By Robert Rapier for Investing Daily
Forty years ago Americans received a wake-up call about energy security. The events of October 1973 had a tremendous effect on the American psyche and would shape US energy policy for decades.
Global crises and resulting policy shifts certainly pose extra risks for energy investors. By understanding the past we can better anticipate the future and have a better sense of what works and what doesn’t.
When President Richard Nixon took office in 1969, concerns about energy were not high on the list of American priorities. That situation would change dramatically during Nixon’s presidency. US oil production had increased at a fairly steady pace for over 100 years, and in November 1970 would reach 10 million barrels per day (bpd). Today that mark still stands as the all-time high for US oil production.
Beginning in 1971, the Nixon administration began a series of price-control measures designed to combat rising inflation. By the summer of 1972, there were long lines at gasoline stations in some regions as shortages of gasoline were dealt with by rationing. (Many people associate the gas lines with the embargo that followed, not realizing that they were already happening as a result of the price controls.)
In October 1973, in retaliation for the West’s support of Israel in the Yom Kippur War, the Arab members of the Organization of Petroleum Exporting Countries (OPEC) producers’ cartel stopped supplying the US and Western Europe. US oil production had already begun to decline, and the US was unable to make up the supply shortage caused by the embargo. This resulted in a supply/demand imbalance. Oil prices quadrupled in a very short period of time, contributing to a deep global recession.
The embargo set US energy policy on a path that still guides us 40 years later. Every president since Nixon has placed energy security high on the list of presidential priorities, but each administration has attempted to deal with the problem in different ways.
In response to the oil embargo, Nixon instituted additional price controls and began rationing oil to states. On Nov. 7, 1973, he announced Project Independence, which promoted conservation and alternative energy initiatives with the goal of ending the reliance on oil imports by 1980.
That same month, Nixon increased funding for mass transit, and authorized the Trans-Alaska Pipeline by signing legislation that disposed of legal challenges from the project’s opponents. Soon after, the 55-miles-per-hour speed limit was mandated nationwide to conserve fuel.
Gerald Ford was nominated to serve as vice president under Nixon on Oct. 12, 1973, less than a week before the Arab oil embargo began, so he too was molded by the crisis that followed.
When Ford became president in August 1974 following Nixon’s resignation, he maintained energy independence as a high priority. “Our growing dependence upon foreign sources [of petroleum] has been adding to our vulnerability for years and years, and we did nothing to prepare ourselves for such an event as the embargo of 1973,” Ford said in his first State of the Union address.
President Ford proposed a number of initiatives designed to reduce growing dependence on foreign oil. He promoted expanded use of coal and nuclear power to shift electricity production away from oil, the development of synthetic fuels and oil shale resources, and tax credits to help homeowners with the cost of insulation. He set forth goals to reduce oil imports by 1 million bpd by the end of 1975 and by 2 million bpd by the end of 1977.
But Ford faced a hostile Congress that sometimes openly questioned the political legitimacy of his presidency, since he had not been elected. He therefore had a difficult time getting some of his proposals passed.
Ford did have some lasting energy policy successes. In December 1975, the Strategic Petroleum Reserve (SPR) was established when the Energy Policy and Conservation Act (EPCA) was passed by Congress. The law was designed “to reduce the impact of severe energy supply interruptions” such as the OPEC embargo. The fuel efficiency of autos improved quickly following adoption of the Corporate Average Fuel Economy (CAFE) standards in 1978. A 2002 study by the National Academy of Sciences concluded that motor vehicle fuel usage was 14 percent lower in 2002 than it would have been in the absence of fuel efficiency standards.
Despite these efforts, by the time Jimmy Carter took over as president in 1977, oil imports had increased by 370 percent from Nixon’s first year in office. Oil consumption was at an all-time high, and domestic production was down 14 percent from the 1970 peak.
Only three months into office, Carter delivered a major speech in which he predicted that energy security would get progressively worse through the end of the century. But Carter underestimated the potential for production increases. At the time of his speech, the world consumed 60 million bpd. Carter noted that production declines of existing fields meant that just to maintain production at 1977 levels would require “the production of a new Texas every year, an Alaskan North Slope every nine months, or a new Saudi Arabia every three years.” Despite Carter’s skepticism, global oil production continued to expand and is now 50 percent higher than during his presidency.
One of President Carter’s lasting energy legacies was the creation of the Department of Energy in 1977. Other Carter proposals were advanced with the Energy Security Act (ESA) of 1980. Included within the ESA were programs to increase the production of gasohol (gasoline/ethanol blends) via loan guarantees for biomass and alcohol fuels projects, marking the introduction of ethanol into the fuel supply.
The ESA also included the US Synthetic Fuels Corporation Act, which established the Synthetic Fuels Corporation (SFC) — a government-funded corporation with the purpose of developing a synthetic liquid fuels industry. But technical challenges and cost overruns ultimately doomed the SFC to failure, leading many critics to argue that the government should leave the energy business to the markets.
President Ronald Reagan pursued a dramatically different approach from President Carter. As if to emphasize that point, he removed from the White House the solar panels installed by Carter. He also accelerated the phase-out of the price controls on domestic oil production, let the tax credit on solar power expire, abolished the US Synthetic Fuels Corporation, and repealed the Crude Oil Windfall Profits Tax Act that had been signed into law by Carter.
Reagan was a strong supporter of domestic drilling, pushing to open more federal land to exploration and development. He unsuccessfully advocated drilling in parts of the Arctic National Wildlife Refuge (ANWR). Reagan was also an advocate of nuclear energy, signing several industry-friendly laws. Nuclear production overtook hydropower to become the second largest provider of electricity in the US behind coal while Reagan was in office.
The Gulf War was the defining energy event of President George Bush’s administration, but there were other noteworthy developments. Due to environmental concerns, in 1990 Bush signed an executive moratorium banning offshore oil developments outside of the western Gulf of Mexico and certain parts of Alaska. The ban covered the North Atlantic, Pacific Coast, New England, Mid-Atlantic, and the eastern Gulf of Mexico, and lasted until it was overturned during George W. Bush’s second term as president.
The elder Bush also signed into law the Energy Policy Act of 1992 (EPAct), addressing energy efficiency standards for buildings and appliances, and promoting energy conservation as well as the use of alternative energy vehicles.
President Bill Clinton’s two terms in office corresponded with oil prices that were both lower and less volatile than those in the 1980s, and thus the goal of energy independence got pushed off the front burner.
Still, there were some significant energy initiatives during the Clinton years. The Partnership for a New Generation of Vehicles (PNGV) was founded by the Clinton administration in 1993 as a venture between the US government and major automobile makers including Chrysler, Ford, and General Motors. The purpose of the program was to develop vehicles with a fuel efficiency of up to 80 miles per gallon.
The three major domestic automakers all built hybrid concept cars capable of achieving at least 72 mpg. However, the program was cancelled following Clinton’s presidency by the George W. Bush administration. This highlights one of the biggest challenges in energy policy. Energy projects often take many years before they bear fruit, but many of them don’t survive political shifts. This is one of the biggest reasons US energy policy often seems dysfunctional.
The Clinton presidency marked the end of 12 years of Republican rule, and Clinton’s priorities on energy and the environment sharply differed in some areas from those of Reagan and Bush. For example, Reagan was a proponent of developing the oil reserves in ANWR, but Clinton vetoed a bill from the Republican-majority House that would have allowed drilling in ANWR.
The George W. Bush presidency was extremely eventful in terms of energy developments. Among the events occurring during his two terms in office were the September 11 terrorist attacks followed by a war with Afghanistan, another war in the Persian Gulf, major hurricanes that interrupted supplies and caused record gasoline price spikes, an almost uninterrupted increase in the price of oil, and passage of some major pieces of energy legislation that led to a massive expansion of biofuel production.
Bush initially talked up a hydrogen economy, and later promoted ethanol made from switchgrass as a motor fuel. Noteworthy during Bush’s two terms were the Renewable Fuel Standard (RFS) in 2005 and its expanded version, the RFS2 in 2007. These pieces of legislation dramatically increased the size of the corn ethanol industry in the US by mandating increasing volumes of ethanol in the fuel supply. But domestic oil production would decline during all eight years of the Bush presidency.
An oil production turnaround was in the works, however. As the fracking revolution began to bear fruit, domestic production declines began to slow. By the first year of President Barack Obama’s administration, domestic production had begun to increase, and has now increased during every year of his term. That has not happened since Lyndon B. Johnson was president. If the trend continues, energy security may once more fade as a national priority.
But it is important not to forget the lessons of history. OPEC has lost some power, but the organization still supplies more than half of the world’s crude oil imports. So even though OPEC’s contribution to US oil supplies is declining, the cartel hasn’t lost its short-term ability to influence global prices.
That’s why we must continue to enact programs that bring America’s oil supply and demand into balance, despite the occasional boondoggle and miscalculation.
Courtesy Robert Rapier for Investing Daily (EconMatters author archive here)
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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