Solving the Energy Crisis

In the midst of all the news on how Nixon's new dictatorial powers are saving us from the energy crisis, it is all too easy to lose sight of the extent to which the federal government itself created the crisis. That a serious crunch was in the making has been obvious for some time (see "The Power Crisis," REASON, February 1971), based on the government's absurd energy policies. For years the government has promoted the wasteful depletion of U.S. fuel reserves; by severely restricting oil imports (until last year) the government encouraged a considerably higher rate of domestic oil consumption than would have been the case during all the years when foreign crude was much cheaper than domestic; by artificially holding down the price of natural gas for decades, the government has encouraged incredibly wasteful uses of this extremely clean fuel. Among the side effects of overconsumption of natural gas has been a sharp decline in coal mining activity; thus, even though there are huge U.S. coal reserves, the capability does not currently exist to expand production fast enough to meet the need. On top of all this, the arbitrary bureaucratic imposition of environmental controls on coal mining, oil drilling, refineries, and power plants has led to severe capacity restrictions whose full cost is only now beginning to be considered.

Thus, when the Nixon Administration made the political decision last fall to provide massive aid to Israel (knowing full well that there was a significant risk of Arab oil cutbacks in response), it was taking risks with an energy system severely distorted from normal marketplace relationships. Hence, even though Arab oil amounts to less than 10% of America's supply, the cutback came at a time when our other sources were already seriously depleted, and our capacity to increase production severely curtailed.

But the U.S. might have avoided a full-blown crisis, despite the weakened energy system, had the free market mechanism been able to operate effectively to deal with the shortage of crude and its rippling effects throughout the entire energy and petrochemical industry. However, the oil cutoff came precisely at a time when the market mechanism had been thoroughly crippled by the bureaucratic dictates of the Cost of Living Council. Even before the oil shortage hit, American industry was waist-deep in an incredible miasma of shortages, production bottlenecks, and inequities caused by wage and price controls.

Cases in point:

• Since the overseas free market prices of chemicals such as benzene, ethylene, and methanol are two to three times higher than the frozen U.S. prices, a black market has sprung up, in which U.S. producers sell to overseas buyers, who resell the chemicals to U.S. consumers, all at free market prices. Both producers and consumers thereby evade the price controls.

• Similar situations exist in such areas as steel, nonferrous metals, and plastics. These goods are in short supply in the U.S., because producers are able to get up to 50% more in free markets overseas. (Some of these controls were eased in December.)

• A severe shortage of fertilizer threatens 1974's farm production, yet it was not until November that the CLC decontrolled fertilizer prices. (Incidentally, one of the key factors in fertilizer production is ammonia, which is made from natural gas.)

• By controlling the price of gasoline all year, the CLC managed to keep gasoline a bargain, thereby encouraging high levels of consumption and promoting summer shortages, even before the Arab cutoff.

If was this kind of a marketplace that had to adjust to the impact of a sudden Arab oil cutoff, and it is hardly surprising that visions of crisis appeared in the government's heads.

So now what is to be done? By the time this magazine reaches you, it is likely that the Administration will have "reluctantly" begun a program of gasoline rationing. Senator Jackson has called for making the oil companies into regulated public utilities, with stringent controls on prices and profits. And the Administration has put into effect a program of petroleum "allocations" to industrial users, based on last year's usage (which means, among other things, that coal mines and oil drilling rigs can't get the extra diesel fuel they need to expand production).

None of these measures will solve the energy crisis. They will succeed only in granting additional life and death powers to more armies of bureaucrats. They will not solve the economic problems of equating demand with supply: they will merely spread out the shortages, in an equal—and therefore arbitrary—fashion. But a true solution must solve not only the current supply/demand problem but also the longer-term problem of ensuring adequate energy supplies.

The surest way to accomplish both aims is to deregulate all prices, the sooner the better. Freed of controls, prices will rise steeply to equate demand and supply, and the resulting higher profits will stimulate increases in exploration, expansion of plant capacity, and development of new energy sources. It is not just energy prices that should be deregulated: there is no way to drill for oil or build refineries or conduct research and development without materials, tools, machinery, and equipment. The country can no longer tolerate controls-induced shortages of virtually everything. The only way to ensure adequate supplies of energy and materials is to allow the economic system to do its job—an incredibly complex job that no group of bureaucrats, no matter how well-informed or well-intentioned, has the ability to do. A recent article in the LOS ANGELES TIMES ("Nation Lacks 'Fuel Gauge' for Crisis Planning") lamented the government's inability to measure whether its measures for dealing with the energy crisis were working. How ironic an admission for the government to make, after it has spent the past three years destroying the measuring instruments—the free market price system.

Despite the economic rationality of the case for deregulation and decontrol, the usual argument against it is political: allowing unregulated price increases and "windfall profits" for oil companies is considered politically suicidal. But the Nixon Administration has long since lost its political credibility and has no reelection prospects in any event. What more noble an act of statesmanship than for Richard Nixon to throw political considerations to the winds and (this time) do instead what is right. The country is at a crucial turning point between permanent controls and a return to the marketplace. By restoring the free market to America, Nixon may someday be remembered as more than just a cheap politician.