A half-century ago this month, the Arab members of the Organization of Petroleum Exporting Countries (OPEC) announced a production cut and an embargo against the United States. Panicked motorists, many with tanks half full, queued at service stations around the country. The 1970s “Energy Crisis” was in full swing.
While shortages were blamed on Big Oil at home and OPEC abroad, the real culprit was federal price and allocation controls. President Richard Nixon’s August 1971 declaration of a 90-day freeze of wages and prices, intended to check price inflation then running near 4 percent (one-half of 2022’s average), set the stage for a decade of public policy failure.
Frozen prices did not address the underlying cause of expansionary monetary policy. Nor did it override the market’s continually changing scarcity values. With demand artificially encouraged and supply discouraged, strife with an everyday, essential commodity resulted.
This lesson should be remembered with today’s tensions in the Middle East. Let prices rise amid global uncertainties, knowing that the cure for high prices is … high prices.
Background
Petroleum shortages arose in late 1972. In February 1973, Senate Interior Committee hearings on fuel shortages demonstrated, in the opinion of committee chair Henry Jackson (D-Wash),
- One, there has been an unprecedented breakdown in our energy supply and distribution system;
- Two, the fuel shortages now being experienced are far more extensive than anticipated;
- Three, more severe shortages of fuels, particularly gasoline, are in the offing. (p. 535)
Expert testimony was heard from L. G. Rawl of Exxon about how 18 months of price controls were at the root of the supply shortfalls (pp. 554–55). The next month, the U.S. Senate held hearings on energy conservation, which attracted a wave of environmentalist organizations— including the Environmental Defense Fund, Friends of the Earth, and the Sierra Club. Economic efficiency (the prior standard) was replaced by less-is-more, or reduced use for its own sake, on the premise that oil and gas were declining, unreliable, or both.
Interventionist Tsunami
Ever more pervasive government energy policy would continue, before oil decontrol in early 1981. Nixon’s price control program morphed into Phase II, Phase III, Phase III 1/2, and Phase IV, before continuing in the Emergency Petroleum Allocation Act of 1973 (enacted the month after the Embargo).
Under the EPAA, two-tier pricing for domestic crude oil in 1974 would expand to three tiers (1976), five tiers (1977), and eight and then eleven tiers (in 1979). Complicated programs under the EPAA to deal with price distortions included the Buy/Sell Program (1973), Supplier Purchaser Rule (1973) and Old Oil Refinery Entitlements Program (1975). Phased decontrol beginning January 1980 came with a recapture from the Crude Oil Windfall Profit Tax of 1980.
The regulatory tsunami included dozens of state and federal laws mandating energy efficiency and conservation that harked back to the U.S. Fuel Administration of World War I and the Petroleum Administration for War in World War II. Major federal laws created the Strategic Petroleum Reserve (1975), Synthetic Fuels Corporation (1980), and an ethanol-biomass subsidy program (1980).
Conclusion
The petroleum crises of the 1970s did not result from oil “profiteering,” Peak Oil, or the lack of a national energy plan. It resulted from maximum prices by law. Milton Friedman noted at the time:
- “We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly you’ll have a tomato shortage. It’s the same with oil or gas.” “Friedman Blames Mess on Federal ‘Helpers’,” Los Angeles Times, February 10, 1977.
Other free market voices such as Henry Hazlitt (New York Times), Ayn Rand (Ayn Rand Letter), and Murray Rothbard (Libertarian Forum) rang loud against Energy Leviathan. In retrospect, their angst was right on the mark.
May the lessons of history caution against government activism in a perceived or actual crisis. The free market’s buffer of civility is the best policy in abnormal, not only normal, times.
