Lessons from the Great Energy Crisis
Creating Abundance: America's Least-Cost Energy Strategy, by Roger Sant et al., edited by James Bishop, Jr., New York: McGraw-Hill, 166 pp., $14.95
The energy crisis of the '70s is certainly over. Yet we continue to hear—from self-appointed consumer protection groups, environmentalists, many of the media, and lobbyists—statements such as the one cited in the postscript to Creating Abundance: "The Administration and the Congress must recognize that the nation's energy future is not just a matter of chance, determined by uncontrollable market forces, or unpredictable resource shortages.…What is needed most is a recognition by our national leaders that the important choices before us cannot be blindly left to the market place and that by planning wisely, we can safeguard the national interest while meeting our energy needs."
This conclusion, reached by 14 major environmental groups in their joint 1982 report on President Reagan's energy policies and programs, is arrant nonsense. Yet we are hearing many others saying essentially the same thing, at the same time that OPEC is struggling to buoy up sagging oil prices.
If they were not so dangerous, such silly conclusions and recommendations would merely be laughable. But many influential people still believe that the government needs to "do something" about our energy supply. This is why Creating Abundance is so valuable.
In this excellent book the authors argue, quite convincingly, that government did not end the energy crisis of the '70s. If our government did anything, it prolonged the crisis and increased its severity. Consumers and businesses, acting in their own self-interest, were responsible for the present improved energy situation.
The guiding light of the book is that petroleum, natural gas, coal, and so on are demanded because they provide services, not merely because they provide energy. People do not want energy for its own sake. They want energy services—mobility, heat, coolness, and comfort. Energy by itself accounts for only a portion (sometimes a very small portion) of the total cost of these services. Thus the objective of people who consume these services is to minimize the total cost of the services, not simply their energy cost.
Since they want to minimize total cost, people respond to a higher price of energy in three separate but related ways: (1) they conserve on the services themselves—they drive more slowly or keep their homes cooler in winter; (2) they replace the more-expensive energy ingredient with other goods that help provide the services—home insulation was substituted for natural gas, or more-fuel-efficient automobiles for gasoline; (3) they invent methods to change the technology used in the production of the energy service so that less actual energy is used—improvements in truck design have reduced fuel consumption.
Remember the way politicians and the media harangued us after the oil embargo in 1973: We would just have to live with less. We must learn to do without. We must make sacrifices. As Roger Sant et al. show, in case after case after case, it just wasn't so. We did not have to learn to live with less. We had to learn to do it differently. We had to provide our energy services in a different way, a way that used less pure energy. After all, it wasn't the energy we wanted to consume, it was the services. And people did learn how to find a lower-cost method of providing these energy services.
In Chapters 3 through 6, the authors document the methods employed during the past decade to change the least-cost method of providing energy services. First, they point out the ways that improved technology and substitution have reduced the energy used in providing the service of mobility, at a lower cost. Next, they turn to the same types of developments that made comfort and convenience in buildings more affordable. They then show how the energy cost in industrial products has been lowered. Finally, they discuss some alternatives to traditional fuels that have been and are being developed.
So the doomsday that so many expected did not come to pass. We did not have to learn to do with less. We had to—and did—learn to do it differently.
Given that we have been so effective in reducing energy consumption over the past decade, is there any reason to believe that we will become suddenly incompetent in the near future? The authors don't think so, and for good reason.
Doomsday forecasters are fond of projections that show a resource Armageddon in the year 2000. The authors of Creating Abundance respond by making two projections of US energy consumption to the year 2000. One case assumes continuing historical patterns of investment in energy production. The other assumes that all cost-effective energy investments are made. Under the least-cost assumption, the total US demand for fuels is projected to remain almost constant, even though the demand for energy services would grow about 2 percent per year (with GNP growing at 2.6 per year). Quite interestingly, under the assumption of historical patterns—business as usual—total demand for energy is projected to be only about 10 percent higher than under the least-cost assumption, with the total cost of energy services also 10 percent higher.
Several prevalent energy myths are also debunked by the authors: that vastly higher energy prices are inevitable, that environmentalists caused the energy problem, and that oil imports are the problem. Many of the refutations are fascinating.
In the final chapter, "What Else Is Required," Sant et al. conclude that government should reduce its role in energy policy. After all, as they show many times, it was the private sector—not government—that got us out of the mess we were in during the 1970s.
This very optimistic book does end on a rather gloomy note, however. How will similar resource problems be handled in the future? the authors ask. Did we learn anything from the energy crisis? The answer seems to be no.
The authors prophesy that water will be our next resource crisis and that government will respond in the same way it did with energy in 1974. A severe nationwide drought will occur, and the media will call it a "crisis." The president will announce a cabinet-level Water Department. Congress will not allow water prices to rise to market levels, because the rich could pay their way and the poor would suffer. And on, and on, and on.
We should hope this depressing story will not come true. Maybe if enough people read the evidence, like that brought forth in Creating Abundance, the same mistakes won't be made when the next crisis occurs.
Charles Maurice teaches economics at Texas A&M University and is the coauthor, with Charles Smithson, of The Doomsday Myth: 10,000 Years of Economic Crisis.