Carter Was Pro-Drilling Compared to Obama

The last Democratic President to acknowledge the need for exploration was Jimmy Carter, under whom I served as Deputy Assistant Secretary for Oil and Gas. Carter pushed both an offshore 5-year leasing plan and production from the Naval Petroleum Reserves. I know–I was in charge of both.

So despite the Windfall Profits Tax and much hyperbolic rhetoric, President Carter had a foot, or at least a few toes, in the pro-production camp. And it was none other than Carter who set up the Arctic National Wildlife Refuge (ANWR) for drilling (after adequate study) as one of his last acts in office.

The 39^th President also initiated both the decontrol of gas dating from the 1950’s and the (phased) decontrol of crude oil and oil products that began with Richard Nixon in 1971 which Reagan simply accelerated with his famous decontrol executive order of January 1981.

Democrats vs. Drilling

But no more! Democrats today seem to want to fly in the face of reality by espousing phantom sources of energy and working at cross purposes with American interests:

Democrats today tend to:

• Believe in Peak Oil and the imminent end of the hydrocarbon age
• Accept Global Warming Alarmism unquestioningly
• Exaggerate the decline in the state of the environment when it is actually improving
• View hydrocarbons as a threat to modern civilization rather than its creator and preserver and to viscerally oppose oil and gas exploration
• Exaggerate the environmental impact of oil drilling both on and offshore

All this leads Democrats to support and subsidize trendy new sources of power (e.g. switchgrass!) without acknowledging how limited or how environmentally damaging they are when implemented on a large scale.

This has only a little to do with “free market” ideology. I assert that a centrist–or if you like a moderate liberal–who believes in moderate government intervention (securities regulation, social security, Medicare, single payer health, etc.) can:

• Continue the intangible drilling cost deduction(In place during the last ten administrations)
• End ethanol subsidy($22/bbl)
• End wind subsidies(2 cents/kWh)
• Eliminate “green” power mandates
• Renew offshore drilling off the east  and west coasts
• Drill the small proposed ANWR acreage
• Curtail the over-rated “green jobs” program
• Put a hydrocarbon realist in the Energy Department
• Treat the domestic oil and gas industry as one of the most successful drivers of the US economy. (Any bailouts for Chevron etc?)
• End petroleum related international sanctions except when absolutely necessary (keep Iran; end Syria and Sudan)
• Provide reasonable support abroad for domestic energy companies now locked in competition with state owned companies.

Democrats are willing to see a Goldman Sachs man in treasury, but you can imagine the howl if Rex Tillerson (Exxon CEO) was tapped to head the Department of Energy?

And all this anti-hydrocarbon cant has been going on since the 1980s—three decades now.

Where’s an Energy-realist Democrat to Turn?

So I find myself applauding institutions such as Cato, IER, and the American Petroleum Institute and wishing for the day when we could have some Democrats in the White House, Senate and House who understand how the real energy world works.

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R. Dobie Langenkamp (BA, Stanford; JD, Harvard Law School) was Deputy Assistant Secretary for Oil and Gas, U.S. Department of Energy (1977–81) and deputy assistant secretary for Naval Petroleum Reserves, U.S. Department of Energy (1996–97).

He has consulted for the Department of Energy and the State Department on Iraqi energy law and policy and was Director of the National Energy-Environment Law and Policy Institute at Tulsa University Law School. He now practices and lectures on international energy law. His entire resume is here.

Thirty years after President Carter declared that our energy crisis was the “moral equivalent of war,” forever known as “meow,” we are faced with another federal potentate who is sure that he knows what is best for us. At a Smart Grid conference in Washington, D.C., Energy Secretary Stephen Chu opined that “The American public … just like your teenage kids, aren’t acting in a way that they should act.”

Just as President Carter declared that our country’s failure to conserve natural gas and oil was a symptom of a “malaise,” not heaven forefend, the low prices for fuels sold at (federally) regulated prices, so does the current Energy Secretary believe that our citizenry is incapable of making rational decisions about energy use.

Why would the smartest guy in the room (read: central planner) say such a thing–a mistake his press office now says?

Incentives Matter

We consumers respond to economic incentives all the time. If the government offers an incentive to get rid of a car that was already paid for, then we will take the $4,500 and walk away with a new one; when the price of oil and gas rise people put on sweaters and turn down the thermostat, install new windows and think about shorter commutes to work; if the government encourages banks to lend money at very low rates to anyone with a pulse, then people will borrow money to purchase houses they cannot afford; if the government pays companies to generate electricity using wind then they will try to do so regardless of its specific utility in the energy mix. Incentives run the world of personal choices. People can only make rational decisions about the real alternatives that face them, not about some theoretical concerns far in the future.

Obviously, the Secretary thinks he was the only person to grow up in a household where dad told us to turn off lights, shut the refrigerator door, close windows in the winter and other staples of energy-conscious behavior. Only it was not really energy-conscious behavior that motivated dad, it was the gas and electric bills at the end of the month.

I’ve got news for you, Mr. Secretary, a lot of us grew up with this dad, made fun of him at the time for his “light bulb fetish,” and now tell our children exactly the same things (and don’t track mud on the floor, while you’re at it!).

School Indoctrination: Will Cod Liver Oil Beat Incentives?

But if you are not going to use the market, then you have to use the children. How better than by scaring the daylights out of them with tales of global warming disasters that are imminent. As Dr. Chu’s boss, the president, said today in New York, “time is “running out” to fix the problem” of climate change and we risk “irreversible catastrophe.”

To reverse the generational direction of energy-related nagging the US government launched this month a partnership between the Environmental Protection Agency and the Parent Teacher Organization focusing on ‘real[i] children’ with a cross-country tour of 6,000 schools to teach students about climate change and energy efficiency.  (Having already been on the receiving end of this sort of thing, I wish all you thirty-somethings the very best of luck, especially when your child comes home with some sort of carbon footprint scorecard that will, of course, remain entirely confidential.) This is a kind of “take it, it’s good for you” doled out by our children – perhaps we will have to retaliate by teaching them the joys of discounted cash flow analysis of energy conservation investments.

So, if I understand the government logic, their policies in energy are going to cut utility bills just by “making a few small changes.”   This may work very well in some households, especially if the parents are already energy-conscious. The rest of us will take a look at the bottom line and say “hmmm, if my utility bill is going down on account of all this efficiency, then maybe I can afford to add that extra room to the house and put a flat screen in there and watch the game in shorts and T-shirt.”

Put another way, making energy more affordable will increase consumption of the services provided by energy, not decrease it. If enough schoolchildren can nag enough parents into reducing energy use (demand falls[ii]), then the price will go down and the people impervious to the entreaties of their kids will use more energy. If you force me to scrap my furnace and buy a better (more efficient) one, then I will take my revenge with a more comfortable house, eating up a lot of the energy savings, which are a lot less expensive per cubic foot, now that the cost of using energy (as opposed to purchasing energy) has fallen.

Back to Incentives

No, that won’t work, and they know it. The Waxman-Markey bill is full of mandates and fines and timetables for whole classes of energy consumers. They will not only raise the price of energy, but also propose to interfere in willing buyer-willing seller transactions, such as those involving vehicles, houses and appliances. Prices will go up for electricity and oil products, as they must with any kind of carbon tax. In Western Europe compliance with the carbon régime has led to electricity prices for households even higher (16-44 cents/kWh) than those in California (15 cents/kWh, as opposed to 8.5-11.4 cents nationwide). So Europeans use less electricity – rational consumers responding to price signals.

What about heating your home? Londoners pay about $18.60/mmbtu for residential gas. In Stockholm, gas will set you back more than $56/mmbtu. In the US residential natural gas prices have averaged about $11.50-13.50/mmbtu so far this year. Guess who lives in the small houses, with sweaters on all winter? In the US the average new house is 2,330 square feet (up from 1,400 in 1970[iii]); in Europe the figures range from 730 square feet in the UK to 1320 square feet in Denmark. You see, the technology available to Europeans to heat their houses is not all that different from what we have here, it’s just that the fuel costs a lot more and regulations limit size and style of new dwellings. There are no magic technologies that can keep us warm and run our economy using a lot less energy. There are only tradeoffs – housing choices, car purchases, industrial structure (yes, you can save a lot of energy if you do not make anything). The government mandarins may talk as if there is special knowledge of energy known only to them. But the behavior of the DOE itself, with its ongoing problems implementing simple energy conservation measures in its own buildings, belies that claim.

Conclusion

So the Secretary is actually correct: we will behave like teenagers when the government tells us what size house we can have and what sort of windows and the like must go into it. We are probably not going to like it because it does not make sense to dad, who pays the bills, unless the bills go up as well (and they will). If you have to use subterfuge, force, regulations and falsehoods to get your way on energy policy you are probably not the smartest guy in the room.

Apparently, Secretary Chu has taken to heart the arguments of the Hirsch report, which was essentially a survey of expectations by various forecasters, primarily peak-oil advocates, with little sense of the history of similar warnings or resource economics. Because the forecasters assumed that production would decline after the peak, without regard for prices, and because they assumed that the recoverable portion of resources would not expand, and because they assumed that methods which had always failed before were now reliable, they came to conclusions that were counter to both theory and history. So much for that report.

Secretary Chu’s thinking is reminiscent of the comments of former President Jimmy Carter, who, in his famous Moral Equivalent of War (MEOW) speech in 1977 stated that the problem was that the oil and gas supplies we rely on are simply running out, a thesis that led him to ignore the real problems, such as U.S. price controls on domestic natural gas, which suppressed production, created occasional shortages, and increased oil consumption and imports, and, thus, U.S. vulnerability.

Of course, President Carter was informed by the best and brightest minds of his time, relying on a combination of the Hotelling and Hubbert theories, as well as “top” intelligence from the Central Intelligence Agency. Its former Director, James Schlesinger, subsequently Carter’s first Secretary of Energy, flogged these arguments endlessly, arguing in 1979 that oil production would never surpass the 65 million barrel a day level (it’s now 85 mmb/d). Of course, Schlesinger is one of those now arguing that oil production has recently reached a peak and that the debate has been won by peak-oil advocates.

While supplies of nonrenewable resources like oil, gas, and coal are, in theory, finite and will, in theory, peak and/or plateau and decline, the lack of relevance of this fact is well established but often ignored by those with a Malthusian bias and especially by those in the peak-oil community. Resource economists like M. A. Adelman have often pointed out that the absolute amounts do not matter, rather the costs of the supply compared to competing fuels and other substitutes (particularly capital, i.e., more efficient technology) determines whether and when we cease to produce and consume a particular fuel.

Many examples exist, from anthracite in Pennsylvania to coal in Britain, both of which have peaked and declined—and left consumers with cheaper supplies of energy. Indeed, even in the United States, when oil production peaked, prices dropped as cheaper imports came in (albeit not cheaper for long).

And as for the idea that it is “forward-looking” companies that recognize the need to be prepared for ever-rising prices: In reality, many in the industry have become inured to constant warnings of impending resource scarcity. Much of the energy-efficient investment done by companies is not based on their expectations of a resource-poor future, but in response to economic signals, including tax breaks.

One can only hope that the economic crisis prevents too many companies from being ‘forward-looking’ enough to invest foolishly, for example, in biofuels, fuel cells (hydrogen and other), electric vehicles, and photovoltaics.

Actually, you can’t. The United States is still a nation of laws, and without strong political support, the acts of one administration cannot be easily reversed or undone by the next.

But there is more to the story than simple inertia and political head-counts. Each new administration enters with an agenda of positive goals. Spending time and political capital on your predecessor’s agenda can often find its way to the bottom of the to-do list. Moreover, a new president has only a limited circle of advisers. They cannot know everything about what the last guys did (Hayek’s revenge).

So it is that we find ourselves saddled with a whole series of outmoded, inappropriate, and just plain counterproductive energy laws and regulations. What is astonishing is the longevity of policies that prevent the United States from developing and implementing a constructive approach to energy, an approach that could use the totality of our resources to fashion a constructive, efficient and clean energy system.

The Bad Past

The U.S. political class in the 1970s was not one to let a good crisis go to waste. Indeed, this is what was done in the 1970s:

First, Nixon and Ford set the stage with price controls and product allocation rules, including:

• Price controls on oil and gas at the wellhead and at the consumer level
• Encouragement to build small, inefficient oil refineries (the Entitlements Program)

But the Carter Administration really got the ball rolling toward ill-conceived, disincentivizing, counterproductive policies. Some of the greatest hits of that era included:

Nuclear Non-Proliferation Act (1978) – under that benign banner lurked a prohibition on reprocessing the spent fuel from civilian nuclear power reactors (the other 95% of the energy in the fuel rods), leading to the waste storage “problem” that inhibits development of nuclear power to this day;

Natural Gas Policy Act (1978) – established 8 different pricing tiers for gas and set them on a path to converge with oil by the mid-1980s, preventing the emergence of a natural gas market until the 1990s; prohibited the use of natural gas for new electric power plants (except for cogeneration);

Solar Tax Credits (1979) – encouraged significant spending on immature and inefficient solar technologies;

Windfall Profit Tax (1980) – Intended to raise more than $100 billion by taxing the “excess” profits of oil producers in the United States, raised only $40 billion before it was repealed in the late 1980s, but reduced domestic oil and gas production by 6-10 percent over that period;

Energy Security Act (1980) – established the Synthetic Fuels Corporation, a public-private partnership intended to improve the technology of coal and shale liquefaction/extraction and eventual commercialization. This act was repealed in 1986, after spending just $1.2 billion on 3 projects. In one of the supreme ironies of the entire 1970s energy policy frenzy, this $1.2 billion was perhaps the most cost-effective technology funding by the U.S. Government in that period. Though it was not used to produce shale oil or coal-based liquids, the technology to convert heavy, dirty feedstocks to light refined products was used by U.S. refiners to produce a slate of valuable light products from less expensive, heavy crudes, saving U.S. consumers many billions of dollars in crude acquisition costs over the years.

With the coming of the Reagan Administration in 1981 some of these measures were swept away, including price controls, entitlements, and some provisions of the Natural Gas Policy Act. For others, including the Synfuels Corporation, Solar Tax Credits, and Windfall Profit Tax, legislative relief was required, which did not come until late in President Reagan’s second term.

For the domestic oil and gas industry the Malthusian gloom of the Carter years inhibited interest in readily available oil and gas reserves, hiding behind a belief that oil and gas were doomed to run out soon in any event. Jimmy Carter was a fan of Peak Oil Theory before the current decade’s bandwagon was ever conceived.

In the end, the energy policies of that past 30 years that had significant positive effects were mostly of the “first do no harm” variety. Most of those policies were enacted during the 1980s, so as to undo some of the most egregious acts of the 1970s. With the exception of the spectacular unintended consequences of the (relative) pittance in Synfuels Corporation funding, all of the careful mandatory allocations, use restrictions, production restrictions, punitive taxes, price controls and technology development showed either negative impacts on the supply of energy or no discernable effects on energy supply and use.

A number of the Carter era policies have remained part of the US Government’s official approach to energy: restrictions on offshore oil and gas production, “catch-22” type regulation of spent nuclear fuel, reliance on overall manufacturer fuel economy standards rather than prices to encourage conservation of gasoline, and last, but not least, the ethanol tax credit.

The price that we have paid for these interventions – less domestic energy production, more price volatility, aging network infrastructure – far exceeds any of the supposed benefits of such policies. Now we have a new president who wishes to make his name by even more massive intervention in energy markets – since it worked so well the last time. We face grandiose plans that start from the assumption that markets do not work and private firms cannot be trusted to make the “right” types of investments, when, in fact, most of our “remnant” problems result from ignoring rather than following market pricnciples. If the 1970s are any guide we will live with the consequences of our follies for many years.

It is much better to choose wisely than quickly.

So get ready for the end-of-growth mantra from the Left as time marches on and Obama’s economic recovery plan keeps the economy from recovering.They will say that government tried and failed with his stimulus plan, so now we need to adapt to a economically constrained but environmentally ‘richer’ lifestyle.  Maybe this is just what a lot of anti-capitalist environmentalists mean by “sustainability.”

But history should not be forgotten. Jimmy Carter bought into the “limits to growth,” and a new voice emerged who spoke of a new morning in America.

In the 1980 presidential campaign, candidate Ronald Reagan dismissed Carter’s call to address energy shortages with “sacrifices and changes in every life.” “People who talk about an age of limits are really talking about their own limitations, not America’s,” Reagan said.

But President Malthus spoke of the dangers ahead in his farewell address:

There are real and growing dangers to our simple and our most precious possessions: the air we breathe, the water we drink, and the land which sustains us. The rapid depletion of irreplaceable minerals, the erosion of topsoil, the destruction of beauty, the blight of pollution, the demands of increasing billions of people, all combine to create problems which are easy to observe and predict, but difficult to resolve. If we do not act, the world of the year 2000 will be much less able to sustain life than it is now.

Reagan cast an altogether different light toward the nation’s problems in his inaugural address of January 1981:

We’re too great a nation to limit ourselves to small dreams. We’re not, as some would have us believe, doomed to an inevitable decline. I do not believe in a fate that will fall on us no matter what we do. I do believe in a fate that will fall on us if we do nothing. So, with all the creative energy at our command, let us begin an era of national renewal. Let us renew our determination, our courage, and our strength. And let us renew our faith and our hope. We have every right to dream heroic dreams.

Reagan also rejected the central planning mentality that had grown alongside energy problems and asked a question:

In this present [energy] crisis, government is not the solution to our problem; government is the problem. From time to time we’ve been tempted to believe that society has become too complex to be managed by self-rule, that government by an elite group is superior to government for, by, and of the people. Well, if no one among us is capable of governing himself, then who among us has the capacity to govern someone else?

Reagan walked the talk by deregulating petroleum a week later. “Ending price [and allocation] controls is a positive first step towards a balanced energy program,” he announced, “a program free of arbitrary and counter-productive constraints, one designed to promote prudent conservation and vigorous domestic production.”

All this was quite different from pessimism and despair’s call to action. Noted one historian at the time:

The contrast with both traditional conservatism and post-Humphrey liberalism could not be more striking. Gone are the dour conservative prescriptions of austerity and self-sacrifice and returning to the past. Gone is the Carter-era pall of limited resources, complexity, and a world in which “more is not better.” Reaganism is kinetic, expansive, and endlessly (critics would say mindlessly) optimistic about the future.

[This post is taken from chapter 11, "New Light," of my new book, Capitalism at Work: Business, Government, and Energy. Citations can be found on p. 403]