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A Free Market Energy Policy

Doug Bandow

Ever since the 1973 Arab oil embargo Americans have thought of the Persian Gulf as the West's lifeline. And that's why the U.S. rushed into the Gulf back in August -- to preserve "jobs," in the words of America's Secretary of State.

In fact, the importance of Middle-Eastern oil has been greatly exaggerated. But this widely accepted mythology is fueling calls for a national "energy policy" to reduce our dependence on petroleum imports. Indeed, the Bush administration has been widely criticized for not embracing energy taxes, conservation controls, and the other sort of draconian government regulations that characterized the Carter administration's approach to energy.

Contrary to the claims of the doomsayers, the U.S. does have an effective energy policy: reliance on the market. And we should continue that approach, so that any price increases from a future disruption bring forth new supplies, promote new technologies, processes, and substitutes, and encourage conservation.

Indeed, this is the lesson of the "energy crisis" a decade ago that the planners and meddlers want us to forget. Despite the hectoring of Congress and predictions of disaster by the "consumerist" lobby, oil decontrol brought forth more energy at lower prices. OPEC's domination of international oil markets was broken.

Unfortunately, however, memories are short. Once gas prices began rising last July, consumers, many of whom had made tens of thousands of dollars from selling their appreciated homes, began complaining. Democratic and Republican legislators charged "plundering" and "profiteering." (Their charges weren't original. In 1977 Jimmy Carter attacked the oil companies for "potential war profiteering.") Even George Bush joined in, browbeating the oil companies to hold the line on prices.

Along with the usual demagoguery against the usual suspects, the oil companies, were calls for federal action. Analysts started dusting off their policy panaceas of a decade ago, calling for energy taxes, subsidies for alternative fuels, strict enforcement of the 55-mph speed limit, and tighter CAFE auto mileage standards. Washington Post columnist Judy Mann even advocated nationalizing the oil companies. The war pushed energy planning from the front burner, but now attention is again turning to the issue. And, unfortunately, enthusiasm for government "plans" seems eternal.

What happened the last time the government attempted to micromanage the oil markets? The result was, to say the least, less than desirable.

Oil Price Controls

Richard Nixon first imposed limits on oil prices as part of his wage and price control programs. Government regulation left companies with neither the money nor the incentive to explore for new domestic supplies -- an off-shore platform can cost tens of millions of dollars, for instance. Nor did firms want to invest in new technologies that could enhance the recovery of oil from old wells, refine "heavy" oil, and so on. (A 1978 Office of Technology Assessment study concluded that high-cost recovery techniques could yield up to 30 billion extra barrels of oil -- if American companies were allowed to realize the revenue.) Oil price controls also stifled the development of lower-grade oil resources, such as coal (liquified coal could provide up to a trillion barrels of oil), oil shale (the possible source of 1.8 trillion barrels), and tar sands (even larger potential reserves).

Further, to combat the obvious unfairness of some companies being more reliant on more expensive foreign oil, the government created an "entitlements" program which required companies with more domestic reserves to send checks to firms that imported more oil. In practice this operated as an import subsidy. Two M.I.T. economists figured that by 1977 the program had caused oil imports to be three and one-half times greater than they would have been without controls.

The final impact of price controls was to encourage consumption and discourage conservation through added home insulation, more fuel-efficient cars and appliances, and so on. With the lifting of controls, however, Americans looked for ways to reduce their energy consumption; as a result, energy use per ton of output has dropped by nearly a third since 1973.

Windfall Profits Tax

The demagogues in Congress, horrified at the thought of oil companies making even an average return on capital, imposed a roughly 70 percent excise tax on oil (misleadingly called the "windfall profits tax"). The tax has since been repealed, but during its prime it discouraged production of between 415,000 and 800,000 barrels a day.

Gasoline Price Controls and Allocation Rules

Most Americans are not aware that during the 1970's the government decided how much gasoline was to be shipped where. Since allocations were based on previous use, fast-growing urban areas were short-changed, resulting in gas lines, while rural states were flush with gas. The rules were further distorted by the political clout of such groups as auto fleet operators, boaters, and farmers, whose members received larger allocations than average motorists. In a free market local shortages would have pushed up prices, causing firms to divert shipments to those areas. But federal bureaucrats learned nothing, and the problems persisted throughout the decade.

Energy Fascism

President Carter's Moral Equivalent of War included a range of other measures, including an energy Gestapo to enforce temperature controls in "public" buildings. There were oil overcharge prosecutions that continued into the 1980's. And on and on.

It is not enough to simply avoid repeating the mistakes of the past, however. For as long as we are willing to allow arcane environmental regulations to block expansion of our energy supplies, U.S. soldiers may find themselves at risk in the Middle East.

Most of America's remaining reserves are on federal property -- both the third of the U.S. that the federal government owns and off-shore areas claimed by the state or federal governments. All told, the national government owns mineral rights to 52 percent of U.S. land and controls 95 percent of oil resources, 85 percent of high grade tar sands, 76 percent of oil shale, 40 percent of natural gas, and 35 percent of coal.

Indeed, the federal outer continental shelf (OCS), which already provides roughly 14 percent of our crude oil and 29 percent of our natural gas, is thought to contain as much as 32 billion barrels of oil and 116 trillion cubic feet of natural gas. Unfortunately, we don't know how much there is because less than 3.8 percent of OCS lands have been leased and just two percent are now under lease. With much of the OCS -- placed off-limits by Congress and the administration, little leasing is likely to occur in the near future.

There is also Alaska. Although Prudhoe Bay yielded a major find, only two of the state's 23 basinal areas have been intensively drilled and a dozen haven't been explored at all. As much as nine billion barrels of crude oil may be present in a sliver of land just 65 miles away from the North Slope, but again, we don't know, because the area, within the Arctic National Wildlife Refuge (ANWAR), has not been explored.

Ironically, the environmentalists who so fervently oppose developing federal lands allow drilling within their own wildlife preserves. The National Audubon Society in its Louisiana Rainey Reserve and the Michigan Audubon Society in its Michigan Bernard W. Baker Sanctuary both collect millions from oil production. The drilling is carefully controlled and the wildlife is unharmed.

Similar procedures could be used in the development of federal land. Energy reserves tend to be concentrated in limited areas: the U.S. Geological Survey says that only 2.7 of about 82 million acres of Wilderness lands have much potential for oil; of the 1/5 million acres in Alaska's ANWAR, only 15,000 acres are thought to possess most of the oil. Drilling might be commercially justified on a larger portion of OCS lands, the safety record there -- 95 percent of OCS oil is piped to the mainland -- has also been very good. Over the last 15 years the spillage rate has been just one one-thousandth of one percent.

Unfortunately, even after land is opened for leasing, the regulatory process is unnecessarily complex: Offshore drillers have to obtain 15 different permits and comply with 90 sets of safety regulations. There is normally almost a two-year delay between the lease sale and the acquisition of drilling permits, and litigious environmental groups, local politicians, and federal bureaucrats can drag the process out indefinitely. For example, a Chevron-led consortium has spent $2.5 billion to develop the Point Arguello field off of California, which could produce roughly 100,000 barrels of oil a day. But the Santa Barbara County Board of Supervisors has so far blocked production by refusing to issue permits to transport the oil to refineries.

The energy crisis a decade ago was always a political crisis. Thus, if officials in Washington are really worried about our dependence on foreign oil, so worried, in fact, that they are willing to send tens of thousands of troops to prop up authoritarian, oil-rich monarchies, then they should adopt an official energy policy of getting out of the way. Federal land, including mineral rights, should be sold off in toto. What is not sold should be leased. On particularly environmentally sensitive land, drilling need only be more carefully controlled, as it is on the Audubon Society's own property.

"Crises" seem to bring out the worst in everyone, and the current crisis is no exception. Although the administration's plan, announced in February, is relatively modest, interventionist legislation is proliferating on Capitol Hill. Before the public falls under the spell of Washington politicians and bureaucrats chanting "energy policy, energy policy," however, people need to reflect on how poorly federal controls worked in the past. If not, the Congress might succeed in creating what Saddam Hussein was never capable of achieving: gasoline lines in the U.S.

Doug Bandow is a Senior Fellow at the Cato Institute and the author of Beyond Good Intentions: A Biblical View of Politics (Crossway Books) and The Politics of Plunder: Misgovernment in Washington (Transaction Books). This article is adapted from The Free Market.
Copyright © by Covenant Community Church of Orange County 1991
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