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Energy Price-Control Lessons for ObamaCare (remembering a classic WSJ editorial from 1979)

For decades I have enjoyed the opinion-page editorials of the Wall Street Journal, both the unsigned editorials and the guest opinions. During the 1970s energy crisis, and today amid climate alarmism and the futile crusade to regulate carbon dioxide, the Journal has been a bastion of sound thought.

I was recently reminded of perhaps my favorite WSJ energy editorial of all, “Buffer of Civility,” published during the dark days of energy rioting in summer 1979 (yes, the U.S. experienced fuel riots from federal price controls that caused energy shortages). What brought this to mind was another WSJ editorial, “Sebelius’s Price Controls,” which reported on a 136-page price-regulating rule under ObamaCare–and this message to state governors from HHS Secretary Kathleen Sebelius

urging them “to prevent unjustified and excessive health insurance premium growth.” Apparently, “unreasonable” means rate increases that exceed 10% next year, except when it doesn’t. If an insurer crosses this arbitrary threshold, “The review process would then determine if the increase is, in fact, unreasonable.” So that’s cleared up.

The Journal added:

This discretion is typical of the vast ad hoc powers that ObamaCare handed to regulators, though Ms. Sebelius’s true goal is to punish the insurance industry for rising health costs that the new entitlement is already turbocharging. Like so much else in U.S. health care, no one seems to find it odd that the government is decreeing how much businesses are allowed to charge for a product that consumers want to buy, regardless of the economic reality.

Economic reality: maximum price controls cause shortages, and shortages cause social strife, even violence. This brings us back to June 1979 and a plea to recognize the real virtue of the free market,  our buffer for civility.

Here is the classic editorial.

“Buffer of Civility,” Wall Street Journal (June 26, 1979)

How much this would affect the price of gasoline is a matter of conjecture, but we know of no informed opinion that would put the clearing price as high as the $1.60 a gallon that has already been touched by a favored station or two in the current crisis. The Department of Energy recognizes that its regulations are the cause of lines, and indeed has proposed deregulation in the past. Now it is asking for comment on four different price-control alternatives. The best is a single uniform national price lid; if it were set high enough –$1 in our opinion, $1.30 in nearly everyone’s—the market itself would dictate a lower price and still handle the allocation problem. We would have the moral equivalent of decontrol, and people would no longer be rioting over gas station lines.

The truckers’ revolt has the same root cause. Diesel fuel has escalated in price, boosting trucking costs already pushed up by the 55-miles-an-hour speed limit and inflation generally. Why does an increase in costs lead to strikes and highway blockades and shootings? It would be far more peaceful if truckers simply boosted their rates to pass along the higher costs, letting consumers decide which items are, and which are not, worth the additional cost of higher truck rates. This civilized course is not the one the truckers are following, but the reason has nothing to do with their being colorful characters who talk CB and love violence. The reason is that their prices are controlled by a bunch of white-collared bureaucrats called the Interstate Commerce Commission.

Police with dogs and billy clubs cleared the streets of Levittown, Pa., Sunday after a two-day riot by fuel-hungry motorists and truckers, plus the usual thrill-seeking teenagers. Dozens of people were hospitalized, one with a gunshot wound, storefront windows were smashed, two service stations vandalized and firemen attending a burning auto were pelted with rocks and beer cans.

The social fabric of this society is stretched tauter than any time in a decade. Even with people being killed in gasoline lines and gunshots ripping through truck cabs, of course, we are still a long way from, say, 1968, with slums aflame and campuses everywhere erupting. American society survived that and will survive this. The difference is that the disruptions of the 1960s really did have roots deep in the culture. The long hot summer of 1979 is entirely needless, even silly.

The gasoline lines, with their inconveniences and distempers, could be abolished overnight, literally with the stroke of a pen. President Carter need only exercise his authority to lift price controls from gasoline, which would also abolish the Department of Energy system of allocating gasoline supplies. Once dealers were free to bid against each other for available supplies, the price mechanism would automatically direct supplies into any locality where heavy demand suddenly erupted. Learning that gasoline will be expensive but at least available, motorists will stop topping off tanks. The problem of lines will go away.

By now, of course, the big trucking companies have grown comfortable with the ICC, acquiring a vested interest in its denials of entry that limit competition. (The big oil companies are well along the same route with DOE.) So while the truckers have your attention, they are also opposing truck deregulation efforts being led by President Carter and Senator Kennedy. The President and the Senator are right. Open price competition not only makes the best use of the nation’s economic resources, it also avoids the kind of social disruption that results when the allocation of diesel fuel has to be decided in a political joust between truckers and farmers.

Classical economists used to list among the virtues of the price mechanism that it avoided social strife. It did not set group against group, they taught. In our lifetime, we have protected the poor with income transfers to insure a minimum standard of living, but we have generally allowed prices to allocate goods among different end uses. It has worked so smoothly we did not understand what the classical economists meant; today we see. In addition to its economic virtues, the price mechanism is a vital buffer of civility.

4 comments

1 Ray { 02.02.11 at 1:07 pm }

Every leftist knows that the market is unfair because some people get more and some less. This requires government regulation so everybody gets the same amount and everybody gets to wait in line, except, of course, the politicians who are exempt from the regulation.

2 Trey { 02.02.11 at 4:54 pm }

Off-topic: I know a few of the energy experts here at MR have ties to Texas (Bradley and Bryce, for example). Does anyone have any thoughts on today’s rolling power outages? Might make an interesting post…

Related questions:

How much capacity do we have this time of year? (According to Bryce, we use 60+GW on some summer days.)
How much was down due to scheduled maintenance?
Was some power being sold to other states?
How much did wind power contribute?
Is there a web page where one can see current load on the ERCOT system (supply and demand)?

3 Price Controls Of Whatever Kind | LIKE LICORICE { 02.02.11 at 10:08 pm }

[...] on the nature of price controls he attaches that editorial, “Buffer of Civility”. This is from Masterresource, and I think you will like it. window.fbAsyncInit = function() { [...]

4 JavalinaTex { 02.03.11 at 10:25 am }

Trey,

Unfortunately, the ERCOT web site was totally changed when they went to nodal dispatching effective 12/1/10; and I can no longer find much of the information you are looking for. What was especially interesting was the houly revised 48 hour (by hour) wind forcasts.

A few answers. They do have a location where they list unit outages. Very little electricity is exported out of (or imported in to) ERCOT (I would guess max cap of 1 GW).

What matters, then is load. Off of memory, much of the off peak months the load will average at 25 GW and range between 20 and 30 GW. You can see on the 29th and even some later days it ranged between 25 and 31 GW. Then you go to late in the day on the 1st (and continuing to the 2nd and 3rd) and the load skyrockets to 55 GW having ramped up all day from a low of 28 GW. It has been in the 49 to 56 GW range since.

http://www.ercot.com/content/cdr/html/20110202_actual_loads_of_weather_zones

Regarding the editorial, I have always argued that Carter’s unwillingness to bite the bullet and deregulate gasoline prices, if not oil, cost him reelection much more than even the fall of the Shah. Carter knew the policy was wrong, believed it was wrong, he just was too poor a politician to do that (at least until after the 1980 election). As it was, Carter signed an exec order for total deregulation on 9/1/81. Reagan’s first (or second act) as president was to immediately deregulate oil prices. There was a very short, sharp spike upward, not as bad as projected, followed by a decade long downward spiral in oil and natural gas prices.

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