The 70s: Bad Music, Bad Hair, and Bad Energy Policy (What Obama can learn from Carter)

Many in the energy business, whether or not they support President Obama’s positions on energy and the environment, are likely to think, “Look, the US is a big ship. It cannot be turned around in a couple of years, and even if they tried, you can right the course at the ballot box.”

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.