“In the late 1970s, only three prominent energy experts continued to insist that oil prices would not rise inexorably and to display a contrariness to all efforts to dissuade them: Peter Odell of Erasmus University, the late Morry Adelman of MIT, and Arlon Tussing.” (Michael Lynch, below)
Several months ago, a giant of modern energy economics died at age 82. I belatedly sing his praises.
Arlon Tussing, author, co-author, or editor of an estimated 300 books and publications, influenced a generation of market-oriented energy economists. He also educated the energy industry by being realistic and blunt at a time when the conventional thinking was that ‘depleting’ resources meant that costs and prices had to go up.
Tussing analysis such as in his 1983 “An OPEC Obituary” (Public Interest) were spot-on, at a time when many voices were saying ‘Just Wait’ for Energy Crisis #3 (following #1’s Arab OPEC in 1973/74 and #2’s Iranian Revolution in 1979). Programs such as the federal government’s Strategic Petroleum Reserve were founded on the premise of Crisis #3.
Tussing understood that energy crises have much more to do with price controls than the natural state of things, even with foreign governments as resource owners and allocators in the world oil market. Like Julian Simon, Arlon Tussing understood the economics of mineral resources (resourceship).
Tussing also understood the perils of government intervention in energy markets and the spiraling effects of the same (what is called the Mises Interventionist Thesis): Two notable quotations from his work (with Connie Barlow) are:
“A fascinating theme that runs through the long, convoluted history of natural gas regulation is the seemingly inexorable expansion of government intervention. Regulation seems to have spawned further regulation; soon after one regulatory gap was filled, another appeared.”
– Arlon Tussing and Connie Barlow, “The Rise and Fall of Regulation in the Natural Gas Industry,” Public Utility Fortnightly, March 4, 1982, p. 15.
“Federal regulation of the gas industry is coming to look more like a tar baby. The ink barely dries on a new law or a new rule when it becomes obvious that the intended solution gives rise to altogether new headaches.”
– Tussing and Barlow, The Natural Gas Industry. Cambridge: Ballinger Publishing, 1984, p. 13.
Tussing generated understanding in such publications as “Permanent Devolution: The Agonies of Half‑Hearted Decontrol in the Natural‑Gas Industry,” published by the American Enterprise Institute in 1984.
His 1984 book (written with Connie Barlow), The Natural Gas Industry: Evolution, Structure, and Economics, was a classic. It would be updated in 1995 with co-author Bob Tippee, economics editor at the Oil & Gas Journal.
His consultancy’s monthly publication, ARTA Energy Insights, was required reading in the industry.
Arlon Rex Tussing (1933–2016) was born in Portland, Oregon. He attended the University of Chicago where he received his degree at age 16! He went on to earn a PhD in economics at the University of Washington.
Tussing honed a political economy/public policy career in Alaska and in Washington, DC, in the 1960s and 1970s. Relocating to Washington State (Mercer Island) in 1976, he founded the Seattle-based consulting firm Arlon R. Tussing & Associates (ARTA). He was also professor of economics at the University of Alaska until retiring in 2005.
As Michael Lynch stated in his tribute, Tussing was “an energy economist who made significant contributions to policy-making but didn’t receive the attention that flashy pundits normally get.” Lynch added:
In the late 1970s, only three prominent energy experts continued to insist that oil prices would not rise inexorably and to display a contrariness to all efforts to dissuade them. Peter Odell of Erasmus University, the late Morry Adelman of MIT, and Arlon Tussing, who started at the University of Alaska Fairbanks but spent much of his career in government and consulting. This is important because it’s much easier to be an iconoclast when you have a tenured faculty position.
John Jennrich, the founding editor of Natural Gas Week, worked with all the greats in and out of the gas industry. Recently retired from the US Energy Information Administration, Jennrich offered these thoughts:
Alaskan Lands and Energy Policy
As a staff economist with the U.S. Senate Committee on Interior and Insular Affairs in the early 1970s (chaired by Senator Henry Jackson of Washington State), Tussing worked on the Alaska Native Claims Settlement Act (ANCSA) and the Alaska National Interest Lands Conservation Act (ANILCA). Tussing also worked on legislation that would result in the building of the TransAlaska Pipeline.
Most importantly, Tussing was an architect of the Alaska energy policy reform that got the oil companies’ money to the people (via a Trust Fund) instead of the government coffers.
Tussing’s resource optimism (energy realism) rang true. As with other supplemental gas projects, the uncompleted portions of the pipeline and huge North Slope gas reserves were in a quandary. Summarized Arlon Tussing in 1983:
The upheaval that has occurred in natural‑gas markets since 1980 means, effectively, that an Alaska gas‑transportation project is either an idea whose time has yet to come or, more likely, one whose time has come and gone. . . . It is indeed conceivable that Prudhoe Bay gas will never be a marketable commodity. Before it can become such a commodity, the worldwide energy situation, the technological menu, or both, will have to change in ways that we cannot now foresee.
We are still waiting.
An article by Dermot Cole in the Alaska Dispatch News, Maverick economist Arlon Tussing shaped Alaska energy policy, was published this July 7th. Excerpts follow.
In 1984, a Wall Street Journal reviewer praised his “accurate but controversial forecasts in the volatile world of energy price forecasting.”
In the early 1980s, when some economists and oil promoters predicted a never-ending increase in the price of oil, Tussing correctly forecast a prolonged downturn. Some experts said Alaska oil production might climb to 3 million barrels a day by 2000, but the pipeline had been operating only for four years when he said, “There is not the slightest chance that all of the promising onshore and offshore areas of Alaska will even be leased, let alone explored and developed, in this century.”
Long before the Permanent Fund dividend became the most popular part of state government, economist Arlon Tussing spoke of a revolutionary idea about handling some of Alaska’s oil wealth.
“The only way to guarantee that the money does any good to most of us is to hand it out to the people,” Tussing told a reporter for Time magazine in 1970. This was less than a year after a lease sale had generated $900 million, fueled by the discovery of the largest oil field ever found in North America.
“The state should form an investment company, something like a mutual fund, and distribute the stock to Alaskans on the basis of one share for every year of residence in the past 15 years. In this way, a family of five could expect an annual income of about $2,500 from the first $900 million lease sale alone,” he said….
Statement of Arlon R. Tussing After 1991 Gulf War
Real war in the Middle East has vastly revived the nostalgia for the 1970s energy consciousness and the yearning for a coherent national energy policy.
The administration, I think, has responded to this in an admirable and appropriate way with a strategy or so-called strategy that is a mixture of small blessings, trivia, and irrelevancies because the yearning for coherent energy policy is a formula for disaster.
Before Congress yields to this yearning it ought to take a hard, cold look at the energy policies of the 1970s that are being so praised today and the premises that were used to rationalize them and their actual effects.
On the whole, the government’s massive intervention in the energy business in the crises years of the 1970s did far more harm than it did good. And the good that came was at exorbitant cost to consumers and to the economy, the taxpayers.
And to those of you who don’t remember or never knew, the centerpiece of our national energy policy in the 1970s was a system of price controls and rationing for crude oil. And it was these made-in-Washington controls, not any Arab embargo, not any action by OPEC, and not the Iranian revolution that caused the gas lines, that caused the shortages and the panics that led to worldwide…., that reinforced worldwide price increases.
And that resulted in misplaced investment, a misallocation of resources that we have yet to write off or live down. Pricing allocation, subsidized imports of OPEC oil, depressed domestic production, and muted incentives for conservation.
The Federal megabucks appropriated in the 1970s for research and development were channeled into energy alternative white elephants like the fast breeder reactor, synthetic oil, and gas.
And these were monstrosities which along with most of the lesser technologies favored by tax benefits and Federal R&D grants, some of which Congressman Krueger mentioned, required subsidies precisely because their sponsors in the Congress and the executive branch knew they wouldn’t work, they weren’t needed, or they weren’t cost effective.
I say that with full knowledge, because I was heavily involved in the drafting of those regulations. It was a kind of dirty secret among many of us that we knew that the public demanded action. The public hated the oil companies.
The public wanted their Congress to show that they were doing something about the energy crisis, and we knew that what we were doing was by and large harmful. And if now and then we could sneak in something that was of benefit to the Nation or that reduced the energy problem, we were happy.
The failures stemmed mainly from a failure of imagination. A fallacy which is still abroad today and which I sense in the proposals of all of these gentlemen. And that is the assumption that energy prices, energy costs go up over time and so that one of the functions of government is to jump start or provide encourage for the more expensive alternative that must be introduced to take the place of what we have today.
Now, that is an absolutely false premise on principle and on historical basis. The real cost of useful energy at the point of consumption always goes down. It has been going down for some 200 years now and it is quite obvious why this is the case.
And energy is the most abundant commodity in the universe. It is available in an unlimited number of primary forms. And available to us through an ever expanding menu of extraction, conversion, transportation, and use technologies.
We did have some notable successes. The 1970s policy that came to fruition in the 1980s. These were the instances where national policy worked with the fundamentals, worked with the fact that the long term of cost is downward.
Free enterprise driven by profit and loss, coordinated by markets and voluntary contracting, and disciplined by competition, favors efficiency, energy efficiency and extraction, conversion or use. It means fewer harmful emissions and it favors at all times the lower-cost, less environmentally harmful energy alternatives.
Our biggest success was the Natural Gas Policy Act. The NGPA did take the natural gas business in the United States through a frightful and costly detour on its way to becoming part of a progressive market economy.
The ultimate destination of the NGPA though was to free the production and marketing of natural gas not just from the stifling burden of government price regulation, but also from the crushing embrace of government sponsored pipeline monopolies.
The result has been that since 1981 the commodity price of natural gas has fallen tenfold in real terms. That this winter we have an abundance of natural gas at the lowest price recorded since there has been a free market in gas and that price is comparable in inflation terms to the regulated prices of the 1960s.
It makes utterly no sense for us to cripple or damage the American economy or impose costs on consumers through a floor price for crude oil when we have a domestic or North American resource which is more abundant, cleaner, and in virtually unlimited supply at a price considerably lower than the lowest price we have seen for international crude oil.
The current free market price of natural gas in the Gulf States is equivalent to about $7 a barrel for oil. This is for a commodity that does not require refining for most of its uses. It’s a commodity that can replace oil and does replace oil in virtually every application.
It’s equivalent at the city gate to about 30 cents or 35 cents a gallon for gasoline. I simply don’t see why, given these comparisons, it is necessary for government to subsidize the production of that commodity to penalize the production or consumption of conventional fuels or to take any action other than to continue the policy that we have had during the 1980’s of opening up the access to natural gas supplies throughout the economy, removing the monopoly constraints and removing the barriers to the cheap and efficient delivery of this commodity throughout the country.
I think our second biggest success is with electricity. One of the biggest successes with respect to electricity is repealing the crowning glory of the 1970’s energy policy, the Fuels Use Act which prohibited the use of natural gas, our cleanest, most abundant, most environmentally benign fuel for electrical generation.
But the Public Utilities Regulatory Policy Act [PURPA], started the reform, the unbundling, the deregulation of the electric business and initiated a process that recognized electricity generation as a potentially competitive activity that is distinguishable from the traditional natural monopoly organization of electrical distribution facilities.
PURPA for the first time encouraged Federal and State regulators to substitute lease costs for cost plus as a nonutility acquisition. The electrical energy still lagged several years behind natural gas in the acceptance of competition in the producing sector as the generation sector, in open access to transmission, and in the adoption of rate structure and other regulatory incentives for economic efficiency.
PURPA as the electrical sector is an area for further activity or further reform by the Congress which requires a quantum increase in the vision on the part of the Federal Energy Regulatory Commission.
Other mixed-success stories are the energy efficiency standards, including the CAFE and the reduction in the harmful discharges and emissions. I think we have not done as well in these areas as we might have because we have relied too much on command-and-control and not enough on economic incentives.