on the road in the United States as of this writing can reach that goal.49 Although Obama said the auto industry was behind him, according to one auto expert, the auto industry did agree but did not believe in it. “We’ll agree to anything that’s 15 years out,” an anonymous auto industry executive was quoted as saying. Given the technological hurdles, this source expected the mandate simply would be revised or

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2012 claimed that the data showed that few long-term jobs had resulted. Committee on Energy and Commerce Memorandum from “Majority Staff,” June 18, 2012. Section 136 of the Energy Independence and Security Act of 2007 established an incentive program, the Advanced Technology Vehicles Manufacturing (ATVM) Loan Program. Sections 1703 and 1705 (the latter amended by the stimulus bill) were programs for loans to clean and renewable energy development. But the stimulus guaranteed that the size of these loans individually in some cases and in total would be quite large. A large percentage of the ATVM loans went to Ford and Nissan Motor companies. By 2011, the 1705 program had closed. The administration has also suggested a goal of 62 mpg, even less likely to be reached. Obama said that automakers endorsed the 65 percent increase to 54.2 but that has been rebutted. According to the Daily Tech’s blog post of June 27, 2011, automakers thought an increase only to the low to mid-40-mpg range would be fair, at http://www.dailytech.com.

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dropped. “This is a pipe dream,” the source continued. “There’s no science behind it.”50 As of 2012, I can only speculate on the outcome of these projects. Yet, if history is to be the guide, revisions or abandonment will probably be true of everything on the list above. Nearly the entirety of Obama’s campaign promises, and what he proposed in his 2011 address, are either not known to be technologically attainable or are attainable technically but are not viable economically. The Obama administration has seemed oblivious to the technological problems of solar and wind electric power generation. The two sources, although clean, are intermittent, undispatchable,51 require huge spaces for large-scale efforts, and are costly. Until there is low-cost massive grid-scale energy storage, which as Nobel laureate physicist Burton Richter argues means storage “capacity in gigawatt-days not kilowatt-hours,” solar and wind cannot replace base load coal and natural gas electric generation.52 The Obama administration seems to believe it can replace conventional base load generation and has dramatically increased wind and solar subsidies. Subsidies to the former were $4.9 billion in 2010, a tenfold increase from 2007. Solar, too, received a huge subsidy boost. Of course, as noted in Chapter 6, proponents (e.g., Pernick and Wilder 2007) have argued that large subsidies for alternative energy technologies are just a leveling of the playing field because conventional resources have received large subsidies for decades. But then solar and wind have also been subsidized in one form or another for much of the past forty years, with little to show for it. Advocates have argued for decades that solar and wind costs would fall if there were mass production; that is, alternatives need subsidies to start commercialization so that costs can come down. As Joseph Lindmayer, a solar cell expert, argued, “cost breakthroughs will come as soon as mass production starts.” That prediction, however, was made in 1975, after four bills increasing support for solar research, development, and demonstration had passed Congress (Barnes 1975). The same article noted a National Science Foundation funded study by Westinghouse, which predicted solar heating would be cost-competitive with conventional technologies by 1985–90. Large increases during the Carter era did not 50

51 52

Quoted by Henry Payne, Detroit News, July 29, 2011, available at https://detroitnews.com. It also was constructed to disadvantage foreign automakers because it gives advantages to large trucks, which appealed to the American companies who endorsed the higher standards. That is, power cannot be generated on demand. Interview with the Stanford University News Service, Jan. 9, 2012, at: http://news.stanford .edu.

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do the trick of achieving solar and wind commercialization. In fairness, production costs of some solar equipment have fallen. Photovoltaic (PV) panels were much less costly in 2012 than they were even ten years earlier. But recent studies have shown that generating electricity from PV installations would still be more costly than natural gas even if the price of PV cells were zero.53 Yet, the Obama Administration is clearly unconvinced. As of 2010, on a per-unit-of-energy basis, as Table 8.1 shows, the subsidies for wind and solar had expanded considerably. These technologies received many times the subsidies for all other forms of electric generation, even carbon-free hydro, nuclear, and geothermal. But subsidies notwithstanding, as the DOE’s own Energy Information Administration shows, by 2016, onshore wind generation will still cost roughly 50 percent more on average than natural gas; off-shore wind generation will be more than twice as expensive; and solar thermal and photovoltaic even with subsidies will produce power that costs several times more than gas-fired power, and will be considerably more costly than new nuclear or coal with the added cost of carbon capture and sequestration. Though both wind and solar can have niche roles in electric generation, they both require the right combination of climatic factors to be useful at all. But their lack of reliability makes them unable to substitute for gas, coal, or nuclear. Consequently, in some states, utilities must burn coal anyway to have a backup ready in case the wind or sun is not available in sufficient quantities. RPS mandates that rely on solar and wind also raise the costs of electricity; rules typically require power distributors to buy the power at high prices (feed-in tariffs as noted in Chapter 6), which in turn means higher prices for users. Guaranteed high rates have proven in some parts of the world to be an invitation to fraud. In Spain, for example, an audit of solar generators showed that it was claimed that some of the solar electricity sold at those higher rates was being generated at night.54 There have been hints in this agenda that the administration has adopted a Carter-like belief in another respect: that energy policy should be used to make Americans better people. In 2009, Secretary of Energy Steven Chu likened the American public to teenagers who “aren’t acting in a way they really should act,” a comment later qualified in a way that did not make 53 54

See “Solar Power Cost: Don’t Forget Intermittency.” Available at http://www. masterresource.org. Discussed at http://www.theecologist.org, Apr. 16, 2010. It should be noted that PV systems are unlikely to produce electricity at night but solar thermal arrays could in theory store daytime heat for nighttime generation.

Crisis 2.0 Coal Natural Gas and Petroleum Liquids Nuclear Hydro Geothermal Wind Solar

319 $0.64 $0.64 $3.10 $0.75 $12.50 $52.42 >$700.00

Table 8.1. Direct Federal Subsidies for Electric Power Generation Subsidies per megawatt-hour electricity produced. Fiscal Year 2010. Source: Energy Information Administration, July 2011.

any sense.55 Thus, energy policy becomes somewhat less about energy and more about a belief system. The Obama administration also seemed to lack any concept of the process of technological adoption or of what can be achieved through legislative acts and centralized direction. In early 2012, Secretary Chu, in remarks to a Detroit auto show, claimed that the price of car batteries that power plug-in hybrids by 2015 “will be reduced to $3,600” and would be reduced by more than half again by 2020.56 Chu made reference to a cost for battery packs of $12,000 in 2008. But what was the average cost when Chu made his remarks? According to most sources, in 2012, the cost of batteries had not come down much if at all. Electric car battery packs cost at least $12,000, often more.57 Overall, however, Secretary Chu was making a market failure argument: the United States must subsidize electric vehicles because they will be cost-effective, but the market was not recognizing it. At the time he made his remarks, few experts would have agreed with him. Although he had begun the process with the stimulus, Obama was unable to address all parts of his energy agenda through that legislation. For example, the administration had not established a national RPS, nor had it created a cap-and-trade program for carbon emissions. These goals were set aside for the larger economic goal of the stimulus. Soon after its passage, however, Representative Henry Waxman (D-CA) introduced a bill 55

56 57

Wall Street Journal blog post Sept. 21, 2009, at http://blogs.wsj.com. The qualification was that Chu meant teenagers should be educated about energy – a vastly different proposition from what he actually said. Quoted by Reuters, Jan. 11, 2012, available at http://www.reuters.com/article/2012/01/11/ us-autoshow-batteries-idUSTRE80A1FA20120111. See for example, “Ford CEO: Battery Is Third of Electric Car Cost,” Wall Street Journal, Apr. 17, 2012, at: http://online.wsj.com/article/SB100014240527023044t327045773500525 34072994.html. It was estimated that Ford’s electric battery packs cost $12,000–$15,000 each. A more general review of battery packs, also from 2012, put average costs at around $17,000 each, with some as high as $36,000 each. At: http://www.evsroll.com/ Electric Car Battery Cost.html.

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encapsulating the ambitious goals for climate and energy on which Obama had campaigned. His sponsorship, along with fellow Democrat Representative Edward Markey (MA), led to the short identification of the bill as the Waxman-Markey (W-M) bill. Officially it was called the American Clean Energy and Security Act of 2009, and it ostensibly was intended to address climate change. Although climate change itself became an important and divisive issue after 2010, the bill had far greater goals, including job creation, energy independence, and economic and social transformation. It ran 938 pages in its original draft and 1,428 pages when it passed the House and was sent on to the Senate. By setting its goals all the way to 2050 – emissions were scheduled to be reduced 83 percent by 2050 – the bill would surely have failed even if it actually had passed Congress. The thinking appeared to be, set up a system – cap and trade – for carbon emissions reductions, and the success of the program, bureaucratic inertia, and perhaps bureaucratic internalities would have obligated future Congresses to follow through. In fact, there was no way the bill could possibly have worked for forty-one years without frequent revisions, possibly major alterations, especially given the vast scope of the bill. It was to double the amount available for loans (to $50 billion) to advanced technology vehicles, as well as infrastructure spending for electric cars and a “smart grid,” a computerized national electricity system in which consumers could be aware in real time of their electricity costs and options. The reduction in emissions slated for 2050 suggested that by that time, nearly all coal- and gas-fired electric power would be gone. In its place there would have to be wind installations, utility-scale solar, geothermal power, and maybe some hydropower and perhaps even nuclear. But in a sense, it was an 80+-in-2050 RPS. It would, of course, create millions of “green jobs.” The quotes around “green jobs” are there first because the concept was repeated endlessly by the Obama administration and second because no one can really define just what these jobs are. A survey of a number of studies of green jobs all had different definitions (Morriss et al. 2009). For example, one study had existing jobs in nuclear power as green but not future ones; others did not include any nuclear power jobs; still others included them all.58 This issue became a key focal point because of a high unemployment rate and conflicting data as to how much the subsidization of an industry 58

A U.S. Conference of Mayors Report had different future categories; a UN report omitted them entirely, both of these cited in Morriss et al. (2009). The nuclear industry unsurprisingly defines all nuclear power jobs as green (see Marvin Fertel, “In Energy, Nuclear Leads Transition to Green Jobs,” 2012, Nuclear Energy Institute, http://www.nei.org).

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actually leads to net job creation.59 A study in Spain, for example, caused considerable controversy when it claimed that for every job the government’s green agenda created, more than two were lost in the private sector. This was due in part to the changing composition of production and also partly to the fact that green energy simply costs more, leading, according to that analysis, to reduced output and employment in the economy as a whole (Calzada 2010).60 Another issue arose when it became clear that firms could manufacture wind and solar systems more cheaply in China than in the United States or European Union. As the world’s developed economies recovered slowly from the recession of 2009, solar industry lobbies, and their supporters in Congress, accused the Chinese of unfairly subsidizing their own green manufacturing to dominate the industry, and solar advocates called for trade retaliation. But in the 2009–10 congressional energy debates, the major problem for legislators was the cap-and-trade system for CO2 emissions. Although cap and trade has worked well with sulfur-dioxide emissions from power plants, the cap of pollution allowances acts as a tax on emitters, which would of necessity be passed on to customers. It sounds better than a tax, but it is really a close substitute: it only substitutes a government-mandated quantity for a mandated price (Weitzman 1974). If a quantity program is calibrated correctly, it in fact should have results that are indistinguishable from a price (tax) program. Republican critics referred to the WaxmanMarkey (W-M) bill as “cap and tax,” rather than cap and trade, which was essentially correct. But in the end, it was too controversial, and although it passed the House, it died in the Senate. Most Republicans were against WM, but some Democrats from states that primarily burned coal to generate electricity joined the opposition.61 Consumers in those states stood to pay the highest costs since coal emits more than twice the carbon per unit of energy as natural gas. Consequently, most legislators from states dependent on coal-fired electric generation opposed the measure regardless of party. While the Senate avoided W-M, Senators John Kerry (D-MA) and Barbara Boxer (D-CA) introduced a version of it called the Clean Energy Jobs and American Power Act. It had many of the same kinds of provisions as the House bill, but it also did not advance to a floor vote. By spring, 59 60 61

For the argument that government inherently never creates jobs, see Matt Welch, “Creation Myth,” Nov. 2011, available at http://reason.com/archives. Also, Green (2011) expands the analysis to all of Europe. There was some concern among these senators that failure to pass some kind of legislation would lead to more onerous regulation by the Environmental Protection Agency, but senators from coal-burning states remained opposed to W-M or the Kerry-Boxer bill.

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Kerry was ready to try again, with the American Power Act, cosponsored this time by Senator Joe Lieberman (I-CT); originally the pair had been joined in the endeavor by Senator Lindsay Graham (R-SC) in an effort to achieve a bipartisan consensus. But the Senate was too divided. Given that there was no gas price crisis anymore and that climate change was too far off and too abstract to generate urgency, the narrow local and regional views prevailed.62 During the summer of 2010, President Obama and congressional Democrats reportedly wanted to find a way to get some pieces of an energy bill passed by side-stepping divisive cap-and-trade issues. But these efforts were unsuccessful. There would be no major energy bill, and no cap-andtrade regime for carbon emission in 2010. There would be none in 2011 either. Despite a focus on implementing a major energy program in Obama’s State of the Union Address, it was clear that he would have little hope of achieving it since the Republicans regained control of the House in the 2010 election. Nevertheless, the Obama administration’s general energy goals were advancing through aggressive promotion of existing programs and also by statutes of individual states. States were being encouraged to adopt, and were aided in the pursuit of, RPS goals. Wind farms and solar installations proliferated. During September 2011 alone, the DOE gave out $7.9 billion in loan guarantees before the loan authority expired at the end of that month. In effect, the DOE had become a major source of venture capital – making again an implicit market-failure argument; however, venture capital is a role that government generally is ill suited to play (DeHaven and Edwards 2009).63 In an effort to keep such programs alive, and in fact to expand them, Democrats introduced the Clean Energy Financing Act of 2011. It 62

63

There was, however, a major distraction – a large-scale oil-well blowout in the Gulf of Mexico. It was referred to in Congress as “the worst ecological disaster” and “the biggest environmental disaster in our Nation’s history” and led to blame and proposed legislation that ranged from bans on offshore drilling, to punishments of BP (the company that owned the well), to efforts to curb the authority of the agency that was supposed to regulate offshore drilling. It proved less of a disaster than first thought (although as of this writing the full extent of the cost is still uncertain); BP was persuaded to set up a compensation fund; and drilling was temporarily halted offshore in the Gulf of Mexico. This last gesture eventually led to charges the following year that that ban had caused or at least contributed to high gasoline prices. Also, Stephen L. Carter, “Energy Department Is No Venture Capitalist,” Bloomberg View, Sept. 28, 2011, available at http://www.bloomberg.com. Even officials have recognized the problem of government as venture capitalist. In e-mails released with respect to the bankruptcy of the solar cell manufacturer, Solyndra, as noted in Chapter 5, Obama economic advisor Lawrence Summers observed that the “gov is crappy at vc [venture capital].”

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had not passed as of this writing, and given a number of problem loans from the guarantee program, its success appeared doubtful. In the meantime, even as the Obama administration has pursued its energy agenda, the energy world has been in the process of transformation. Although among many policy makers, the energy narrative has remained unchanged,64 the evidence is more confounding. The transition to a clean energy future is couched in terms of the end of oil and natural gas and the environmental problems of transition to coal or to expanded use of nuclear. But improvements in drilling technology – notably horizontal drilling and hydraulic fracturing or fracking65 – have opened apparently vast quantities of oil and especially natural gas to exploitation. Estimates are that the United States could expand its use of natural gas and still have reserves that would last for another century. A fuel thought on the verge of complete depletion in the 1970s began to seem more likely the fuel of the near future. Proponents of “peak oil” or those who seek the transition to a “clean energy economy” no matter how large the extant fossil resources, have tried to (a) discredit the belief that the discoveries are really very large;66 (b) show that the process of exploiting them – hydraulic fracturing, for example – may be dangerous to the environment (Wiseman 2009) and in fact may be worse than coal in terms of greenhouse gas emissions (Howarth et al. 2011);67 and (c) argue that it is bad policy to rely on fossil fuels because the United States must transition to a green-energy economy anyway (Heinberg 2011).68 64

65

66 67

68

As Representative Mike Quigley (D-IL) noted in House remarks, “[On energy policy] there are actually many things we can all agree on. We agree our dependence on foreign oil endangers our environment, hurts our economy, and weakens our national security.” CR, 112th, May 4, 2011. Fracking is the utilization of fluids under high pressure to fracture rock formations, releasing oil and gas if present in the rock. It is actually a technology that is sixty years old but was developed by George Mitchell in the 1980s and ’90s in part because of a benefit contained in the 1980 windfall profits tax legislation to exploit unconventional gas and oil resources. A series in the New York Times by Ian Urbina in 2012 suggested that there was far less gas available in shale formations than people were being led to believe. The argument in Howarth et al. (2011) has been strongly rebutted by Cathles et al. (2012). The latter paper argues that the anthropogenic global warming emissions of shale gas are likely to be less than one-half those of coal. The film Gasland attempted to demonstrate this and was nominated for an Academy Award. Some experts, notably John Hanger, former secretary of Pennsylvania’s (the state Gasland features) Department of Environmental Protection, have come forward to dispute the inferences and conclusion made in the film. Said Hanger, “Gasland presents a selective, distorted view of gas drilling and the energy choices America faces today. If Gasland were about the airline industry, every flight would crash and all airlines would be irresponsible.

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Arguments over the safety and efficacy of fracking have only just begun and have certainly not been resolved.69 Although a considerable amount of research needs to be done and experience tracked, if there is indeed an opportunity to expand the use of natural gas safely in the United States, there would be less reason to pursue the promotion and commercialization of alternatives. The administration’s program of mandates and new technologies to be brought to commercial fruition by central direction and wise legislation seems an artifact of the late 1970s. Of course, as noted earlier, as of this writing, there is no definitive answer to how it will all turn out. Maybe there will be breakthroughs in solar, electric cars, cellulosic ethanol, even nuclear fusion; or maybe there will simply be bouts of high gas prices, futile energy legislation, “do something” crises – a recapitulation of a four-decade process. Given the history, the odds would suggest it will not turn out well. Energy policy over the past forty years has been a pursuit not of policies that failed but rather of conceptually failed policies.

5. The Department of Energy, Thirty-Four Years Later In 2011, the Obama administration generally, and the Department of Energy in particular, faced a scandal. One of its largest loan guarantees, $535 million, had gone to a company called Solyndra, a maker of a new type of solar panel. The company and its product were touted by President Obama, Vice President Joe Biden, Secretary Chu, and other senior administration officials as a prime example of how to create green jobs and lead the transition to a green economy. The company was backed by a leading Obama fundraiser, and after a second guaranteed loan, Solyndra declared bankruptcy and closed its doors. It was not the only failure among the thousands of awards from the DOE, but as of this writing, it was the largest and probably the most politically tainted. Outraged Republicans demanded investigations. In one sense, the outrage seemed more pose than genuine. How could a government body dispensing billions of dollars to companies creating complex technologies not be politically tainted at some point? Every other administration, including the Bush administration, had its favored

69

In Gasland, the gas industry is unsafe from beginning to end and is one unending environmental nightmare with no benefits. Gasland seeks to inflame public opinion to shut down the natural gas industry and is effective. In pursuing this goal, Gasland treats cavalierly facts both by omitting important ones and getting wrong others.” For a balanced presentation by both sides on this issue, see “Forum: Just How Safe Is ‘Fracking’ of Natural Gas?” Available at http://e360.yale.edu/feature/forum just how safe is fracking of natural gas/2417.

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lobbies and corporations (e.g., Halliburton) that benefitted from government largesse. Members of Congress make a point of lining up rents for preferred constituents. Former House Speaker Representative Nancy Pelosi was personally invested in a company that would have benefitted from a bill to subsidize natural gas-powered vehicles. Still, the Solyndra scandal was both large and visible and led to calls for Secretary Chu to resign.70 But my view is that Chu’s resignation should be a side issue. The scandal raises more basic questions: Just what is the DOE actually doing, and what is it supposed to be doing? At this point in history, what is its reason for being? Does it enhance social welfare or is it an exemplar of government failure? The Department of Energy was created by the Department of Energy Organization Act, signed into law by President Carter on August 4, 1977.71 According to Title I, the Declaration of Findings and Purposes, The Congress of the United States finds that – (1) the United States faces an increasing shortage of nonrenewable energy resources; (2) this energy shortage and our increasing dependence on foreign energy supplies present a serious threat to the national security of the United States and to the health and welfare of its citizens; (3) a strong national energy program is needed to meet the present and future needs of the Nation consistent with overall national, economic, environmental, and social goals; (4) responsibility for energy policy, regulation, and research, development and demonstration is fragmented in many departments and agencies and thus does not allow for the comprehensive, centralized focus necessary for effective coordination of energy supply and conservation programs; (5) formulation and implementation of a national energy program require the integration of major Federal energy functions into a single department in the executive branch. (91 Stat 567; 42 U.S.C. § 7111) Thirty-four years later, where do things stand? Does this title really describe the U.S. energy situation? As this book has argued, basically the answer is, no. An increasing shortage is true as a tautological deduction (i.e., finite resources are finite), but reserves of U.S. oil and natural gas are rising, and coal reserves and nuclear 70 71

Representative Brian Bilbray (R-CA) called the loan guarantees to Solyndra “felony dumb.” P.L. 95–91, Stat. 565.

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resources represent fuels potentially available for centuries to come. As for energy security, the concern has been ill defined and often exaggerated. In fact, the American energy market has endured production disruptions (as well as war and economic turmoil) throughout the world. Labor strife, wars, revolutions, natural disasters – the reasons have been many. The places are many as well – Iraq, Iran, Libya, Venezuela, and Nigeria have all experienced supply disruptions due to political strife and natural disasters. As a result of these disruptions, prices have risen, but modern civilization did not come to a halt. The American way of life did not end. The U.S. economy, after a pause, continued to prosper. Indeed, what has become clear is that high prices actually lessen energy security concerns, as supply disruptions bring with them price-induced curtailment of quantities demanded.72 There have not been gas lines after the policies that produced them were abandoned. The fear of embargoes lingers, but since the first one, none have been declared by a group of producers. Then again, because the result of the embargo was to damage the countries imposing it far more than it damaged those that were cut off, embargoes appear unlikely. Although people have worried about terrorists or the government of Iran blocking the Strait of Hormuz and choking off the oil shipping lanes of the Persian Gulf, there seems to be little reason to believe that there would be anything more than short-term effects in the market.73 A major war in the Middle East could be more damaging, especially if it included Saudi Arabia. Conflict could have a large-scale impact on the world economy, but it is likely to be temporary also and will affect the United States less than it would other developed countries. The SPR has had enough oil to make up the shortfall from Saudi Arabia to the United States for a year, by which time there would undoubtedly be a major international effort to restore production.74 Some have suggested scenarios of oil countries essentially committing economic suicide, destroying their own oil capacity to spite us.75 Some experts (e.g., Taylor and van Doren 2008) consider this scenario too farfetched to entertain seriously. But if a 72

73

74 75

Or, as Pierre No¨el has written in an editorial, “[H]igher prices are not an energy security problem but a solution.” “Challenging the Myths of Energy Security,” Financial Times, Jan. 10, 2008, available at http://www.ft.com. According to W. Jonathan Rue of the Institute for the Study of War, Iran does not “have the ability to effectively block the strait.” Quoted in “Iran Can’t Blockade Hormuz, Analysts Say,” Dec. 30, 2011, available at http://www.cbc.ca/news. There is some question as to whether the United States already has advanced contingency plans for such an event. See Bronson (2006). Saddam Hussein did in fact order the destruction of Kuwait’s oil production capacity as his troops fled during the Gulf War in 1991. This caused a massive oil spill and destruction of several million barrels per day for a few months. But by the end of the year, the price of oil had fallen.

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country such as Iran were to do something like it, the result would likely be just another spike in prices. Thus, the imposition of a “strong national energy program” for energy security or any other reason seems a misguided use of resources, especially given that, in the past, the stronger the efforts, the larger the failures. Strength has too often been conflated with maximal intervention in markets and greater top-down direction, the attempt to pick winners, and a reversion to directing resources based on political calculation. In 1977, the Carter administration could have justified creation of the DOE on the grounds that energy policy making in Washington was chaotic; just about every cabinet department in Washington, DC, was trying to put together an energy policy, and the need to rationalize the process by creating a central office for control may have made administrative sense. But with 16,000 federal employees and almost 100,000 contract workers, the energy bureaucracy is massive, and whether or not it is administratively rational, the outcomes of policy have been poor. No doubt some of the functions of the DOE are useful; the Energy Information Administration, for example, is an accessible repository of data. But the department was intended to do more than that, particularly to coordinate and formulate national energy policy. Yet, no coherent energy policy has ever emerged from it. A compelling question is whether the DOE is an instrument of sound policy or is instead just a compendium of various types of government failure. Consider the DOE with respect to three of the categories of government failure discussed in Chapter 2. Internalities: What is the metric for success of DOE programs? Using the language of the enabling legislation, the metric must provide a measure of “a strong national energy program.” But what measurement would show that that has been successfully and usefully achieved? Energy independence? Low prices? What is the metric within the programs that the DOE is asked to manage? In fairness to DOE officials past and present, the legislation they have been asked to administer either has had vague goals such as energy independence or unattainable goals, such as the demand for 2 MBD-oil-equivalent of liquefied/gasified coal, the goal of the Synthetic Fuels Corporation bill, which the DOE could not have attained at any sensible cost. Budgets for the DOE have increased substantially; in real terms, the 2011 budget was (if one includes stimulus funds) more than double the last DOE funding request of Jimmy Carter. For the 2012 fiscal year, absent stimulus funds, the budget was still 35 percent higher in real terms than the request for fiscal year 1981. No doubt the argument would be that such funds are necessary to improve existing programs, but then there is no clear

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metric by which to assess whether there has been improvement or not. One question the DOE does not seem to ask is, does this program do better than the market, presumably the only reason to undertake most projects in the first place? Concerns about capture, another internality, grow as budgets grow. Close ties between the Bush administration and oil companies and the Obama administration and alternative energy companies have raised many questions about who is benefitting from DOE programs and why. Perhaps the Solyndra scandal (Wolfe notes that scandal is often a prerequisite for change) will lead to changes in practice, but I would argue that as long as budgets are large and political considerations are present, there will always be those who are able to obtain rents simply on the basis of using existing institutions to their benefit. Hasty implementation/rising costs: This second category of government failure is an ongoing problem for DOE programs. An egregious example occurred in the fall of 2011, when officials guaranteed $7 billion in loans in part because the department would lose the authority over it on September 30, the end of the fiscal year. Overly optimistic projections of program costs have been the rule; in some cases, such as synfuels and ethanol, hasty implementation occurred because there was either a lack of available analysis or because it was ignored. Both were implemented largely because Congress and the two presidents felt under pressure to come up with a solution to a perceived energy crisis. Of course, politicians will often hear what they want to hear – certainly true with ethanol – or they will be influenced by a forceful presentation by someone with an ideological or pecuniary interest in the result. Thus, expanded oil and gas development often comes down to a contest between environmental groups and oil companies – each lobbying those legislators they feel will be most receptive or most malleable to their arguments. But supposedly it is up to the DOE to create and implement policy, and presumably to do so in a careful objective fashion, not subject to voter demands. This is, of course, unrealistic; the department is a part of a political administration and will be itself lobbying for some legislation in which political expedience or political panic is the motivator. Finally, there are distributional inequities. Programs that hand out billions of dollars create winners (some of which never produce a single useful product) and losers. Rent seeking is a zero-sum game. Nothing productive occurs with the rent-seeking process itself, and there are always trade-offs. When there is more money or tax breaks for alternative or conventional energy producers, someone else pays – often consumers or taxpayers. Intentions do not guarantee results. So solar subsidies designed to encourage consumer

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purchases of solar equipment in 2011 were actually going mostly to Wall Street limited partnerships that had figured out ways to take advantage at the expense of the system and in the long run at the expense of the consumer.76 There is no such thing as a free “energy” lunch. Does this mean that the DOE has outlived its usefulness and should be abolished? That is one possible conclusion to be derived from an analysis like this, but it is not the only one. Presumably, the DOE could be revamped and its mission made more modest. How this could be achieved is considered in Chapter 9.

76

See the op-ed by T.J. Rogers, “Subsidizing Wall Street to Buy Chinese Solar Panels,” Wall Street Journal, Dec. 8, 2011, available at http://online.wsj.com.

NINE

Modesty

Out of the crooked timber of humanity no straight thing was ever made. – Immanuel Kant (1784)

1. Markets What happens to U.S. energy policy when government is too confused to act or when it acts precipitously and fails? The answer is that policy reverts to a default position. Government effectively lets energy markets decide. I would emphasize the word “markets,” plural; although the rhetoric of policy switched years ago from fuels to energy, in reality, there is no one energy market and no single policy that would encompass all energy fuels and technologies coherently. In fact, too often, politicians conflate oil policy with energy policy – and come to illogical conclusions as a result. For example, even in recent years, officials have claimed that more nuclear power would lessen U.S. dependence on foreign oil, even though nuclear energy is used only to generate electric power, and, since the 1990s, little oil is used to produce electricity. In reality, the world market for oil is quite distinct from the mostly domestic market for natural gas,1 and both are quite different from markets for coal or electric power. To an extent, fuels markets are related, especially when there are substitution opportunities between them (e.g., coal and natural gas in electric generation; oil and natural gas in petrochemicals). But each fuel, each technology has its own dynamics, its own social spillovers, its 1

There is an international market for natural gas in a liquefied form. The price of liquid natural gas (which must be kept at a temperature of −162˚C or lower) varies greatly as of this writing. But a world market is growing and prices are likely to find an equilibrium (plus transportation costs) as it grows. The United States is thought to have the potential for entry into this market as an exporter.

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own history, its own legacy of both market imperfections and government interventions. When policy makers think grandly in terms of “energy,” they typically begin with an implicit assumption that with the right legislation, “we can solve the energy problem.” Just consider the preambles of the 2007 bill or the Waxman-Markey (W-M) bill of 2009 noted in the previous chapter. However, this assumption is wrong in almost every respect. First, it is generally unclear what “the energy problem” is. That is, what is the problem exactly that policy makers think they are trying to solve? Legislation based on an undefined or undefinable problem certainly cannot solve it. Of course, government officials and many energy policy advocates would claim that there is a specific problem to solve: the energy problem is America’s dependence on foreign oil. This condition underlies the longstanding U.S. energy narrative. The goal is simple: reduce dependence. But the claim itself, as well as the goal, is indefinite and filled with ambiguity. Why is the fact that the U.S. imports oil a problem? Overall, the U.S. economy has prospered despite reliance on oil for more than a century and on imported oil for forty years. What is meant by “dependence”? If it is a problem now, what level of imports, that is what level of dependence, is not a problem? And how do the proposed means – say, synfuels or solar energy – get the nation to that goal without causing more serious problems in the process? Because there are always trade-offs, what are the financial and social costs even if policy leads to a reduction of imports? Government officials usually tie dependence to U.S. national security. Sometimes, national safety is said to lie in total disengagement from the (always volatile) Middle East/Persian Gulf region. Scholars dispute whether national security has ever really been threatened because of oil imports (or whether if once true is still in 2012).2 Supply disruptions in the 1970s caused shortages only because of U.S. price and allocation controls; since then, disruptions only create price fluctuations. Oil is an entirely fungible commodity, and as long as there is an oil trade anywhere, U.S. refiners will always be able to acquire supply. The Middle East has seen wars, revolutions, and other forms of internal strife on a regular basis since the 1970s. Nevertheless, America has always been able to get supplies of oil. Moreover, as insurance against a truly major catastrophe in the region, however unlikely, America keeps about 700 million barrels of oil in storage. 2

Auerswald (2006), Stern (2006), and Taylor and van Doren (2008), challenge the idea of U.S. energy insecurity. MacAvoy et al. (2011) are among those advancing a security rationale for energy policy. See also the Journal of Energy Security, which provides various analyses of security concerns internationally.

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The second misconception of the premise (“we can solve the energy problem”) is that there is a legislative package that will provide answers to all energy issues. Thus far, as this book has shown, legislation has produced mostly waste and confusion. Still, elected officials seem forever smitten by the prospect of a fairy-tale ending: the U.S. achieves energy independence through an Apollo-type program that produces a low-cost technological energy panacea. When members of Congress talk about energy technology, they evince little knowledge of what technology might be possible, of what sorts of technological or scientific breakthroughs would be needed to make any particular technology possible, or what economic, environmental, and even social effects it would have if it became possible. Nevertheless, usually during a perceived crisis guided by the political need to “do something,” successive presidents and Congresses have acted on their rhetoric, failing in the process. At the same time, government, by failing in its interventions, has left energy mostly to markets. Ironically, things have not worked out so badly. The government has pursued failure; the pursuit has cost taxpayers many billions of dollars, but predictions to the contrary notwithstanding, American prosperity and way of life endure. Of course, it would be unfair to say that with respect to energy every act of Congress or every action of the Executive branch or of the DOE or of the government’s other agencies has been counterproductive. For example, energy research has produced some advances. Other useful developments seem entirely possible. But as long as elected officials think they will reinvent fire, negative outcomes are inevitable. Energy policy making needs a different mind-set. If the U.S. government is to be effective, it must proceed from a different premise – namely, legislation and top-down directives are limited in what they can achieve. Policy requires modesty – modesty in what can be accomplished and modesty in understanding. Modesty is perhaps a foreign idea among elected officials. But a modest approach is the only way to develop policies related to energy resources and technologies that have a real chance to do some good. Following are eleven ideas for policy.

2. Toward a Modest Energy Policy i. Change the Narrative U.S. energy policy will never get anywhere as long as policy makers cling to an obsolete narrative, because the narrative entails an analysis. The obvious first step is to change it.

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Old narrative: The United States has a dangerous dependence on foreign oil. The Organization of Petroleum Exporting Countries (OPEC) already in some sense does or will be able, to quote Representative Ed Markey (D-MA), to hold “our Nation hostage.”3 In the event of another Arab oil embargo, U.S. consumers will again sit in lines at gas stations. The world oil market threatens America’s economic health, standard of living, and way of life. New narrative: The United States does depend on the world oil market. This dependence is not dangerous, does not mean the country’s sovereignty or way of life is threatened. It can produce uncomfortable price fluctuations, but these tend to be transitory. No country can hold America “hostage.” That idea is meaningless. OPEC exporters are far more dependent on selling their oil than the United States is on buying it. Gas lines were caused by bad U.S. policies, not by OPEC or even the Organization of Arab Petroleum Exporting Countries (OAPEC), and shortages have not returned since those policies were abandoned. Old narrative: America (and much of the rest of the world) is running out of oil and possibly quite quickly; if America is unprepared, it will be catastrophic when the tap runs dry. There is the danger of a gap between supply and demand – the former falling inexorably, the latter growing exponentially. Growing nations, notably China and India, will demand more than the world can supply. Therefore, the United States must begin a crash program to find alternative domestic resources of fuel. This effort will move the country forward to the ultimate goal of energy independence. New narrative: The United States is not about to run out of oil or other fossil fuels that could partly substitute for oil – most notably natural gas. The old narrative expresses unwarranted panic. If in fact resource exhaustion was near, the effects would be gradual and would play out over decades. Prices would trend upward inexorably, but the long time frame would allow ample time for adjustment. The idea of a supply-demand gap is, as Alchian noted in 1974, simply nonsense – although it is repeated often to this day.4 If demand growth is greater than supply growth, the price will rise, which will discourage demand and provide an incentive for conservation. Because of nonappropriability and public goods issues, the government might usefully underwrite research into new energy technologies. But if and when fossil fuel prices rise high enough, there will be increasing incentives for entrepreneurs to pursue various technological paths. Crash government programs are generally based on political panic, 3 4

CR 111th, June 26, 2009. For example, “Oil Demand May Outpace Supply after Economy Improves: Study,” Global Refining & Fuels, Mar. 25, 2009, 37.

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arrogance, and misunderstanding, a combination that will typically lead to failure. The pursuit of energy independence is both fruitless and pointless. It is pointless to have an “Apollo” program to achieve something that cannot be achieved.5 When this is understood, energy programs will no longer need to be grandiose, meant to solve everything. Massive, unrealistic goals for substitution of costly new technologies for old ones can be shelved. Instead, policy makers can look at where market imperfections (e.g., antitrust, public goods) might suggest a role for public policy to make energy production and delivery more efficient. Old narrative: Fossil fuels are a problem, and not just because they are running out. New narrative: There are problems connected to fossil fuels, to be sure, but the fuels themselves are not inherently a problem. Fossil fuels have been largely beneficial to economic development for the past two hundred years, and they will play a major and largely productive role in developed and developing economies for the foreseeable future. Fossil fuel production and use create spillovers, such as pollution, and these must be addressed, but over the past half century, pollution from fossil fuels in the United States has been reduced significantly. Old narrative: Energy markets are rife with failure. Perhaps the most vexing of these failures is the lack of foresight in both energy and capital markets; government must step in with large-scale programs. New narrative: To a great extent, the markets have worked and will continue to do so; government failure has been more of a problem with respect to energy than market failure. The goal moving forward should be as Ronald Coase (1964) argued: to choose the economic organization likely to fail least. It should be noted that as of early 2012, various experts, politicians, and interest groups have adopted revised versions of the old narrative. It is said by some that fracking and expanded use of natural gas will lead to U.S. energy independence after all. The New York Times (Mar. 22, 2012) ran a story, “Inching toward Goal of Energy Independence,” that cited several expert opinions that the long-sought objective was near. Washington Post columnist 5

Arguably, if energy self-sufficiency were achieved, it would make United States energy supplies less secure. It would remove fears of an embargo, which are unwarranted in any case, but would make the United States more vulnerable to natural disasters, such as hurricanes that would shut down Gulf refineries, or droughts that would diminish biofuel output. Any disruption would have a much larger effect on the country if it were detached from world energy markets than if it remained connected to them. See Peter Z. Grossman, “Is Energy Independence Undesirable?” Oct. 6, 2012, at: http://theenergycollective.com/ pzgrosz/120186/energy-interdependence#comment-34966. Also, Stern (2006).

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Robert Samuelson weighed in with a column, “Energy ‘Independence’ after All?” a couple weeks later. But in general, this change in the narrative is only that through natural gas the United States can/will be energy independent, not that the underlying story has changed. This version of the narrative spins natural gas as the panacea that solves the conundrum. But there are many problems with this point of view. The recent glut of natural gas has lowered prices dramatically, but they are unlikely to stay low especially if demand for gas increases in the coming years. One lesson of history, in fact, is that gluts and falling prices are followed at some point by rising prices and fears of scarcity. As if to emphasize this point, natural gas prices have been rising in the second half of 2012, with predictions they will rise further in the years ahead. There are, of course, problems connected to energy. Energy production and consumption do involve externalities (actual market failures that may be helped by government action), and world political problems will affect U.S. access to, and price of, oil. Although it is true that the politically unpredictable Middle East and Persian Gulf areas supplies only about 20 percent of U.S. petroleum imports (which generally are falling as a percent of consumption), U.S. allies such as Western Europe and Japan rely much more heavily on the region’s supply. Consequently, as the past twenty years have shown, the United States, at present the world’s only superpower, will be called on for diplomatic and military support with respect to that region for decades to come.6 Although there are problems, there is no immediate crisis, there is no great moment in history where a transformational change must be undertaken and society turned upside down to do it. There are other problems in the United States besides energy – employment, education, health, and so on – that arguably demand as great or greater public attention and resources 6

Yergin (2011) argues that there remain major security concerns, including those from outbreak of a major war in the region that causes not only shutdowns of production in several countries but also the blockage of the Straits of Hormuz, the main choke point of the Persian Gulf, where each day millions of barrels of oil pass. Also, he notes that a major terrorist incident or social upheaval in Saudi Arabia could be far more disruptive than those in Iran, Libya, and other lesser contributors to the world oil market. All of these are possible and would involve the United States even if the direct impacts were manageable. No doubt planners both diplomatic and military have considered these possibilities and have extensive contingency plans. But then some of these problems would likely be short-term – al-Qaeda, for example, seems to possess little of its former threat – and others would impose major hardship on the oil producers themselves as well as the world economy. This would raise prices; in the event it was long lasting, it would induce more production and less consumption. As has been shown, the world economy can adapt.

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than energy. In any case, these will not be addressed by lavishing enormous expenditures on wind farms, ethanol, or high-speed trains.

ii. Make Energy Policy about Energy Initially, the 2009 Waxman-Markey (W-M) bill was supposed to be about reducing carbon emissions. Instead, it purported to be a way to “create clean energy jobs, achieve energy independence . . . and transition to a clean energy economy.” This wide-ranging promise was continuing a long trend. Since the 1970s, energy policy has been said to have near magical qualities. Legislation is always supposed to create jobs – thousands, hundreds of thousands, even millions – but there is scant evidence that energy-related acts of Congress are the best way or even a good way to create any jobs. Transferring government resources to one sector from another often leads to net losses in employment, as “green” initiatives in Europe apparently did (Green 2011). Often, officials make precise-sounding employment predictions. For example, in 1992, as Chapter 7 noted, President George H. W. Bush claimed that a bill would create 315,000 jobs. Such phony precision is unrefutable but is made without any real evidence that the promise would be realized if the measures actually became law. Over the years, proponents of energy legislation have claimed myriad benefits even beyond those related to jobs. Energy bills have been said to offer ways to reduce the U.S. trade deficit, aid farmers, build U.S. manufacturing capabilities, provide world technological leadership, strengthen the dollar, reduce inflation, boost economic growth, protect the American way of life, and restore America’s confidence. I find it hard to take seriously any energy policy that claims to deliver this sort of grab bag of virtues. Energy resources and technology are vital for modern society, but they are only means and are themselves morally neutral. If they are being used to inefficient or costly ends, then the use should be changed. But if the goal is to reconstruct social norms or save the American psyche, no energy policies exist that could achieve it. Admittedly, policies that claim such objectives may be politically useful because they sound worthy and no one can possibly measure success. Moreover, the evidence over the past four decades is that money will be spent, rhetoric with be expended, and income will be redistributed, but fundamentally nothing much will change. In my view, the only issue that should be addressed by energy policy is energy. Policy may help to ensure efficient delivery of energy, fair markets in energy resources, or opportunities for innovation in energy. Government may also help find other ways to utilize (or to benefit by saving)

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energy resources, and policy can be used to ameliorate externalities. But in any case, policy should be based on what every administration says is a prerequisite: explicit identification of a market failure. The identification should include an explanation of where the failure lies, and a clarification of why any government policy would actually be an improvement. Even with detailed analyses, there will, of course, be mistakes. But this kind of specification at least produces a sound basis on which success or failure can be judged. This is a modest goal, but then perhaps a goal that could actually be achieved, because it will tend to limit legislation that comes with extravagant (Waxman-Markey-like) claims. Which leads to point iii.

iii. Make Every Goal of Energy Policy Measurable, Explicit, and Realistic Energy policy goals should be stated simply and directly, and measurement of the results should be unambiguous and sensible. Basically, there has been a dichotomy in policy: either it is too vague to be measured or too ambitious to be achieved. In both instances, the goals have suffered from the problem of excess. A continual concern with energy legislation and federal directives is just how one measures success. In the 1970s, energy independence – seemingly as clear a goal as one could get – meant different things to different people. The Ford administration talked about independence equaling “invulnerability,” but there was no metric of invulnerability. It is not clear what the 2007 Energy Independence and Security Act meant by independence or what W-M took it to mean. Legislation has also promised “reasonable” prices, “windfall” profits, and many other concepts with multiple or really, no, meanings, and often only arbitrary ways to measure them. At the same time, some policies have had explicit numeric goals, but these have been unrealistic: 20 percent of all energy solar by 2000 or 36 billion gallons of ethanol by 2022. These goals are measurable, but they were considered unrealistic even by people in the administrations that called for them. Modesty in policy would mean a careful explication of the goal, as well as the means to achieve it. The Powerplant and Industrial Fuel Use Act of 1978 had a very clear goal: to end the use of oil and natural gas in electric power generation. Over the next decade, most new power plants burned coal, and oil was largely phased out as a generating fuel. The bill was premised on the belief that natural gas would become increasingly scarce and expensive.

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When this premise was disproven – gas was far more plentiful than forecast – the bill was repealed. But the Powerplant Act has been the exception. For the most part, for forty years, energy policies have lacked clarity, measurability, and achievability, and even when they seem to have failed, they are left on the books.

iv. Focus on Institutions Institutions are defined here after North (1990, 1994) as “the rules of the game.” That is, laws (formal institutions) and social norms (informal institutions) produce and structure economic incentives. Institutions may raise or lower social welfare generally, depending on the nature of the incentives they create. Often, these are unpredictable. That is, even a well-intentioned law – for example, California’s 1996 electricity statute – may lead to unproductive or even perverse incentives. How (and whether) institutions are enforced also will determine social outcomes. Laws that cannot be enforced may produce the opposite of what had been anticipated. National energy legislation, in recent years typically hundreds or even thousands of pages long, apparently unread by most if not all members of Congress, has a history of perverse incentives, exploitable loopholes, and politically motivated favors, so the outcome will be far from any purported aim. As Claude Brinegar (Ford’s secretary of transportation) warned his colleagues, when he was in the oil industry, he scoured laws to find loopholes, and he found “hundreds” of them.7 This book describes many examples of formal institutions that largely detracted from social welfare. But that outcome is not inevitable. In fact, as Chapter 6 explains, the United States has beneficial institutions that foster innovation (for example, laws protecting contracts or ones that define property rights). These rules form the basic structure of American economic and social life; enforcement of contracts, for example, is enshrined in the U.S. Constitution. Over the years, these rules have proven generally flexible and adaptable to changes in the economy and in society. But technological change creates continuing demand for institutional adaptation. In fact, technological change often runs ahead of institutional changes needed to accommodate them. New ideas and new resources may encounter rules that stymie rapid adoption. Institutional problems may be especially likely where there are multiple – federal, state, local – jurisdictions. 7

Discussed in Chapter 4, FPL, ERC Meeting transcript, CEA (Greenspan), Box 43.

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Questions of which rules apply, when, may present barriers to private energy undertakings if for no other reason than uncertainty over who has the authority to make and enforce the rules. A case in point is the proposed “smart grid.” The smart grid concept would reinvent the electric grid to make it interactive. Users and producers would be able to communicate in real time, sending and receiving price and load information, locating and correcting problems quickly. The electric system, which now runs one way only – from producer to consumer – would run in both directions. The technology could in theory make the electric market more competitive and more reliable. The stimulus of 2009 included money for smart-grid technology; $3.4 billion was appropriated for smart-grid development. In reality, the money was appropriated mainly to state “regulatory institutions [that] have not changed significantly from the forms set in place in the early twentieth century” (Kiesling 2010a, 150). State regulatory bodies have, Kiesling argues, tended to resist the kind of innovation smart technology actually presents. State regulators and many of the franchised monopoly electric companies that are subject to state rules are comfortable with a system in which the regulators set prices that allow the electric producer a reasonable rate of return. A smart-grid system would require institutional changes that would alter the roles of regulators from price setters to referees of a competitive market that facilitates “retail choice, retail competition, . . . and [reductions in] transaction costs” (Kiesling 2010b, 11). Essentially, the “rules of engagement” in this market will need to be defined (Tabors et al. 2010, 6). There are likely to be several areas in which government regulatory efforts could play a positive role – for example, in establishing technological standards – but perhaps the most important issue for government in terms of a smart grid is to decide who is in charge. At present, as Tabors et al. (2010) point out, it is not clear who will be in charge since the U.S. electricity grid involves at least three agencies of the federal government as well as state public utility commissions and public consumer advocates. Thus, “the opportunity for turf wars abounds” (Tabors et al., 2010, 6). But a thoughtful comparison of different institutional regimes seems both a necessary component of smart-grid development and one that government policy makers will have to undertake. The key questions in the crafting of legislation are the following: what is the goal, and among a range of alternative institutional arrangements, which is most likely to achieve it? Of course, legislators often start with this kind of goal only to produce arrangements that have quite the opposite effect.

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Not only can government policy produce change in institutions that fosters smart-grid innovation, but such change is a crucial element if the promise of the technology is to be realized.

v. Recognize the Trade-Offs Immodest energy policy offers free lunches. The California electric power restructuring bill A.B. 1890 assured all interest groups that they would be winners. But the bill actually contained multiple trade-offs. Guaranteed lowcost electricity for consumers placed new risks on distributors that would have to take losses in the event their costs rose above the mandated retail price. The law also forced distributors to divest themselves of their generating capacity, creating the heightened risk of blackouts if the generating market was insufficient or too costly. A competitive wholesale market for electric power was an innovation, but the rest of the bill increased the likelihood that with rising prices no distributor would be able to buy it. Going forward, all energy programs must enumerate the extent of costs explicitly, explain who will bear them, and address how the benefits of policy will be distributed. Virtually all energy programs that can be devised involve redistributions of income. For example, Obama administration programs have redistributed income from ratepayers and taxpayers to wind and solar energy companies. Carter also aimed to benefit solar energy companies, whereas Reagan sought to assist nuclear power producers. Costbenefit calculations can be ambiguous. Solar benefits might include the present value of pollution foregone,8 possibly entailing a high value (and low discount rate) based on an assessment of a relatively high positive probability for a massive catastrophe from global climate change (Weitzman 2007, 2009; Stern 2007). Others looking at the same information would be inclined to use far lower probabilities (even zero) of catastrophe and a higher discount rate and/or low damage costs for more moderate effects of global warming.9 In any case, long-term costs of pollution mean intergenerational trade-offs: either wealth is extracted from people living today to prevent or delay problems in the future or the burden is transferred by people today to the future. That is, of course, unless some new technology materializes, which does not cost very much and solves every problem. 8 9

That is, the benefit is the absence of cost related to particular pollutants – i.e., medical costs that would be assumed to be needed if the pollution were not abated. For broader discussions of discount rates, see Nordhaus (2008) and Tol (2009).

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vi. End Commercialization Subsidies Energy commercialization subsidies directly transfer wealth – whether given to producers or consumers – and are detrimental to the normal development of energy production. Subsidies are insidious and hard to reverse, because recipients have every reason to try to preserve them. If the beneficiaries have a strong lobby, officials will be reluctant to make any changes. This is true whatever the form of the subsidies: direct grants, loan guarantees, feed-in tariffs, or tax preferences. By definition, they attract rent seekers and lead to the picking-winners problem. Many government benefits have gone to fossil fuels. Critics of government energy policy are correct that oil and gas preferences are wasteful and should be eliminated.10 Benefits to nuclear power development have also been significant. In the years before the 1973 embargo, nuclear power received the bulk of all energy-related subsidies. Even in the twenty-first century, nuclear subsidies have been large enough to be termed “nuclear socialism” by energy expert Amory B. Lovins.11 They, too, should be stopped. Proponents of new, renewable technologies point to the decades of subsidies that fossil fuels have received and claim a disadvantage for “clean” energy. Accordingly, they assert that wind, solar, and other new technologies need subsidies to “level the playing field” (e.g., Pershing and Mackenzie 2004). Of course, subsidies for renewables are more than thirty years old and under Obama have vastly exceeded those for conventional resources. As noted in Chapter 8, on a per-unit-of-energy basis, subsidies for renewables far exceed those given to conventional resources, especially to natural gas. It should be noted that not all proponents argue that subsidies for renewables must be increased. Leonard (2011), for example, claims that the elimination of all subsidies, a “free market” in energy, would work to the benefit of renewables such as solar and wind. Although it is correct that elimination of subsidies would allow “the whole energy sector to respond better to price signals and consumer demand,” it has yet to be demonstrated that it “would benefit green energy sources by enabling them to fit into rational long-term energy supply strategies” (Leonard 2011). Given the large disparities of cost of production, this conclusion is questionable, to say the least. More likely, solar and wind will return to niche status. 10

11

An argument could be made that oil and gas tax preferences compensate for a high corporate tax rate in the United States, which has some effect on willingness to invest in energy development projects. But if that is the case, the answer lies in reform of the tax code generally, not in preferential treatment for a particular industry. Appeared online at The Weekly Standard, Oct. 25, 2010, http://www.weeklystandard.com/ keyword/Nuclear-Energy.

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Nevertheless, the federal government should test this proposition and eliminate all subsidies aimed at commercial energy development. This would include fossil fuels, nuclear power, and renewables. Subsidies by definition skew choices, create inefficiencies in the use of scarce resources, and are utilized all too often for political advantage. I emphasize here “commercial development” subsidies; R&D funding is a different matter.

vii. Support Energy R&D “[W]e expect a free enterprise economy to underinvest in invention and research . . . because it is risky [and] because the product can be appropriated only to a limited extent” (Arrow 1962, 619). Arrow’s analysis is largely correct. A market failure rationale for nonprivate support of research and development holds up theoretically and seems well grounded empirically. Government-funded research has led both to improvements in existing technologies and in some cases to new inventions.12 Narin et al. (1997) point to the very large (and growing) number of patents and research papers generated by what they term “public science.” Future invention and advances in pure science will require at least a measure of public support to maximize R&D’s social benefit. Unfortunately, government energy R&D funding has tended to follow political developments rather than scientific ones. R&D programs have started, then stopped, then restarted with a new focus – only to change again a few years later. Photovoltaic (PV) programs (Pegram 1991) have been an example of this kind of inconsistency – an example that provides a few important lessons for policy makers.13 As of 1974, $2.4 million (about $12 million 2011 dollars) was appropriated for PV research, a budget that was administered by the National Science Foundation (NSF). The program followed a kind of competitive model. The NSF offered a large number of small grants to fund various PV concepts to see which appeared most promising. Follow-up grants, however, depended on performance – progress that could be demonstrated to peer reviewers for the NSF. In other words, each of these 12

13

This includes tax incentives for private industry R&D. The development of fracking in expanding natural gas reserves was aided by tax incentives for development of unconventional gas and oil resources that were in the 1980 windfall profits tax bill; fracking development was also assisted later by logistical support from a DOE-funded laboratory (see Ted Nordhaus and Michael Shellenberger, “Lessons from the Shale Revolution,” The American, Feb. 22, 2012, available at www.american.com). This refers to terrestrial applications of PV. Space applications were funded separately and were not connected to the DOE.

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concepts was in competition with every other one to gain further research and development funds. Ones that did not show encouraging results were simply dropped in the next round of funding. According to Pegram (1991), the program was considered to be productive and seemed to be encouraging new invention and innovation. But the program was upended in 1978, when Congress decided the United States needed an all-PV effort, with $1.5 billion (more than $5 billion 2011 dollars) authorized over ten years and a goal of 4,000 megawatts (MW) of installed PV capacity by 1988. This effort was intended to create a substitute for basic fossil fuel-fired electric generation. In other words, the idea was to retire electric power plants attached to the nation’s electric grid systems and replace them with PV installations. As noted in Chapter 5, President Carter’s aides considered the goal implausible, and Carter was somewhat reluctant to agree to it, but he signed the bill into law so as not to appear antisolar. This new direction for PV, however, undermined the old NSF procedure. PV and solar generally became part of a transformational commercial energy goal rather than an example of an ongoing program of government-supported R&D. Funding crested in 1980 at $150 million (about $500 million 2011 dollars), a rapid rise that led both to large awards for firms and individuals that were unqualified to receive them, as well as to new bureaucratic problems and costs (Ouchi 1984). The positive aspects of the NSF approach were lost. The expansion of the PV program had been expected to realize large social benefits, but only because benefit calculations were predicated on forecasts of ever-rising oil and gas prices. That is, benefits equaled the value of oil and gas that would be replaced – based on a projection that was far out of line with reality. Thus, at the outset, the benefits were greatly overstated. In any case, the Reagan administration cut PV R&D funding by more than 75 percent by 1988, at which point the nature of the program had to be rethought. Although the Bush and Clinton administrations restored some funding, in real terms, R&D funding for PV never reached half of the 1980 peak over the next twenty years.14 Despite problems brought on by government caprice, research had helped to lower the cost of PV production and improve efficiency of the solar cells.15 Although the goal of 4,000 MW was abandoned, entrepreneurs began to find niche markets for PV products. PV cells powered calculators and other 14 15

As noted in Chapter 7, various tax preferences for purchasing or producing solar equipment were enacted; this figure is only for R&D expenditures. For a brief discussion of the technological characteristics of PV, see Cassedy and Grossman (1998, 403–5).

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hand-held devices. More important, PV was (and still is) used for remote applications, where it would be far costlier to connect to the grid than to use PV and where an intermittent supply is not an issue. Remote sensors and communications devices often use PV. PV cells also are used to charge outdoor lights, signs, and so on, avoiding the cost of running power lines instead. The PV story has three lessons. First, the 1974 model has merit as a basic research funding approach. I have argued that it is impossible to avoid a “picking winners” problem, but the more open the competition for research funding, with continuation dependent on results, the less likely government will pick winners largely on political grounds. Of course, there will be objections that the political component cannot be removed from the process; inevitably questions will arise as to the basis by which progress is determined. This problem is ultimately unanswerable, and there will always be some level of bias influencing the process. But because energy R&D as currently practiced often evolves into favored RD&D programs that waste resources, a competitive model in energy research seems more likely to produce useful outcomes. The second lesson is that if there are productive advances with commercial application, entrepreneurs will find them. The variety of successful PV products suggests strongly that the ostentatious $1.5 billion 1978 program was ill advised. There was no evident market failure to motivate a 4,000-MW PV goal. Yet, the pressure of government funding on a vast scale skewed incentives toward the objectives of Congress, not science. Consequently, marketization of those PV applications that were close to commercial viability was delayed. In other words, so far from correcting a market failure, Congress created one. Third, the PV story suggests the need for consistency in research efforts. Energy R&D budgets should have carryover of resources, preferably at a relatively consistent funding level (adjusted for inflation). Funding should not be subject to the political whims of the hour, and researchers should not have to spend a great deal of their time and money lobbying Congress and the DOE annually to maintain funding. As things stand, research centers are unsure of funding from one cycle to the next and need a geographically diverse set of allies – that is, others engaged in similar work – to influence members of Congress and the funding process. With a different narrative instead of massive ethanol spending or gigantic solar projects, perhaps there can be a long-range biofuels R&D program as well as solar thermal and PV programs in which government commits to research support. Arguably, the support could increase if a program has a high level of new patents and

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other markers of technological development, but this should be undertaken cautiously lest euphoria over preliminary results combined with a crisis leads to a massive expansion that in the end undercuts technological advance and delays any commercial applications.

viii. Reform or Abolish the Department of Energy There are a number of useful features of the Department of Energy (DOE). Much of the research it funds is undertaken by its research laboratories. The DOE supports twenty-one centers, most of which (such as the Princeton Plasma Physics Laboratory) are engaged primarily in basic scientific and technological research, not efforts at commercialization, as Arrow (1962) argued, is the proper realm of public support. Roncaglia (1989) has argued specifically that nuclear fusion development (such as the work at Princeton or the Plasma Science Center at the Massachusetts Institute of Technology) requires government R&D funding. The Energy Information Administration (EIA) has played a vital role as a center for basic information on energy production and consumption. This book has relied on EIA data; so have dozens of other works. As Chapter 1 discussed, during the 1973–4 energy crisis, members of Congress were suspicious of energy data because all of it came from industry and was deemed self-serving. The purpose of the EIA was to provide information to the public that could be relied on as impartial. This is an essential function that has largely been achieved. In the process, it limits asymmetric information problems – failures – with respect to energy markets. Finally, the DOE performs essential functions with respect to nuclear safety and electric power reliability – old functions of the Atomic Energy Commission (and later the Nuclear Regulatory Commission) and the Federal Power Commission (FPC), respectively.16 Of course, these functions as well as the research and information elements could be put in other cabinet departments, but there may well be cost savings by having related activities contained in a department like the DOE. Also, elimination of the DOE and transfer of its key components to other departments would involve transition costs and probably confusion over lines of authority – confusion that could last for years. There would be a danger of a return to the muddle of the 1970s, when Commerce Secretary Pete Peterson asked understandably, “Who’s in charge?” 16

Actually, areas formerly under FPC authority are handled by several offices within the DOE, including the Federal Energy Regulatory Commission, which is an independent commission that is affiliated with the DOE.

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At the same time, it must be acknowledged that the DOE, a creature of the 1970s energy narrative, has in 2011 become the public exemplar of government waste. As the arm of government charged with forming government energy policies, it has played a large role in the government’s long pursuit of failure. The multi-billion-dollar loan program that gave rise to Solyndra and other failed enterprises17 has shown the DOE still caught in the old narrative. In the process, its plans have been too grandiose, its leaders overly politicized, and its efforts costly, wasteful, and unpromising. The DOE operating with a revised mission could be modest. Its charge would be to manage research programs, provide information, monitor energy infrastructures (such as pipelines and electric grids), and evaluate the efficiency of existing institutions. Because pollution control affects energy production and consumption, arrangements and research with the Environmental Protection Agency should continue. There may be a question about whether the DOE as an organization would persist with its ambitions so drastically reduced. Is the DOE policy apparatus so tied to the big project, the transformative energy project that requires government venture capital, that it will seek to return to that approach at the first opportunity? As Chapter 2 discussed, bureaucracies have their own agendas, most especially to protect their budgets and influence. Although a sitting president could put into top positions people willing to accept a diminished role, it is not clear that the organization as a whole can change its perspective so quickly. If a modest DOE represents an oxymoron, then the only other alternative would be its abolition, its components parceled out to other cabinet departments.

ix. Improve Market Failures Energy policy makers have often acted vigorously on imagined market failures, particularly perceived capital market failures. The results have been synfuels, ethanol, Solyndra – in fact, failure after failure, and waste of resources. However, there are failures in energy markets that have been improved by government intervention. Energy-related externalities, for example, have been ameliorated through government action. The Clean Air Act and its 17

Solyndra received $535 million in government guaranteed loans (with favorable interest rates) in March 2009 and declared bankruptcy in September 2011. Other large-scale failures include the 2012 bankruptcy of battery maker A123 and the liquidation of Range Fuels, a producer of cellulosic ethanol, which received more than $40 million in loans from both the George W. Bush and Obama administrations.

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amendments have led to generally positive effects on air quality in major U.S. cities, requiring among other adaptations, as Chapter 6 noted, technological changes for automobiles and for electric power plants. The results have been significant. Many American cities have far cleaner air today than they did forty years ago; some estimates of the overall benefits of the Clean Air Act and its 1990 amendments run into the trillions of dollars, and in general these have, from the 1970s onward, produced substantial net social benefits (Cole and Grossman 1999). As of 2011, the focus of attention has been on the issue of climate change and carbon emissions, especially from the combustion of fossil fuels, which W-M and the 2010 Senate version, the Kerry-Lieberman (K-L) American Power Act, sought to address. That both bills were overly ambitious, bloated, and impractical does not settle the questions of whether there should be legislation to address climate change, what that legislation should look like, and how it would affect energy production and consumption. In the period from 2009 when W-M was introduced to the time of this writing, the climate debate has grown ever more politicized and contentious. As of early 2012, it seems doubtful that any climate bill could pass much less one like W-M or K-L. Both advocates and adversaries of climate legislation have resorted to extreme statements. Notable proponents (e.g., Braasch and McKibben 2007; Hansen 2009) have claimed that the world is on the verge of irreversible catastrophe; others (Horner 2008; Sussman 2010) deny that there is any problem at all. I am not a climate scientist, but there are a few observations with respect to the debate that are important in considering whether and how government policy should proceed, in particular with respect to energy. A. Thoughts on the Intersection of Energy and Climate r The Greenhouse Effect, the claim that a CO -rich atmosphere can trap 2

more heat at the surface of the Earth, is a scientific fact. It can be, and has been, demonstrated experimentally in laboratories. r So, too, is the fact that over the past forty years, the Earth’s temperature has on the whole risen. Global warming, whatever else it means, is simply a fact. r It is a logical inference that these are connected and that the former is responsible for the latter. One recent study claims that human actions have caused 75 percent of the observed warming (Huber and Knutti 2011).

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r The climate is not the same as the weather. Nonscientists such as

former Vice President Al Gore, who are alarmed about anthropogenic global warming (AGW), make rash predictions about the weather that appear even at the time they are made foolish and unconvincing. But then, serious climate scientists have also proven extraordinarily poor forecasters of how the facts of the Greenhouse Effect and the rise in temperatures are likely to play out as near-term weather. For example, in March 2000, a British climate scientist lamented to the Independent (United Kingdom) that within a few years, British children “aren’t going to know what snow is”; he became a laughingstock when the winter of 2010–11 proved to be Britain’s snowiest in many years. The predictions that climate change would lead to “more – and worse – Katrinas” (as three climate scientists opined in the Toronto Globe and Mail on September 19, 2005) were followed by one of the longest periods in which no major hurricanes struck the U.S. mainland.18 r Although the fact of climate change is clear, the long-term consequences of a CO2 buildup on the world’s climate and economy are highly uncertain. The global climate is extraordinarily complex, and how the entire system will be affected over the long term is unclear. One important question is climate sensitivity: that is, how sensitive is the climate to changes in atmospheric concentrations of CO2 and other greenhouse gases.19 A recent paper (Schmittner et al. 2011) has argued that the Earth’s sensitivity is much lower than scientists had previously thought, but these results have been attacked vigorously. Moreover, even if Schmittner et al. are correct, this hardly resolves questions of just what a buildup of greenhouse gases will actually mean for the climate and for the planet over the next decade or century. r Some scholars have invoked the “precautionary principle” to conclude that there is a small but positive probability that dire forecasts will be correct and consequently that it is a moral imperative to err on the side of caution (e.g., Cameron and Abouchar 1991). Weitzman (2009) has argued that a positive probability exists for a life-ending (or nearly so) catastrophe and therefore there must be aggressive policy to prevent it. Weitzman based his argument on virtually all extant climate sensitivity studies, which led him to conclude a 5 percent probability 18

19

It should be noted that some model predictions have been validated; see, for example, the Intergovernmental Panel on Climate Change 4th Assessment Report, Climate Change 2007: Synthesis Report. One of these is methane, which is sometimes emitted during the production of natural gas.

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of a catastrophic outcome. Other scientists and economists agree with his basic idea that serious efforts to reduce carbon emissions must be undertaken. But in fact, in many climate models, Weitzman’s kind of catastrophe is not considered even remotely likely. The Intergovernmental Panel on Climate Change estimated that climate change will reduce economic output in the early twenty-second century by 1 to 5 percent and did not assign a positive probability to Weitzman’s catastrophe scenario. Schmittner also has been quoted in various press reports as saying that dramatic and destructive temperature changes (on the order of 10 degrees Celsius) “are virtually impossible.” Furthermore, some models predict differential effects, in which some countries would benefit from climate change and others do not (Cline 2007).20 Drastically reducing emissions would thus have redistributive effects. Still, these issues are unresolved; greater certainty seems a prerequisite before far-reaching policies – such as the reduction of carbon emissions by 80 percent or more – would likely be undertaken.21 r According to some temperature readings, the world’s temperature has plateaued (albeit at a higher level) in the last decade despite increasing CO2 concentrations. Other readings show that a warming trend continues, but (again, the readings vary) at rates at variance to earlier model predictions. These divergent results only make decadal projections less certain. r Ultimately, economic theory would conclude that significant reductions in CO2 emissions would require that a price on CO2 be established either directly through a carbon tax or indirectly through a cap-and-trade program. Climate policy that focuses on energy production rather than carbon is unlikely to produce the results intended. For example, an 80 percent Renewable Portfolio Standard (RPS) does not necessarily mean an 80 percent reduction in CO2 . Because of the intermittency of renewables such as wind and solar, fossil fuels will be employed as backup; in some documented cases, coal-fired plants are being kept in continual readiness, meaning that fuel is being burned, 20 21

Moore (1995) argues overall AGW could be a “boon” to humanity. A more limited but more plausible precautionary argument (one that many scientists and economists would endorse) is that efforts should be undertaken that would not add to the problem, especially if more climate-friendly policies are possible and affordable. Thus, an argument could be made, for example, to subsidize new nuclear plants (nuclear subsidies tend to be less per unit of output than those for solar and wind and nuclear power does not have the intermittency problem), which would cut carbon emissions without imposing large costs on society as a whole.

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but the energy from it is unused. According to several researchers, generating electricity by wind will have a minimal and possibly a negative impact on emissions.22 The history of energy programs to date suggests that a national RPS or CES (Clean Energy Standard) will produce unintended consequences. A national 80 percent RPS will probably cost more than currently thought and will probably fail in both the goal of drastically reducing carbon emissions and of commercializing new energy technologies.23 As Ellerman (2012, 11) argues, “Conflating climate with energy . . . risks heading down the same road to nowhere that energy policy has gone.” r There is a presumption in some of the literature that adaptation to climate change is not a plausible (or moral) alternative to prevention, but it is almost certainly more likely that adaptation will be required than that prevention will succeed. To have meaningful emissions reduction, the world will have to overcome what appear to be insurmountable collective-actions problems.24 Developing countries have demanded that they be excluded from any scheme for global emissions reductions as they pursue economic development projects. Therefore, CO2 concentrations are likely to increase in any case. It has been argued that the key to solving collective-action problems and mitigating AGW is a higher standard of living in poor countries (Lomborg 2007). There is an extensive literature dealing with an environmental version of the Kuznets curve – that is, as a country grows economically, pollution increases with income up to a point, and then it declines as people begin to value environmental goods (Grossman and Krueger 1995). This suggests that the goal of international policy should be to help poor nations develop and leave climate issues aside for the time being. Adaptation as well as mitigation research should continue as such efforts might well be both desired and necessary later in the century. r In the context of a global economy, whatever the United States does or does not do with respect to reducing emissions may not have a great 22

23

24

For example, Oswald et al. (2008) argue that reductions in CO2 will “be less than expected.” Bentek Energy released a study The Wind Power Paradox that concluded there will be at most a modest emissions reduction, but it could in fact be negative. See also Valentino et al. (2012). Other standard energy policy prescriptions such as increased Corporate Average Fuel Economy standards also seem unlikely to significantly reduce CO2 emissions (Dowlatabadi et al. 1996). See Lubell et al. (2007) and Cole (2008) on the collective action issue with respect to climate change. Elinor Ostrom offered some thoughts on governance issues in “Green from the Grassroots,” Project Syndicate, June 12, 2012, available at http://www.project-syndicate .org.

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impact. Indeed, the United States has cut emissions in recent years (by 7 percent as of 2009, the most recent year noted by the EIA), but worldwide the quantity of CO2 emissions is rising because of rapid increases in the developing world, notably China and India. What then could this mean for U.S. policy? It might be argued that a major effort should be made to mitigate CO2 emissions as an insurance policy against the low probability of a global catastrophe. But insurance is typically purchased to protect against events that are both low probability and the consequences of which are known such as fire, accident, or theft. The Strategic Petroleum Reserve, I have suggested in Chapter 4, was a kind of insurance that was intended to address a specific, acute problem, but with climate change, it is not exactly certain what one would be insuring against beyond a vague cataclysmic warming. Although there is concern that there may be a “tipping point” at which catastrophic climate change becomes inevitable regardless of efforts to mitigate it, the evidence is not so persuasive that the world has reached, or will soon approach, that point. This seems especially true because there have been many claims that the world has already passed that point – according to some, a decade or more ago.25 Moreover, how this “point” has been, or will be, manifest is unclear. It seems unlikely there will be a similar immediate warming “crisis” like the one following the OAPEC embargo. A major climate crisis would more probably evolve with a few notable signaling events (e.g., rising sea levels that actually begin to seriously encroach on seacoasts in the United States), which would in themselves provide a warning of greater global damages to come requiring either mitigation or, more likely, adaptation. As the issues become clearer, as climate effects become more unambiguous, there is reason to believe there will still be opportunities for policies to address them. Preemptive massive efforts like W-M and K-L seem like the kind of panicky grandiose solve-all programs that have marked energy policy for four decades applied to climate. Those have never produced much of anything useful. There is little reason to think that these efforts would be any better.

x. Understand That Forecasts Are Usually Wrong Governments need to make forecasts. Planning depends on it. Probabilistic events need to be assessed. On many occasions, government forecasts have 25

See, for example, “Warming Hits Tipping Point,” which appeared online in the Guardian (United Kingdom) in August 2005. James Hansen, an outspoken advocate for drastic action, claimed the world had passed beyond the tipping point in 2008.

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proven to be wrong, and at other times, they have been more or less correct but utilized incorrectly to further one political agenda or another. The projection of continual budget surpluses made in the late 1990s, for example, carried with it so many qualifiers that a careful reading of government analyses showed they were unlikely to materialize. Yet, both Vice President Al Gore and Governor George Bush ran for president as if these surpluses were guaranteed. Of course, there are few areas where forecasts (private as well as government) have been consistently worse than they have with respect to energy. How many years of oil does the United States have left? According to government and industry reports, it has been near exhaustion regularly (except when there was a glut) for more than a hundred years. How many new power plants will the United States need? According to various government and industry forecasts over the years, America will need dozens, hundreds, even thousands of them over the next five, ten, twenty years. How soon will solar energy be commercially viable? Five years. Fusion will be commercially viable in twenty years. And breakthroughs will make the U.S. energy independent. Today, dire forecasts concern rising consumption in China, India, and the rest of the developing world. Experts maintain that these countries will soon become wealthy, and world demand will increase tremendously.26 It may be true, but as prices increase, there will as always be incentives for greater production and less consumption. Essentially, in making forecasts and policies with respect to them, officials need to admit they really do not know. The best guess about the future is only that. A modest energy policy starts with a premise of leveling with people. If people are demanding a new technological breakthrough to solve a perceived energy crisis, officials need to say that such breakthroughs cannot be legislated and that no timetable is meaningful. Instead, Americans hear from officials that in fact forecasters see breakthroughs on the horizon in x years, at which time fossil fuels will be exhausted. What does this imply for policy? Above all, modesty demands that programs focus on things that are known and possible and how these things might be done better. Research to improve existing technologies has a far greater payoff than any new technology effort (Fri 2006). Efficiency can be improved in energy production and consumption. The improvement in 26

The International Energy Agency projects that Chinese energy demand alone will increase by 75 percent by 2035. Energy expert Daniel Yergin (2011) argues, “we can be pretty certain” that demand for energy throughout the world will increase “enormously.”

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drilling technology – largely funded by the private sector – upgraded technologies that had been utilized for almost half a century. But undoubtedly, extraction technologies can still be improved both to prevent environmental damage and to lower the cost and increase the quantity of extracted resources. In other words, there is a place for basic research into new technologies such as solar and fusion, but more value is likely to come from improvement in the materials and construction of an electric generator or a residential heat pump. A modest energy policy rests on these principles: the future is unclear; some things are likely; other things may be possible; forecasts are not fact and are often wildly wrong; using them uncritically to determine policy is likely to produce bad policy choices.

xi. Rely on Markets Generally (There Are Greater Catastrophes than Price Fluctuations) Energy markets sometimes do not work well, yet most of the time, they function well enough so that modern society does not notice any energy problem. They tend to do worse when government in its wisdom decides they need to be improved. Those interventions are distorting and lead to gas lines, blackouts, overproduction of some products, and underproduction of others. Nonetheless, government has a role to play. Policy can protect the environment, ensure the functioning of the market, and assist in the advancement of knowledge. It is true that energy markets lead to price fluctuations, sometimes significant and economically disruptive ones. But despite dire warnings that appear with regularity, there have been no catastrophes; America has not surrendered its sovereignty; the economy endures; the engine starts in the morning, and the switch on the wall usually works when Americans flip it. Modern society overall made possible by utilization of energy has flourished despite a century of anxiety about energy’s future. Although predictions about energy have been gloomy over much of the past forty years, there seems in 2012 less reason to be gloomy, less reason to concoct grand schemes doomed to failure, less reason to imagine panaceas that cannot be realized and should not be believed.

3. A Final Word In the winter and spring of 2012, the Obama administration was still vigorously pushing a clean-energy agenda, even as it was trying to defend the

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loan program that produced Solyndra. But there has remained a curious disconnect in government policies. Officials tout electric cars and vast solar installations, but reserves (and projected resources) of oil and gas are rising; prices for natural gas are low, reflecting a condition of glut. The United States is actually a net exporter of refined petroleum products, gets much of its imported crude oil from Canada and Mexico, and recently weathered the disruption of the flow of oil from several Middle East countries. The U.S. economy is sluggish, but not because of energy, nor will energy policy revive it. Congress and the White House seem to be at a point of stalemate with respect to adoption of any radical energy legislation. This is not due to the recognition of the history of failure but rather to politics and to the fact that without a “do something” crisis, policy makers can largely ignore energy. Of course, conditions and perceptions will change; by the time you read this, the price of oil could be $150/bbl, $50/bbl, or somewhere in between (or somewhere else altogether). Past is no more prologue in 2012 than it was in 1973 or 1981. Although change is inevitable, the past forty years have not vindicated past gloom. So far, negative moments have seemed outsized in their importance but have not been in reality. Whether U.S policy makers will concentrate on the realities is another question. It is especially doubtful that they will when a problem presents itself and there is a compulsion to “do something” – that is, unless somehow modesty prevails.

APPENDIX

The “Do Something” Dilemma, a Decision Problem

a. Definitions, Assumptions Socioeconomic changes that lead to spikes in public attentiveness are termed “shocks.”1 In the case of energy, these spikes are due almost exclusively to large price increases, supply disruptions, or both. A shock may be short lived – a sudden jump in gasoline prices, for example. A shock also may be the result of a single precipitating event. The 1973 Arab oil embargo was an example of this type and its effects lasted for a few months. The acute nature of such shocks, it is argued, spurs a demand from the public for policy makers to “do something.” Energy shocks may also be due to a series of events unfolding over weeks or months that lead to ever-building public attentiveness and growing salience. At some point, however, these events have produced impacts that become increasingly disruptive to constituents. The surging prices of oil along with periodic supply disruptions from early 1979 through early 1980 would be a case of this type. The “shock” is experienced at the point where prices have risen past some general level of comfort and where a continuation of soaring prices and/or constrained supply seems inevitable. This focuses attention and again leads to demands that political actors “do something.” In this model, legislator (L) is assumed to be boundedly rational and self-interested. Her utility is a function of her office, and thus her utility is maximized by election and reelection, or as Mayhew (1974, 5) puts it, she may be regarded as the typical “single-minded [seeker] of re-election” with the value of her actions measured in votes lost and gained (Tullock 1976). Her utility function is discontinuous in that a fall below a plurality of votes means a precipitous fall in utility, a rise to plurality represents 1

This appendix is excerpted from Grossman (2012). Reprinted with permission from Cambridge University Press.

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a more than incremental gain; votes above plurality increase her utility, although at a diminishing rate; losing votes past plurality represent falling utility at a decelerating rate. Since L’s rationality is bounded and, given the unanticipated nature of a shock, she does not know with anything close to certainty about its effects on her election prospects.2 Although it may be assumed that there is homogeneity in legislator utility functions, it must be recognized that some legislators are safer in their seats than others. The most secure may deviate from practices that less secure legislators must follow. Others may have strong ideological motivations that can lead them to vote contrary to the wishes of their constituents on a given issue. But here it is assumed that L is the marginal (vote-seeking) legislator who believes she may lose her seat in the event that a shock becomes a key public issue if her actions and rhetoric do not satisfy the electorate. It is also assumed that before the shock, policy is in a stable equilibrium (Kingdon 1984; Baumgartner and Jones 2009; Sabatier 1993). That is to say that the issue surrounding the shock is not in the forefront of the legislative agenda, has relatively low salience with the electorate, and receives low attention from policy makers. In that environment, a shock occurs. This shock is exogenous; its impact has not been foreseen, and its duration and ultimate severity are highly uncertain. It is clear, however, that the shock could have large social and economic repercussions. Given its unexpected nature, there is no clear direction for policy makers to address the underlying problem. The shock gains its salience because of its wide impacts, but it becomes a political dilemma because the issues are typically complex and technical in nature. Thus, legislators have at best a limited understanding of the shock’s characteristics, even days or weeks after it has begun. An energy price and supply shock fits this category. Because of its disruptiveness and complexity, the ideal outcome for the policy maker is for the problem to resolve itself. That is, because L cannot comprehend well the character of the shock or offer any realistic solution, she would prefer that the issue would lose salience – which shocks often do with time. Natural resolution allows a return to the policy equilibrium in which the rules and payoffs have been clear. That is to say, proposed legislation to “solve” the shock-related problem will either be dropped entirely or it will be subject to normal legislative processes, in which radical proposals will be 2

Arnold (1990, 14–15) argues, “Legislators choose among policy proposals by estimating citizens’ potential policy preferences and by estimating the likelihood that citizens might incorporate these policy preferences into their choices among candidates in subsequent congressional elections.” However, under shock conditions, such estimations may be exceptionally difficult to make with any accuracy.

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rejected, and, at most, incremental changes shaped by policy entrepreneurs and advocacy coalitions will result. Notwithstanding a hope of resolution, L must respond as long as salience is marked and there is persistence in public attention, because of the political “costs of failing to act” (Eyestone 1978, 154). Still, there is typically a range of possible responses, and L must estimate generally which actions would be regarded positively (gaining or at least retaining her votes) and which negatively (costing her the same) by the electorate. How well she can estimate outcomes may depend on the intensity and duration of constituent discomfort: the more time she has to analyze her options, the better her understanding of constituent preferences is likely to be, but the problem of acute discomfort may require a quick response making the probability of a political error higher. It is assumed here that magnitudes of political costs and benefits will also depend on the potential opponent for L’s seat. At the time of the shock, it will be assumed for simplicity that she does not know the identity of her opponent; she may not even know how many opponents she will face. Thus, she cannot know how much her opponent(s) might benefit at her expense. Because of bounded rationality, it is also assumed that neither she nor her constituents generally understand the probability that any legislative action will have positive results with respect to the issue itself. That is, no one can estimate the likelihood that, say, synfuels technology will be successfully commercialized. But in general, L cares mainly that her actions are perceived to be appropriately responsive to her constituents, and success or failure is either difficult to ascertain or ascertainable only in the future beyond the next election cycle. That is not to say that she is entirely cynical about the value of a large change in policy. The point is that success of the new policy is irrelevant if the time horizon for judging it is beyond the next cycle. Therefore, the goal is basically to be seen to be doing something. At the same time, advocacy of an immediate, radical agenda shift may not be wise. As L weighs alternatives, a certain amount of initial restraint may be preferable to a vote for a massive program if the latter seems to be a panicked response to the shock, for which she might be criticized later if the effects of the shock quickly abate; thus, the decision problem is partly one of timing: when should she advocate what?

b. The “Do Something” Process We assume that initially the shock’s effect is to change the policy “image” of the issue and to push it into the “spotlight of macropolitics” and the forefront

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of the policy agenda (True et al. 2007). As a result, L must make an immediate response to show attentiveness. Her responses are assumed to follow a threestep process during which she can hope to observe whether the issue is likely to remain salient for long and can perhaps gather more evidence as to the wishes of her constituents. These steps are termed Engagement, Expression of Intent, and Legislative Action. 1. For the first, Engagement, step, L must decide on whether to take a rhetorical stance with respect to the issue in question. If she does not engage and makes no statement in response, it would seem likely to be costly in terms of L’s support; as the issue has become extremely important to the electorate, she would be portrayed as unresponsive to her constituents. “Doing something” at this step is assumed to be primarily a verbal pledge to relieve constituent discomfort and/or to cast blame. It is here that party politics may be most evident. Blame might be cast on the party in power by the opposition. The party in power may fault actions by a previous administration of the other party. In divided government, Congress may blame the current administration while the latter and its congressional supporters blame Congress. Also, there may be demands for investigations of purported “bad” actors such as oil companies or market speculators. There may be attempts to tie political opponents to bad actors, for example, by emphasizing a party’s ties to oil companies. But in general, there would seem to be a positive payoff for “saying the right thing,” 2. Expression of Intent, step 2, is a call for legislative action. If the shock has dissipated after Engagement, no further action or rhetoric is required; the issue is no longer salient. Those who previously advocated a jump to step three, Legislative Action, might well be regarded as having sought to act in haste and thus are blameworthy. But with clear persistence and/or acuteness of the shock, rhetoric will be deemed insufficient. The demand to “do something” has not abated. She again must decide among alternatives: she may choose an Expression of Intent, decide that rhetoric was a sufficient response, or not act at all. Choosing the first alternative means L must endorse some specific kinds of action to “do something,” taking the form (in this model) of sponsoring or co-sponsoring legislation. Initially she may endorse measures that only address the matter symbolically, aimed mainly to show empathy with constituents. But it is assumed that inaction is unacceptable and an unwillingness to do more than make rhetorical

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nods toward the problem cannot satisfy an electorate that is still demanding that officials “do something.” Proposed legislative actions are basically of two types: symbolic or (ostensibly) definitive.3 There is no reason why L cannot choose to endorse both types of action. Symbolic legislation may be simply a nonbinding resolution to express the sense of Congress, or it may take the form of a demonstration of government willingness to “share the pain,” such as by turning off ceremonial lights or turning down thermostats in government buildings. Legislation may also be directed at helping temporarily to relieve discomfort through, for example, a short-term tax rebate. But endorsement of some legislation, whether it is actually passed or not, may provide “proof” of positive intent that will be noted by constituents. 3. If the shock’s effects persist further, L faces step 3, Legislative Action. Voting for merely symbolic legislation is an action that shows sympathy for the current discomfort of constituents, but it will become increasingly inadequate in the face of persistence. As the outcry of constituents mounts, it is assumed that anything less than an apparently purposeful effort toward a “solution” will be difficult to defend; as noted in Chapter 5, it was argued within the Carter administration that “any answer even if it is wrong” was necessary. If L chooses to opt either for only weak symbolism or no action at all, she can lose out to an opponent who promises to act more forcefully. Presuming that constituents cannot evaluate solutions on their merits and/or have beliefs that every problem can be solved by sufficient will (as Downs, 1972, argues is true in the United States), they will want Congress generally and their representative L to specify some way out of the problem. Thus, given a persistent shock, L will not only endorse specific legislative proposals that claim to offer “solutions,” she must also vote for one of them. Given that the shock remains disruptive to voters, it becomes less costly from a political standpoint to support a radical shift in policy than not. This situation may be thought of along the lines of Charles Jones’s (1974, 438–9) “public-satisfying speculative augmentation” in which the “dramatic surge of public concern” leads policy makers to approve major changes in policy even when a policy maker has little understanding of the solution that has been proposed. 3

Cobb and Elder (1975) refer to purely symbolic legislation as components of a “pseudoagenda” meant strictly to “have symbolic appeal to constituents,” (Cobb et al. 1976, 126), but much in evidence in a time of crisis.

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Legislators may in fact compete by offering various bills that would lead to drastic change, reflecting the influences of party considerations and policy entrepreneurs whose views may have gained traction because of the shock. Competing solutions are beneficial to L because the competition will tend to delay final passage as different interest groups influence legislators, producing some variation in solution proposals. In the meantime, L can commit to a given solution while time might obviate the need for one. But for L, as long as the shock is salient, it is important for her to vote for a bill that promotes a solution. Purported solutions to a persistent energy shock are likely to involve significant actions with societal impacts that may have long-run consequences; for example, programs to undertake mass substitutions of alternative technologies for conventional ones would alter consumer choice as well as the composition of energy industries. But if L does not agree to radical policies that others are advancing at a time of crisis, she will be perceived as not doing enough, and as a consequence, she will risk losing votes to someone who will advocate for such a solution. Moreover, it must be assumed that if the shock persists long enough and public attention remains high, the differences among bills will be resolved, and solution legislation will be passed. The alternative would be a general admission of failure to “do something” with respect to the most disruptive issue of the day.4 Decisive legislative actions may take two forms. The first form may provide a solution, but it comes with large, clear, and direct costs to constituents. The second is a solution that imposes relatively low direct costs on constituents, which both L and her constituents would prefer. Thus, if a program seems to address the problem but entails, for example, large tax increases, it will be rejected if another offers a solution with no tax increases. It may seem unlikely that there will be a solution with little or no costs – either in the form of money or discomfort – to a problem that is described as a persistent shock. But there may be two ways to appear to avoid costs to constituents. First, if the problem has a technological component, then the solution may appear to be technological as well. Therefore, the preferred course of action will be to mandate a major, transformative technological fix to be achieved by shifting funds within the government’s budget. It need not matter whether the fix is realistic or even that it would actually solve the problem if completed. If it is hard to evaluate, then such proposals must be 4

Shepsle and Weingast (1981) note that there are often institutional barriers to radical policy change. But radical steps in the wake of a shock are observed often enough to suggest that at least for the duration of the shock’s effects, the equilibrium these authors find is at least temporarily disturbed.

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at the top of L’s preferred list of choices, especially if any measurement of success will take place several years in the future – which is almost inevitable for a new technology to reach development and commercialization. At the outset, a technological fix will seem like a bold step, a statement of optimism about America’s “can do” spirit. The second way to avoid high costs to constituents is to impose most, if not all, of the costs on an isolated group – for example, oil companies – that may have been vilified initially and are known to have large resources. This could be doubly beneficial. It would accomplish the symbolic goal of punishing bad actors and at the same time underwrite a technological solution. From a political standpoint, then, the preferred solution to a persistent energy shock is to legislate a significant technological fix that would not come to fruition until some time beyond the next couple election cycles and that would not impose hardship on constituents.5 In that case, L may justifiably assume that the failure of any fix in terms of voter support two or more election cycles out will be zero (given that it cost them little or nothing to begin with), assuming the issue is no longer salient. But if L votes for something less than a solution, an opponent has the opportunity to gain the initiative in the next election cycle. The logic of deflective action requires that in the event of a persistent demand to “do something” L will always seek a solution, which with respect to energy, means a low impact but dramatic technological fix. There are actually three potential outcomes of the legislative process with respect to a major shock. First, outcome A: even after committee reports and various floor votes, the shock ends, the issue loses salience, and the legislation simply is never passed into law. Second, outcome B: the shock ends before final passage, but there is now some momentum for energy legislation, and proposals enter the normal legislative process; that is, interest groups and entrepreneurs have recognized new opportunities, but the lack of urgency means that the bill that is finally passed provides rents for various groups and at most incremental changes in national policy. The radical ideas, however, are dropped. Third, outcome C: the shock persists, and solution legislation described earlier is signed into law. To summarize, despite the fact that actually solving extraordinarily complex energy problems through legislation of the type described is highly unlikely, legislators will advocate and vote for such a policy even though its 5

An essay sent to Treasury Secretary William Simon in 1975 noted that for Congress “better politics [is] to run on a ‘something-for-nothing’ platform.” WSP, “Energy Rhetoric on Capitol Hill,” by David P. Stang, Drawer 22, May 10, 1975.

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practicality (or even rationality) is open to question. Legislators will follow a trajectory – Engagement to Expression of Intent to Legislative Action – which carried to the end leads to passage of a purported energy solution, a process that will stop only if the salience of the shock ends, and the demand to “do something” abates. In a real sense, solution policies are unlikely to be even second best, much less optimal, responses to energy dilemmas. But they will likely achieve overwhelming bipartisan support based on their promise alone. The thrust of the “do something” dilemma is to follow the pattern of behavior that looks the best at the next election. If all that such legislation does is deflect criticism of the incumbent, it must be counted a success. This model does yield testable hypotheses: First, following a major shock, legislators will respond rhetorically, generally assigning blame. Second, if public attentiveness persists, legislators will propose or endorse legislation. Third, legislation will be introduced to solve a persisting shock and will either be highly technical and/or will impose costs on targeted, unpopular actors. Fourth, in the event that the repercussions of the shock are prolonged, Congress will adopt solutions that are vast in scope and are either unlikely ever to be achieved or at least will be exceptionally difficult to evaluate especially in the short run. Events appear to have followed the model.

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Index

10-in-10 Fuel Economy Act, 308 A Time to Choose, 178 Ackley, Gardiner, 116 Ad Hoc Select Committee on Energy, 187 Adelman, Morris, 107, 191, 214, 250 Advanced Battery Consortium, 278 AEC. See Nuclear Power: Atomic Energy Commission Agnew, Spiro, 22 AGW. See climate change: anthropogenic global warming Alaska, 171 Alaska pipeline, 32, 39 al-Chalabi, Fadhil, 214 Alchian, Armen, 168 Aldrin, “Buzz,” 219 Alexander, Bill, 265 al-Qaeda, 301 American Clean Energy and Security Act of 2009, 288, 320 American Gas Association, 180, 186 American Recovery and Reinvestment Act of 2009, 315, 339 Amuzegar, Jahangir, 253 Anderson, Jack, 155 Anderson, John, 151 Andrews, Mark, 256 Annunzio, Frank, 269 anti-gouging provisions, 313 anti-trust, 84 cartel, 8, 89 monopoly, 8, 11 Sherman Act, 85 violations, 308, 310

ANWR. See Arctic National Wildlife Refuge Apollo, 3, 31, 38, 111, 197, 218–44, passim, 268 as symbolic effort, 219–20 fallacy, 220–3 model, 203, 227, 233, 332 New Apollo Energy Act, 304 Arab-Israeli Six-Day War 1967, 105 Arctic National Wildlife Refuge, 271, 273, 274, 296–8, 302, 305 Armstrong, Neil, 218 ARRA. See American Recovery and Reinvestment Act of 2009 Arrow, Kenneth justification for government R&D, 46, 51, 342 Ash, Roy, 109 Ashcroft, John, 283 Ashley, Thomas L., 187–8 Aspin, Les, 121 Automobile Association of America, 269 Ballenger, Cass, 278 Bartlett, Roscoe, 287 Barton, Joe, 304 Bastiat, Frederic, 233 Bator, Francis, 46 BCA. See benefit-cost analysis Bechtel Corporation, 158 benefit-cost analysis, 57, 62 Bentsen, Lloyd, 189 Bernanke, Ben, 295 Beulah, ND gasification plant, 237 Biden, Joseph, 324 Big Oil, 8, 13, 15, 246 Bingaman, Jeff, 309

383

384

Index

biofuels, 289, 305–6 advanced biofuels, 308 Biofuels Energy Independence Act of 2001, 302 biomass, 298, 309 bipartisan support, 298 mandate for expansion, 308 Blumenthal, Michael, 179, 210 BOM. See Bureau of Mines Booz, Allen & Hamilton, 215 Boskin, Michael, 267 Boxer, Barbara, 279–80, 296, 321 Braley, Bruce, 310 Brazil, 233, 250 Bretton Woods agreement, 114 Brinegar, Claude, 123, 137, 338 Broder, David, 207 Brown, Sharrod, 297 Bryan, Richard, 273, 274 Bumpers, Dale, 255 Bureau of Mines, 39, 74, 78–80, 88 Burns, Arthur, 114, 116 Bush administration (G.H.W.), 263–77, passim Bush administration (G.W.), 296–314, 328 Bush, George H. W., 263–77, passim 1986 trip to Saudi Arabia, 263 1991 State of the Union Speech, 271 1992 presidential campaign, 275 dispatched to Saudi Arabia, 247 peak of popularity, 271 pessimistic about resource availability, 65 presidential nomination speech 1988, 247 reservations about EPAct of 1992, 275 signs EPAct 1992, 276 takes credit for boosting ethanol, 274 Bush, George W., 286–90, 296–314, passim 2005 State of the Union speech, 304 75-of-25 ethanol goal, 306 calls for energy independence, 303 Comprehensive National Energy Policy, 296 energy crisis, 286, 288 funding for hydrogen vehicles, 314 new energy legislation unveiled, 298 oil surplus projections, 352 pessimistic about resource availability, 65 plan for consumer relief, 298 political emergency, 289 power price caps, 296 response to 2003 blackout, 302

search for new energy solutions, 288 signs Energy Independence Act 2007, 312 supports ethanol, 306 threat to veto anti-gouging provisions, 310 Business Week, 208 Byrd, Robert, 104, 143 Caddell, Pat, 206 CAFE. See Corporate Average Fuel Economy Califano, Joseph, 210 California, 77 California Air Resources Board, 229, 280 California electric power restructuring bill A.B. 1890, 340 Department of Water Resources, 301 electric power price caps, 296 electric power surplus, 301 electricity mandate, 231 EV mandate, 280 gasoline shortages, 202 Low Emissions Vehicle Regulations, 230 renewable energy souce list, 231 Zero Emissions Vehicle rule 1990, 278 Camp David, 206, 209 Campbell, Colin, 77 Canada, 105, 266, 302, 354 cap and trade, 265, 315, 320, 321 sulfur-dioxide pollution, 265, 315 CARB. See California Air Resources Board Carter administration, 47, 62, 117, 167–217, passim, 221, 228, 237, 245, 262 DOE as necessity, 327 Carter, Jimmy, 5, 6, 32, 63, 164–6, 167–217, passim, 236, 248, 254–5, 257, 296, 327, 340, 343, 371, 374–5, 381 “crisis in confidence” speech, 206 “malaise” speech, 168, 207 20 percent solar plan, 257 as moralist, 167–8 belief in declining oil, 65 CIA report on energy forecasts, 183 conversion to coal, 262 creation of DOE, 325 moral equivalent of war, 182 National Energy Plan, 194 national solar strategy, 194 promotes ethanol, 265 Sun Day, 194 CBS News Poll, 269 CEA. See Council of Economic Advisors Central Intelligence Agency, 173

Index CES. See Clean Energy Standard Chafee, John, 275 Chase Econometrics, 291 Cheney, Dick, 297, 299 Chevron, 269 China, 233, 234, 248, 310, 321, 352 Christopher, Warren, 187 Chrysler, 278 Chu, Steven, 318–9, 324–5 Cities Service Oil Co., 140 Citizens Energy Act, 212 CLC. See Cost of Living Council Clean Air Act 1970, 228 Clean Air Act amendments 1990, 264, 270, 274, 346 clean air standards, 148, 305 CLEAN Energy Act of 2007, 308 clean energy economy, 323 Clean Energy Financing Act of 2011, 322 Clean Energy Jobs and American Power Act, 321 Clean Energy Standard, 231, 350 climate change, 66, 275, 277, 288, 309, 320, 322, 340, 347–51 anthropogenic global warming, 288–9, 340, 347–8 Climate Change Action Plan, 281 Greenhouse Effect, 347 Clinch River Breeder Reactor, 260 Clinton administration, 47, 230, 237, 279, 281–2, 296 Clinton, Bill (William Jefferson), 275, 277, 281, 282, 296 BTU tax, 277–8 cheap oil and, 277 dependence is Achilles heel, 247 Executive Order 12866, 47 million solar roofs, 282 pessimistic about resource availability, 65 policy of conservation, 277 Clinton, Hillary, 312 CNN, 312 CO2 , 66, 71, 275, 289, 298, 300, 309–10, 321, 347–51 coal, 70–72, 78, 148 abundant resource projection, 70 as back up for wind and solar, 318 Bituminous Coal Act of 1935, 72 carbon emissions, 321 Carter calls for more use of, 165 clean coal, 275, 304

385

Coal Crisis of 1922–23, 71 coal economy, 40 Coal Mining Institute, 118 coal reserves, 80 competitive pricing, 113 conversion of oil to, 262 cost-effective resource in 1973, 35 decline in importance, 71 derived synthetic fuels, 72, 111 disadvantages of, 71 early federal involvement, 71 electric generation, 317 EPCA, 153 first market fossil fuel, 70 for synfuels, 40, 79, 228 historical importance, 71 historical use, 94 incentive to use, 175 incentives for increased supply, 118 increased production for energy independence, 158 National Bituminous Coal Commission, 72 Powerplant and Industrial Fuel Use Act 1978, 337 reliance on, 172 strike, 190 U.S. Coal Commission, 71 use boosts local economies, 262 use of attacked, 106 waivers to use, 132 Coase, Ronald, 48–50, 334 Cochrane, James, 185 COET. See petroleum: Crude Oil Equalization Tax Cold War, 103 Collins, Michael, 219 Colorado, 120, 194, 231 Commercialization of Alternative Energy Sources and Energy Technology Act of 1990, 269 Comprehensive National Energy Policy, 296 Comprehensive National Energy Policy Act 1992, 274, 275, 276, 300 Congressional Budget Office, 154, 186, 291 Congressional Office of Technology Assessment, 208 Congressional Quarterly, 130, 169 Connolly Hot Oil Act, 88 Consolidated Omnibus Budget Resolution, 262

386

Index

Consumer-First Energy Act of 2008, 313 Conte, Silvio, 40 Conyers, John, Jr., 256 Coolidge administration, 78 Coolidge, Calvin, 87 Corporate Average Fuel Economy, 149, 153, 185, 270, 273, 277, 281, 308, 310–1, 316 auto makers and, 154, 273 bill to raise standards, 273 Cost of Living Council, 9, 15–7, 19, 43, 114–5, 120, 122 Council of Economic Advisors, 5, 64, 109, 137, 159, 160, 179, 255 Council on Environmental Quality, 194 Council on Foreign Economic Policy, 93 coupon rationing, 5 Craig, Larry, 282, 301 Cranston, Alan, 130, 203 Creating Long-Term Energy Alternatives for the Nation Act. See CLEAN Energy Act of 2007 Cutler, Eliot, 203, 211 Danforth, John, 210–1 Daschle, Tom, 300 Davis, Gray, 284 Davis, W. Kenneth, 158 daylight savings time, 24 DeConcini, Dennis, 203 DeFazio, Peter, 270, 271, 300, 306 Defense Production Act of 1950, 203 DeMuth, Christopher, 111 Dent, Fred, 123 Department of Agriculture, 197 Department of Defense, 226 Department of Energy, 59, 174, 178, 181, 186, 190, 194, 203, 205, 207, 214, 216, 217, 245, 258, 261, 270, 279, 281, 282, 284, 298, 299, 316, 322, 344–6 creation, 182 evaluation of department, 324–29 Reagan for eliminating, 257 Department of Energy and Natural Resources, 112 Department of Energy Organization Act 1977, 325 Department of Housing and Urban Development, 193 Department of Justice, 64, 268, 282 Department of State, 104, 248 Department of the Interior, 24, 39, 92, 104, 107, 108, 110, 112, 123, 140, 182

Department of the Navy, 77, 182 Department of Transportation, 42 Department of Urban Development, 182 DiBona, Charles, 117, 119 Dines, James, 216 Dingell, John, 152 do something dilemma, 1, 4, 171, 177, 198, 202, 269, 311, 313, 354, 355–62 Dodd, Christopher, 156, 297 DOE. See Department of Energy Dole, Robert, 143, 278 Domenici, Pete, 155, 213, 254 Donaldson, William, 159 Downs, Anthony, 129 Draper, Claude, 97 DST. See daylight savings time Dubridge, Lee, 111 Duncan, Charles W., Jr., 212 Dunlop, John, 122 Duquesne Electric Power Company, 102 Durbin, Richard, 305 East Texas oil field, 87 Economic Stabilization Act 1970, 113, 120 Economist, 29, 298 Edwards, James, 255, 257 EEPG. See Energy Emergency Planning Group Egypt, 124 Ehrlichman, John, 117, 119, 121 EIA. See energy independence: Energy Independence Authority Chapter 4, See Energy Information Administration otherwise EIS. See environmental impact statements Eisenhower, Dwight D., 80, 91–2, 101 “Atoms for Peace” address, 101 Eizenstat, Stuart, 205, 209 Electric Utility Industry Restructuring Act, 283 electric vehicles, 221, 227, 234, 235, 279–280, 316 EV-1, 280 partial zero emissions vehicles, 280 zero emissions vehicles, 229–31 electricity, 148 blackout of 2003, 302 demand for lower prices, 142 pricing, 138 wheeling, 273 EMB. See energy mobilization board

Index Emergency Fuels and Energy Allocation Act, 118 Emergency Natural Gas Act of 1977, 177 Emergency Petroleum Allocation Act of 1973, 26–30 energy “czar”, 4, 16 energy commercialization subsidies, 341 energy conservation, 169 bank, 213, 216 consumer conservation of energy, 134 curtailed funding, 281 mandatory measures, 147 weatherization, 149 Energy Conservation and Oil “Policy Act,” 150 Energy Coordinating Committee, 198 Energy Development and Supply Commission, 40 Energy Emergency Planning Group, 20 energy independence, 5, 63, 139, 158, 289, 309 and security, 20 as political mantra, 126 as standard political narrative, 129–30 dependence on foreign oil, 90 disagreement on meaning of independence, 127 Energy Independence Act of 1975, 127, 139, 141, 145, 156, 159, 171, 296 Energy Independence Act of 2001, 297 Energy Independence Act of 2002, 297 Energy Independence and Security Act of 2007, 309, 311, 337 Energy Independence Authority, 128, 129, 159, 161, 235, 268 Energy Independence Day, 203 lobbyist push the cause, 126 Energy Information Administration, 14, 78, 128, 318–9, 327, 345 energy lobbies, 69, 126, 325 energy market model supply and demand, 7, 9–11 energy markets, 77, 105 Energy Mobilization Board, 207–9, 216 Energy Modeling Forum, 246 energy narrative, 2, 4, 23, 33, 125–9, 331–2, 346 dependence, 3, 248 government control of, 127 Manhattan and Apollo programs, 158, 161

387

old, 254 old and new discussed, 332, 336 Energy Policy Act of 2002, 300 Energy Policy Act of 2005, 297, 304 Energy Policy and Conservation Act, 145, 152, 153, 155–8, 161, 165, 171, 184–5, 192, 199, 202, 212, 272 energy policy conundrum, 35, 128, 180, 216 Energy Policy Office, 16, 18, 20, 24, 120 Energy Policy Project, 118 Energy Research and Development Agency, 158, 164, 182 Energy Research and Development Corporation, 120 Energy Resource Finance Corporation, 160 Energy Resources Council, 140, 159 Energy Security Act, 216, 297 Energy Security Corporation, 207, 212–3, 216, 235 Energy Security Trust, 201 energy shocks, 355 energy subsidies, 236, 239, 298, 304 Energy Tax Act, 189 energy trading, 308 environmental impact statements, 209 environmental protection, 106 Environmental Protection Agency, 106, 117, 346 environmentalism waivers, 132 environmentalists, 213 EPAA. See Emergency Petroleum Allocation Act of 1973 EPAct 1992. See Comprehensive National Energy Policy Act 1992 EPAct 2005. See Energy Policy Act 2005 EPCA. See Energy Policy and Conservation Act EPO. See Energy Policy Office ERC. See Energy Resources Council ESC. See Energy Security Corporation ethanol, 65, 197, 236, 240, 265–6, 274, 284, 300, 302, 305–8, 328, 336, 344 cellulosic, 266, 307, 309, 311, 324 cellulosic feedstocks, 240 E-85, 306 gasohol, 197, 213, 216 mandate, 59, 60, 289, 310–1, 314 mandate of 2007, 298 report on alcohol fuels 1978, 197 Evins, Joe, 161 Exxon, 91

388

Index

Fall, Albert B., 87 Fannin, Paul J., 148 FEA. See Federal Energy Administration Federal Energy Administration, 42, 43, 126–8, 130, 135–7, 139–40, 142, 144, 146, 148, 150, 152, 154, 164, 171–2, 178, 182, 212 Federal Energy Office, 27, 39, 40, 130, 133, 164 Federal Energy Regulatory Commission, 181, 192, 284 Federal Oil Conservation Board, 78, 87 Federal Petroleum Purchasing Agency, 148 Federal Power Act, 273 Federal Power Commission administered natural gas policy, 104 and creation of Department of Energy, 181–82 and Department of Energy, 345 concerns over price setting, 94–8 control of interstate electric transmission, 95 control of natural gas prices, 113 criticized by Jimmy Carter, 164 DOE controversy, 181 economic disruption due to controls, 217 expanded duties, 184 natural gas pricing goals, 110 natural gas producer complaints, 106 Olds’ proposal, 100 ordered by study of energy sectors ordered by Congress, 94 oversees natural gas pipeline system, 96 pricing policy and market concerns, 157 raises price ceiling for new gas, 157 regulation of interstate natural gas pipelines, 95 sets natural gas prices, 4 Federal Reserve, 293 Federal Trade Commission, 95, 121 FEO. See Federal Energy Office FERC. See Federal Energy Regulatory Commission Fermi, Enrico, 99 Filner, Bob, 303 Flanigan, Peter, 116, 117, 123 Florida, 28 FOCB. See Federal Oil Conservation Board Ford administration, 125–66, passim, 207, 255, 337 Ford Foundation, 118

Ford Motors, 278 Ford, Gerald, 5, 125–66, passim, 171, 296 becomes president, 125 decontrol of oil prices, 151 Domestic Council, 159 energy plan 1975, 141 pessimistic about resource availability, 65 Forrestal, James V., 80 Fortune, 157 FPA. See Federal Power Act FPC. See Federal Power Commission Freeman, S. David, 108, 117–9, 178 Friedman, Milton, 5, 116 fuel economy, 154, 279 Galbraith, John Kenneth, 116 Gallup Poll, 125 General Accounting Office, 186 General Agreement on Tariffs and Trade, 90 General Motors, 278 Gibson, Andrew, 140 Glenn Pool oil find Tulsa 1907, 85 Golden, CO, 194 Gore, Al, 272, 277, 348, 352 Government Accounting Office, 192 government failure, 48, 56–62, 64, 66, 103, 110, 209, 261, 325, 334 derived externalities, 61 distributional inequities, 61 hasty implementation/rising costs, 60, 328 internalities, 58–9, 327 regulatory capture, 328 Graham, Lindsay, 322 Grassley, Charles, 311 Great Britain, 234 Great Depression, 71, 78, 87 green jobs, 315 Greenspan, Alan, 137, 154–5, 160, 163, 293 Groves, Leslie, 218 Gulf Oil, 85, 87 Halliburton Inc., 297 Hamilton, Alexander, 234 Report on Manufactures, 234 Hamilton, James D., 292, 295 Hansen, Charles, 148 Harding, Warren, 71 Harrington, Michael, 23, 40 Hart, Gary, 248 Hart, Phillip, 107

Index Hatfield, Mark, 213 Hayden, Tom, 194 Heinz, H. John, III, 20 Heller, Walter, 116 Henry, John P., Jr., 215 Hickel, Walter, 106 Hoecker, Jim, 277 Hollis, Sheila, 192 Hubbert, M. King, 14, 70, 74 HUD. See Department of Housing and Urban Development Hume, David, 46 Hurricane Katrina, 305 Hussein, Saddam, 266 hybrid vehicles, 313 plug-in hybrids, 280 hydrogen fuel cells, 303 hydropower, 197 Ickes, Harold, 89 Independent (UK), 348 Independent Petroleum Association of America, 91 India, 233, 352 Infant Market Argument, 234 Inslee, Jay, 296, 303 institutions, 61–2, 167, 252–3, 328, 340, 346 and technological progress, 238, 339 categories of, 338 defined as, 252, 338 Intergovernmental Panel on Climate Change, 349 International Energy Agency, 267 Interstate Commerce Commission, 182 Interstate Oil Compact, 88, 104 IPAA. See Independent Petroleum Association of America IPCC. See Intergovernmental Panel on Climate Change Iran, 2, 197–8, 202, 212, 326 Iranian hostage crisis, 212 Iranian oil production, 198 Iran-Iraq war, 256 Iraq, 247, 272, 326 Israel, 1, 17, 43, 105, 123, 124 Jackson, Henry, 34, 38, 41–3, 106, 118, 120–1, 144–8, 161, 164, 187, 201, 213 and S. 622, 146, 148, 152 energy R&D proponent, 37–8, 118, 120, 158

389

gasoline rationing, 29 mandatory allocation controls, 16, 26, 124 oil price rollback, 64 opposition to oil price decontrol, 149, 200, 256 relationship to Jimmy Carter, 181 synfuels, 204, 211 windfall profits, 41 Janeway, Eliot, 215 Javits, Jacob (Jack), 41 Jevons, W. Stanley, 73 Johnson administration, 178 Johnson, Lyndon B., 91, 107 Johnson, Tim, 301, 302 Johnson, William, 163 Johnston, J. Bennett, 213, 271–4 Jordan, Hamilton, 209 Journal of Political Economy, 292 Kaptur, Marcy, 295, 302 Kassebaum, Nancy, 274 Keith, Hastings, 117 Kemp, Jack, 161 Kennedy, Edward, 161, 202, 210, 255–6, 260, 291 Kennedy, John F., 38, 103–5, 219 Kerry, John, 303, 321 Kerry-Lieberman American Power Act, 347, 351 Khomeini, Ayatollah, 212 Kiesling, Lynne, 305, 339 Kim, Jay, 278 King Coal, 70 Kissinger, Henry demand for “just” price of oil, 139 floor price of oil, 149 OPEC oil price stimulating exploration, 150 organizing oil-consuming countries, 139 research expenditures will lead to breakthroughs, 158, 195 Special Committee on Energy, 119 wrong on research expenditures, 232 K-L. See Kerry-Lieberman American Power Act Korean War, 80 Krug, Julius, 79–80 Kucinich, Dennis, 296 Kuwait, 247, 266, 272 Kuznets curve, 350

390

Index

LaFollette, Sr., Robert, 86 Laird, Melvin, 123 Lance, Bert, 180 Landis, James, 104, 108 Larson, John, 297 Leahy, Patrick, 256, 258 Levin, Carl, 233 Levin, Sander, 233 Lewis, Anthony, 179 Lewis, Jerry, 267 Libya, 19, 123, 214, 326 Lichtblau, John, 191, 214 Lieberman, Joseph, 268–70, 322 Lilienthal, David, 100 Limits to Growth, 2, 14 Lincoln, George, 114, 117 Lindmayer, Joseph, 317 livestock production, 197 LMFBR. See nuclear power liquid metal fast breeder reactor Love, John, 16, 20, 27, 120, 122–4 Lovins, Amory B., 183, 341 Lynn, James, 160 MAD. See Mutually Assured Destruction Maguire, Andrew, 150 Maine, 105 Mandatory Oil Import Program, 92–3, 107, 110, 118–9 quota system, 105, 107, 144 Manhattan Project, 31, 218 Market Demand Act, 88 market failure, 34, 44–66, 67, 73, 80, 92–4, 109, 151, 152, 159, 163, 207, 213, 221, 224, 279, 289–90, 319, 334, 337, 342, 344 capital market failures, 55, 64, 89 causes, 49 information, 54 justification for government intervention, 47 public goods, 46, 52, 55 theory, 46 Markey, Edward, 282, 288, 320, 333 Mayhew, David R., 21 McCain, John, 303, 312 McConnell, Mitch, 315 McCormack, Mike, 44, 121, 181, 196 McCracken, Paul, 64, 109, 115, 116 McFall, John, 143 McGhee, George C., 147

McGovern, George, 115, 117, 203 McLaren, Richard W., 64, 110, 119 McMahon, Brien, 100 MEOW. See Carter, Jimmy moral equivalent of war Meserve, Richard, 196 Metzenbaum, Howard, 188, 200, 201, 203, 211, 212, 256 Mexico, 215, 250, 266, 354 Middle East, 6, 331 Mill, John Stuart, 46 Mineral Leasing Act 1920, 86 Mining Act of 1872, 83 Mitchell, George, 273 Mitchell, William, 87 Moffett, Toby, 203, 212, 256 MOIP. See Mandatory Oil Import Program Mokyr, Joel, 238 Mondale, Walter, 168, 206 Moorhead, William, 205 Morton, Rogers, 106, 110, 123–4, 140 Murkowski, Frank, 297 Murtha, John, 266 Mutually Assured Destruction, 101 Nader, Ralph, 162 National Academy of Engineering, 158 National Corn Association, 274 national defense, 46, 52, 67 National Emergency Anti-Profiteering Act of 1990, 268 National Energy Act 1978, 187, 192, 194, 196, 198, 200, 239, 272, 296 National Energy Commission, 283 National Energy Conservation and Policy Act, 189 National Energy Mobilization Board, 205 National Energy Office, 119 National Energy Plan, 176, 184, 187, 194, 200 National Energy Policy Development Group, 297–9 National Energy Policy Plan, 260 National Energy Production Board, 144, 149, 161 National Energy Research and Development Policy Act, 118 National Energy Self-Sufficiency Act of 1979, 203 National Energy Strategy, 264, 270–1 main goal of, 271

Index National Environmental Policy Act, 106, 209 National Industrial Recovery Act, 90 National Recovery Act, 88 National Research Council, 280 National Science Foundation, 317, 342, 343 national security, 52, 63, 80, 83, 91–3, 100, 107, 162, 183, 325, 331 Department of the Navy, 101 threatened by cheap oil, 263 National Security Council, 185 national speed limit, 25, 146 nationalization energy industries, 5 oil, 83 oil and gas, 144 natural gas, 4, 94, 157 “old” and “new” system, 149 decontrol, 149 hydraulic fracturing, “fracking,” 323–4, 334 limited domestic supply belief, 2 limited suply belief, 2 Natural Gas Act of 1938, 95–7 Natural Gas Policy Act, 189, 191, 290 Order 139, 97 policy to 1960, 94–8 price, 4, 135 propane, 16, 123, 152, 255 propane shortages, 125 reserves, 76 shortages, 125 natural states, 252 NEA. See National Energy Act neo-Malthusian, 2, 7, 14, 73, 142, 174, 176, 182 NEP. See New Economic Policy NEPA. See National Environmental Policy Act Netherlands, 18 New Economic Policy, 114 new energy technology, 216, 221 alternative energy, 281, 306, 309 alternative energy development, 201 alternative renewable energy, 300 commercialization of, 175 diffusion, 239–44 government support, 235 mandate, 314 renewable energy, 197 Renewable Fuel Standards, 289, 305, 310

391

Renewable Fuels, Consumer Protection, and Energy Efficiency Act of 2007, 308 Renewable Portfolio Standards, 231, 239, 309–10, 316, 349 Renewable Portfolio Standards mandates, 318 technological optimism, 220 New England Congressional Caucus, 137 New Mexico, 87–8, 218 New Republic, 208 New York, 204 New York Daily News, 162 New York Times, 6, 14, 24, 43, 114, 119, 138, 139, 143, 162, 173, 204, 208, 246, 257, 268–9, 281, 299, 309–10, 334 NGPA. See natural gas: Natural Gas Policy Act Nickels, Don, 273 Nigeria, 2, 29, 214, 251, 266, 326 Nixon administration, 7–44, passim, 57, 64, 74, 106–24, 140, 146, 176, 219 price control phases, 15–17 Nixon, Richard, 1, 3, 4, 7–44, passim, 63, 106–24, 127, 130, 132, 133, 141, 164–5, 171, 178, 204 energy independence, 20 mandatory allocation controls, 26 new technology, 36–7 oil prices, 34 price controls, 15, 119 Project Independence, 3, 23, 31, 34, 37–8, 172 relationship with Congress, 117 Stabilization Act 1970, 114 symbolic gestures, 23–4 windfall profits tax, 41 North American Free Trade Agreement, 190 North Sea, 215 Norway, 215, 250 NRA. See National Recovery Act NSF. See National Science Foundation nuclear power, 98–104, 309, 318, 320 accelerated licensing of plants, 32 Ad Hoc Advisory Committee on Reactor Policies and Programs, 103 advocates, 132 as green jobs, 320 as long-term source, 325 as outside energy policy, 81 as renewable source, 342 as ultimate source of energy, 100

392 nuclear power (cont.) Atomic Energy Act, 101 Atomic Energy Act of 1946, 100 Atomic Energy Commission, 36, 75, 100–4, 107–8, 110, 171, 345 Atomic Industrial Forum, 164 atomic research, 99 atomic weapons, 101 benefits to development, 341 bulk of energy subsidies, 341 Bureau of Mines projections, 75 chain reaction, 99 Cheney report, 299 Clean Energy Standard, 231 coal competitor, 261 Department of Energy, 345 development, 281 development as Cold War policy, 103 early plant construction, 102 Energy Security Act, 297 Enrico Fermi, 99 expanded use, 323 fear of potential dangers, 102 Federal Power Commission, 104 first atomic bomb, 218 fission, 111 fusion, 324, 345 fusion electric generation, 6 government control of information and material, 101–2 growth, 188 H.R. 776, 274 industry, 163 lack of private investment, 103 liquid metal fast breeder reactor, 36, 44, 107, 109, 111, 118, 180 market-competitive, 261 materials, 100 military applications, 101 National Energy Strategy, 271 new conventional plants, 132 no commissioned plants 1990s, 276 not cost competitive, 102 nuclear fuel, 36 Nuclear Regulatory Commission, 345 opposed for being unsafe, 106 plant licensing and EPAct, 276 plant operations, 241 plants, 141, 162, 180 pressurized water reactor, 101 private interests in operations, 160

Index proliferation, 180 Reagan and industry, 260 Reagan assistance to producers, 340 recommendations for improving, 38 reduce oil dependency, 330 reducing costs, 103 renewal of, 296 research, 100, 111 research funding, 99 source of electricity, 313 subsidies, 318 support for, 196 taxes, 278 technologies, 119 Three Mile Island, 202 waste, 274 O’Leary, Hazel, 279 O’Leary, John F., 178–9, 210, 212 O’Mahoney, Joseph, 79 O’Neill, Thomas “Tip,” 181, 187–8, 201 Oakar, Mary, 270 OAPEC. See Organization of Arab Petroleum Exporting Countries Obama administration, 221, 231, 290, 314–29 alternative energy companies, 328 clean energy agenda, 353 general energy goals, 322 green jobs as concept, 320 solar, wind and electric power, 317 Solyndra, 324 subsidies, 318 technological adoption, 319 Obama, Barack, 5, 231, 286, 289, 312, 314–29, passim 2011 State of the Union speech, 316 auto industry, 316 cap-and-trade, 322 energy agenda, 316 OCC. See Oklahoma Corporation Commission OCS. See Outer Continental Shelf ODM. See Office of Defense Mobilization Office of Carpool Promotion, 42 Office of Defense Mobilization, 91 Office of Emergency Preparedness, 114 Office of Management and Budget, 29, 57, 109, 140 Office of Technology Policy, 197 OIA. See Oil Import Administration

Index oil. See Petroleum Oil Fair Pricing Act, 256 Oil Import Administration, 92 Oil Import Appeals Board, 92 Oil Policy Committee, 120 Oil States Advisory Committee, 88 oil “weapon,” 2, 33, 155, 248, 249 Oklahoma, 78, 83, 85, 86, 87, 88, 178 Oklahoma Corporation Commission, 86 Olds, Leland, 97, 100 OMB. See Office of Management and Budget OPEC. See Organization of Petroleum Exporting Countries Oppenheimer, J. Robert, 99 Organization of Arab Petroleum Exporting Countries, 1, 9, 17, 23, 29, 333, 351 Organization of Petroleum Exporting Countries, 1, 2, 8, 11, 15, 18, 19, 33, 35, 37, 40, 43, 53, 63, 77, 105, 123, 139, 147–8, 150, 152, 174, 187, 195, 199, 204–5, 211, 213–5, 219, 246–54, 259–60, 266, 282, 308, 310, 333 Ottinger, Richard, 257 Outer Continental Shelf, 38, 112, 139, 171, 258, 271 Oxley, Michael, 268 Packard, Ron, 278 Packwood, Robert, 147, 157 Paley Commission, 81 Pallone, Frank, 300 Paretian efficiency, 48, 52 Partnership for a New Generation of Vehicles, 230, 278–80 TheClean Car Initiative, 278 path-dependant energy policy, 131–2 path dependence, 131 Peak Oil Caucus, 287 Pearson, James, 189 Pelosi, Nancy, 310, 312, 325 Percy, Charles, 23 perfect competition model, 48–9, 53 Permanent Subcommittee on Investigations of the Senate, 118 Persian Gulf, 155, 199, 301, 326 Persian Gulf War, 247 Peterson, Peter G., 109, 163, 345 petroleum “gap” between supply and demand, 13–15, 75, 173, 246, 299, 333

393

“old” and “new” oil, 16–17 “old” and “new” oil, definition of, 16 “stripper” wells, 16 1973 oil embargo, 1–5, 10, 17–20, 22–6, 30–1, 33, 42–3, 73, 128 allocation rules, 135 belief in need to fix prices, 8 cheap oil, 263 conservation, 248 conservation as result of decontrol, 142 consumption, 250 controls on, 4 Crude Oil Equalization Tax, 180, 184, 185, 199 Crude Oil Windfall Profits Tax Act, 216 dependence on foreign oil, 2 diesel shortage, 1 domestic drilling activity, 190 domestic oil resources, 171 effort to organizing consuming nations, 139 entitlement program for refiners, 137 gasoline shortage, 1 heating oil, 26, 105, 157 import reductions, 149 imported crude oil, 136 inflation argument due to decontrol, 147 limited domestic supply belief, 2 limited supply belief, 2 low sulphur oil, 105 market shocks and recession, 292 no “free” market, 7 oil and natural gas markets, 8 oil field property rights, 81, 83 oil shock, 19, 291–4 peak oil, 75, 77, 287, 323 Petroleum Industry War Council, 90 Phase IV price controls, 217 post-petroleum economies, 253 problem of calculating refined oil price, 136 reliance on a global market, 2 reserves, 76 shortages, 9, 69 state and federal manipulation of prices, 12 wildcatters, 85, 87 Peyser, Peter, 196, 215 Phillips Petroleum, 97 PIES. See Project Independence Evaluation System

394

Index

Pigou, Arthur, 46, 50 PNGV. See Partnership for a New Generation of Vehicles post-World War II energy consumption, 55 Power Reactor Demonstration Program, 102 Powerplant and Industrial Fuel Use Act of 1978, 189, 262, 337 Pressler, Larry, 268 Prevent Unfair Manipulation of Prices Act, 308 price controls, 9, 150 call for in the 1970s, 7 calls for in oil market, 11 Congressional belief in extending, 136 congressional calls for 1970s, 128 creating energy shortages, 9 crude oil, 201 decontrol, 165, 169, 200, 259 market manipulation, 150 Nixon administration, 8 opposition to decontrol, 143 Phase IV, 122, 135 propane, 122 rules and energy shortages, 9 Price, David, 271 Princeton Plasma Physics Laboratory, 345 Project Gasbuggy, 109 Project Independence, 23, 30–5, 38–40, 60, 63–4, 126–7, 130, 165, 171, 219 criticism of report, 138 Ford endorsement, 130–1 increases in federal gasoline tax, 140 mandatory energy efficiency standards, 140 Project Independence Blueprint, 130, 133 Project Independence Evaluation System, 130, 138 Project Independence Report, 127, 138, 140 Project Interdependence, 139 property rights (in oil and gas) capture, 59, 235 consolidation of surface rights, 84 prorationing, 88–90, 110–1 prorationing of surface rights, 85 unitization, 84, 87 Proxmire, William, 164 Prudhoe Bay, 107, 152 public goods, 63, 67–8, 333

Public Law 109–58. See Energy Policy Act 2005 Public Power Association, 108 Public Utilities Regulatory Policies Act, 189, 192 public utility commissions, 68 Public Utility Holding Company Act of 1935, 95, 273, 274 PUC. See public utility commision Puerto Rico, 105 PUHCA. See Public Utility Holding Company Act of 1935 PURPA. See Public Utilities Regulatory Policies Act Putting the Pedal to the Metal: Accelerating the Energy Independence of America Act, 303 PV. See solar energy: photovoltaics PZEV. See partial zero emissions vehicles Quillen, James, 205 Rahall, Nick, 308 Randall, Charles H., 83 Randall, Clarence, 93 Randolph, Jennings, 79 Reagan administration, 246, 254–63 decontrol for growth, 260 Reagan, Ronald, 5, 254–63, 340 accelerates decontrol, 255 decontrol oil prices, 261 deregulate natural gas, 261 energy dependence, 247 energy policy narrative, 263 expand off-shore development, 261 hopes in free energy market, 258 paradigm shift in energy policy, 257 price decontrol, 255 self-sufficiency belief, 260 sought to abolish DOE, 261 stalemate with Congress on energy, 262 supports SFC, 262 recessions and energy shocks, 287, 290–3, 295 Reciprocal Trade Agreements Act of 1934, 91 Reconstruction Finance Corporation, 160, 163 Reid, Harry, 313 Reilly, William, 270 rent seeking, 21, 61, 93, 236, 328

Index resource depletion, 65, 73, 142 Reuss, Henry, 161 Revenue Act of 1913, 86 RFS. See new energy technology: Renewable Fuel Standard Ribicoff, Abraham, 41, 181 Richter, Burton, 317 Rickover, Hyman, 101–2, 182 Rockefeller, John D., 69, 84 Rockefeller, Nelson, 158–63, 208 “cheap fuel is over”, 126 Energy Independence Authority, 129 Rogers, Everett M., 241, 242 Roosevelt, Franklin D., 88, 89, 96, 141 Roosevelt, Theodore, 77 RPS. See new energy technology: Renewable Portfolio Standards Rumsfeld, Donald, 160 SAFE. See Securing America’s Future Energy Samuelson, Paul, 46 Samuelson, Robert, 335 Santa Barbara, CA, 106 Saudi Arabia, 17–8, 36, 123, 155, 172, 198, 213, 247, 249, 254, 258–9, 263, 266–7, 301, 326 Sawhill, John C., 130, 135–9, 140, 212 Sayers, R. R., 79 Schlesinger, James, 60, 172–9, 181, 187, 188, 191, 198–201, 203–4, 208–12, 248, 255, 266 Schmittner, Andreas, 349 Schroeder, John, 262 Schultze, Charles L., 144, 147, 179 Schumer, Charles, 282 Scott, Hugh, 141 Seaborg, Glenn, 36, 75, 103, 107–8, 111–2, 171 Seamans, Robert, Jr., 158 Securing America’s Future Energy, 299–301 Senate Banking Committee, 121 Senate Committee on Banking, Housing and Urban Affairs, 164 Senate Finance Committee, 210 September 11, 2001, 284 Seven Sisters, 12 SFC. See Synthetic Fuels Corporation Shah of Iran, 198, 212 shale, 78 Sharp, Philip, 265, 267, 269, 271, 274, 276, 288

395

Sherman Act, 87 Shultz, George, 107, 119, 123, 219 Sidgwick, Henry, 46 Silk, Leonard, 139 Simon, William, 27–9, 38–40, 120, 123, 130, 133–4, 136, 138, 140, 145, 155, 160 Simpson, John W., 164 Simpson, Richard, 91 smart grid, 339 Smith, G. O., 78 Smith, Nelson Lee, 97 Smith, Phillip, 196 solar energy “million solar roofs” program, 237, 239, 282 “Solar Coalition”, 196 “Sun Day”, 194 20 percent plan, 197, 204 advocated by Jimmy Carter, 165 Carter-era commercialization, 318 development, 196 difficulty crafting policy, 241 DOE as obstacle to commercialization, 194 Domestic Policy Review, 194–7 expansion of use, 60 government loans, 316 growth, 322 heating, 176, 192–3, 221, 223, 234, 239, 242, 317 incentives, 340 inclusive technology, 197 industry, 176, 193, 240, 282 industry lobbies, 321 limitations, 232, 317, 318 mass production and costs, 317 National Energy Act, 193 National Energy Plan, 184 national solar strategy, 194 Obama administration, 290 Paley Commission report, 81 photovoltaic programs, 342 photovoltaics, 234, 242, 282, 318, 324, 342, 345 potential, 197, 208, 216, 231, 324, 340 reduced funding, 257 Renewable Portfolio Standards and, 231 solar bank, 197, 213, 216 Solar Hot Water Model, 223–5 subsidies, 197, 237, 317–8, 328, 341 tax credits, 184

396

Index

solar energy (cont.) tax incentives, 221, 237 taxes and subsidies, 65 technology, 223 use goal by 2000, 174 utility projects, 316 White House solar panels, 197, 257 Solyndra, 324–5, 328, 346, 354 South Korea, 233 Spain, 318, 321 Special Committee on Energy, 119 Speth, James “Gus”, 209 SPR. See Strategic Petroleum Reserve Staats, Elmer B., 203 Standard Oil, 69, 84–5, 87, 91, 95 Standby Energy Authorities Act, 145 Stanford Institute Research Study, 187 Stegmeier, Richard J., 264 Stein, Herbert, 75 Stimson, Henry, 99 Stobaugh, Robert, 204, 208 Stockman, David, 188, 261 Strait of Hormuz, 326 Strategic Petroleum Reserve, 153–4, 184, 269–70, 275–6, 282, 300, 302, 314, 326, 351 foreign policy, 155 Straus, Michael, 79 Strauss, Lewis, 100, 102–3 Stupak, Bart, 308 Suez crisis 1956., 92 Sun Day, 196 Sununu, John, 270 supply and demand for innovation, 223 Supreme Court, 88, 97 Surface Mining Reclamation Act, 118 synfuels, 36–7, 40, 44, 60, 64–5, 78, 79, 80, 81, 109–112, 160–4, 195, 203–13, 216, 223–4, 228, 232, 234, 237, 241, 262, 328, 346 Nazi Germany, 79 program of 1980, 314 synthetic fuels. See synfuels Synthetic Fuels Corporation, 216, 236–7, 262 Synthetic Fuels Corporation Bill, 327 Synthetic Liquid Fuels Act 1944, 79 Syria, 124 Taft, William Howard, 77 Tauzin, Billy, 299, 303 tax credits, 300

Tax Foundation, The, 50 Teapot Dome, Wyoming, 86 Temporary National Economic Committee 1938, 89 Tennessee Valley Authority, 100 Texas, 84, 87–8, 178, 246 Texas Company, 85, 87 Texas Railroad Commission, 12, 88–91, 104, 111 TFP. See total factor productivity The Energy Crisis, 2 Thompson, Victor, 262 Thurmond, Strom, 203 Toronto Globe and Mail, 348 total factor productivity, 292 Toyota Prius, 311 Train, Russell, 123 Trans Arabian pipeline, 108 Trans-Alaska pipeline, 107, 119 truckers “roll” on Washington, 28 Truman Administration, 91 Truman, Harry S., 79, 81, 99, 100 Tsongas, Paul, 196, 199 U.S. Geological Survey, 39, 77–8, 171 Udall, Morris, 34, 40 Ullman, Al, 145, 148, 152, 156, 181 United Nations, 101, 267 United States Council for Automotive Research, 278 Unocal, 264 Urban Development Corporation, 160–1 USGS. See U.S. Geological Survey USSR, 101 Vanik, Charles, 40, 144 Venezuela, 2, 18, 29, 247, 252, 266, 326 Vietnam War, 106, 117 Volkmer, Harold, 268–9 Wall Street Journal, 5, 215, 305 Wallop, Malcolm, 271 War Resources Council, 79 Washington Post, 18, 233, 255, 266, 334 Washington Times, 269 Watergate scandal, 23, 31, 43, 121–2, 123 Watkins, James, 264, 270, 275 Watkins, Wes, 266 Waxman, Henry, 288, 319 Waxman-Markey bill of 2009, 320, 331, 336, 347, 351 Weidenbaum, Murray, 162–3, 255, 257

Index West Virginia, 79 Westinghouse Electric Company, 101–2, 317 Wharton Magazine, 256 White House Economic Policy Committee, 270 White House Energy Policy Office, 27 White House Office of Energy Policy and Planning, 178 Whitten, Les, 155 Wilford, John Noble, 108 Will, George, 233 Wimberly, Harrison, 97 wind energy, 197 a niche product, 234 Carter-era commercialization, 318 electric generation, 318 income to producers, 231 limitations, 232 mass production and costs, 317 not a reliable source, 309 not a replacement for coal, 317 Obama administration, 290 potential, 231, 240 Renewable Portfolio Standards, 231

397

subsidies, 65, 318, 340–1 utility projects, 316 windfall profits, 134, 143, 246 tax, 136, 149–50, 152, 199, 201, 204, 210–1, 215–6, 263, 296, 308 winter of 1977, 177 Wirth, Timothy, 273, 288 Wolf, Charles, 56, 58, 60–1 World Bank, 246 world oil market, 8–10, 16, 33, 216, 247 World War I, 71, 78, 86 World War II, 8, 75, 78, 89–90, 99, 218, 291 Wright, Jim, 187 Wyden, Ron, 304 Wyoming, 28, 77, 79 Yale Law Journal, 71 Yom Kippur War, 1, 17 Yucca Mountain, Nevada, 274 Zarb, Frank G., 140–3, 155–6, 160, 163, 268 Zausner, Eric, 130, 133, 138–9, 163 ZEVs. See electric vehicles: zero emissions vehicles