Dollar Gas

I first noticed it while on tour in the farm country of Iowa, several weeks ago. At about one out of three gas stations, regular gas was selling for $1.01 per gallon. My Time magazine reported 99¢ gas in Texas—and even price wars in Houston. Newspapers and magazines have begun speculating on the demise of OPEC.

It's important that we not let the advent of $1.00 gasoline go unremarked. Little more than a year ago, with gas at about $1.35, pundits were griping that by removing price controls on oil, Ronald Reagan was delivering us into the hands of rapacious oil barons who would soon be ripping us off to the tune of $1.50 or $2.00 a gallon. Yet it never happened.

Why not? Because the market works, that's why. The tripling of oil prices from 1978 to 1981 led millions of individuals and corporations to change their behavior. People chose small cars, even though gas guzzlers were still available. They insulated their homes, to keep heat and bills from going through the roof. Truckers put air deflectors on their rigs to reduce drag, and factories put in cogeneration plants. As a result, in just those three years, per capita energy use dropped by 20 percent.

Moreover, the higher prices stimulated the greatest burst of oil exploration in 20 years. By drilling in new areas, companies found huge new fields in places like the Overthrust Belt. Billions are being invested in secondary and tertiary recovery, to extract a large part of the two-thirds of the oil formerly left in the ground because it was too costly to bring to the surface. In May a huge new structure called an Underwater Manifold Center was placed on the North Sea bottom by Royal Dutch/Shell and Exxon. If successful, it will enable oil to be produced at depths of up to 5,000 feet (compared with today's 1,000-foot limit for offshore platforms), thereby opening up an area the size of Africa.

All these things have come about not because of government energy programs but in spite of them. Instead of encouraging oil production, government placed a huge new tax on the oil companies. And it created a series of energy bureaucracies that forced the industry to produce heating oil when people needed gasoline and vice versa, and in the face of shortages it attempted to allocate gasoline based on historical patterns of use (meaning that gas stations along interstate highways—where people used to be traveling on vacation—got lots, while stations in your hometown—where you stayed because of gasoline shortages—got as little as 70 percent of what they needed).

There are two main lessons we can learn from the "energy crisis" of the 1970s. The first is that we have more to fear from energy bureaucrats than we do from self-styled cartels. OPEC, in fact, was never a true cartel, in that its members never agreed on joint production quotas. By encouraging increased demand for OPEC, rather than domestic, oil—as our bureaucrats did by holding down production of domestic oil and setting up the absurd "entitlements" program that subsidized imports—our government perpetuated the myth of OPEC's control. Only a worldwide recession, with its sharp drop in demand, coupled with the freeing of the US oil market, finally ripped the veil from the sheiks. Over the next few years we'll observe their futile attempts to enforce production quotas as, one after another, the poorer governments resort to selling oil under the table.

The other lesson is the difference between a political response and a market response to an economic disruption. A market response is diverse, flexible, and decentralized. Millions of people make individual decisions based on continually changing economic information. This information is never perfect, and sometimes they guess wrong—spending so much on a solar heating system, for example, that the payback period is longer than the life of the equipment. But those who guess wrong in the marketplace damage only themselves; others observe and profit from the knowledge.

The political response is to build monuments to yesterday's problems and then maintain them, regardless of changing conditions. One example is the gargantuan Synthetic Fuels Corporation. While private firms like Cities Service, Exxon, Occidental, and Tenneco are canceling synfuel projects left and right, the Synfuels Corp. is rumbling along its preprogrammed way, parceling out some $14 billion of our money. (Applicants include such free enterprisers as former Federal Energy Administrator Frank Zarb and former Energy Research and Development Administration official Robert Fri.) After all, when the synfuels legislation was being drafted, the line on the oil price graphs kept climbing indefinitely—to $40, $50, $60 per barrel. Why let something like the market price get in the way?

The Department of Energy is yet another monument—a $13.7-billion empire that controls the price of natural gas (and some electricity), subsidizes industry by sponsoring research, operates giant dams and utilities (for example, the TVA), issues reams of redundant energy conservation regulations, churns out propaganda—excuse me, information—and relieves the oil companies of the burden of maintaining petroleum reserves. Ronald Reagan's campaign pledge to abolish this dinosaur is about to be translated into a bureaucratic reshuffling that will parcel out nearly all its functions to other agencies, saving only about $1 billion. Yet if all DOE's nondefense functions were actually abolished, we could save more like $7 billion a year.

About the only bright spot in all of this was the president's veto of Congress's bill to give him emergency powers to allocate petroleum products—in other words, to recreate the gas lines of 1973 and 1979. Reagan wisely told the pols thanks, but no thanks, and they failed to override his veto. Yet by leaving the substance of the energy bureaucracies in place, Reagan has made clear that he doesn't really understand the lessons of the energy crisis.

Congress retains its ability to hand out favors via energy regulation and subsidy. You can buy gas now for a dollar. Politicians cost more—but they're still available.