Energy imports and energy security: a view from 1970

A few weeks back George Schultz posted a few happy memories on a Hoover Institution website from his time heading Nixon’s Cabinet Task Force on Oil Import Control way back in 1969 and 1970. The task force was charged with reviewing the existing mandatory oil import quotas, first imposed under the Eisenhower administration, and recommending reforms if needed

At the AEI Ideas blog, Ben Zycher finds Schultz’s recollections of that effort maddening off point. Zycher concludes there is “something about oil imports or ‘dependence’ that has a deeply corrosive effect on clear thinking, a commodity all too rare in policy discussions generally, and in the Beltway in particular.”

I found a copy of the task force’s report at the library* to see what the fuss was about. Overall the report looks pretty comprehensive, and the process of preparing the report seems open and thorough (Schultz mentions receiving 10,000 pages of comments in response to the task force’s list of questions published in the Federal Register on May 22, 1969, and these were followed by task force site visits and extensive deliberations). The majority on the task force recommended scrapping the import quotas, imposition of a tariff that approximated the difference between the then current domestic and world oil prices, then periodic reductions in the tariff to bring the domestic price down to the world price over time.

I noticed how far from prescient the report was about how world oil markets would actually change during the 1970s. Forecasting being hard, and all that.

At the time the Texas Railroad Commission, with the help of the Interstate Oil Compact, import quotas and other supportive federal policies, limited domestic production to keep crude oil prices up in the U.S. Current oil prices were then around $3.30/bbl in the United States, and the task force’s proposed policy of shifting from import quotas to a slowly declining import tariff was deemed likely to yield prices drifting down to $2 over a decade. A dissenting view, included at the end of the report, objected to the tariff approach on the grounds that the lower prices expected would harm the domestic energy industry and therefore be bad for national security. Things went a little differently.

Of course the text frequently points out the hazards of prediction. Many things could happen, it acknowledged, and the report considered several seemingly-plausible scenarios within which to consider the policy alternatives. In any case, Nixon shelved the task force report, imposed price controls on oil the next year, then as energy shortages loomed in early 1973 he abolished the quota system and implemented an import allocation program to ensure that all regions got (the Nixon administration’s idea of a fair share of) access to cheaper imports.

It was this cumbersome oil import allocation system, combined with continued federal oil price controls, that created an energy crisis out of the sharp boost in world oil prices in late 1973. All in all, the task force’s recommendation would have been superior to Nixon’s actual policies.

*Actually, since I have a great librarian, I just emailed him and was able to pick it up at the library’s front desk the next day. (I could have had it delivered to my office in two or three days, but I’m an impatient person.)

Lysander Spooner on government surveillance

Put yourself in the 1830s-1840s United States. What was the most disruptive, anti-establishment, anti-authoritarian activity going on at the time? Abolitionist, anti-slavery advocacy, organized nationally through written correspondence. These rabble-rousers threatened to upset the social, cultural, and economic balance of a young nation. Who cares about pesky considerations like the morality of slavery? In that mindset, then-President and authoritarian poster-boy Andrew Jackson urged Congress to pass laws allowing federal government surveillance of mail and the prohibition of sending “incendiary” material through the mail.

Historian Phil Magness points out that the abolitionist activist (and noted libertarian anarchist) Lysander Spooner wrote passionately to oppose such surveillance and censorship:

If this power, so absolute over its own mails, were also an exclusive one over all mails, it would be incomparably the most tyrannical, if not the only purely tyrannical feature of the government. The other despotic powers, such as those of unlimited taxation, and unlimited military establishments, may be perverted to purposes of oppression. Yet it was necessary that the powers should be entrusted to the government, for the defence of the nation. But an exclusive and unqualified power over the transmission of intelligence, has no such apology. It has no adaptation to facilitate any thing but the operations of tyranny. It has no aspect whatever, that is favourable either to the liberty or the interests of the people. It is a power that is impossible to be exercised at all, without being exerted unjustifiably. The very maintenance of the exclusive principle involves a tyranny, and a destruction of individual rights, that are now, and ever must be, felt through every ramification of society. The power is already exerted to the great obstruction of commercial intelligence, and nearly to the destruction of all social correspondence, except among the wealthy. But that we are accustomed to such fetters, we would not submit to them for a moment.

To what further extent of tyranny and mischief, this power, in the future growth of the country, may be exerted, we cannot foresee. But the only absolute constitutional guaranty, that the people have against all these evils and dangers, is to be found in the principle, that they have the right, at pleasure, to establish mails of their own. And if the people should now surrender this principle, they would thereby prove that their minds are most happily adapted to the degradation of slavery.

Sadly, I think Spooner would see a lot that he would recognize today.

Joel Mokyr: Technopessimism is bunk

My department is currently a focal point in the debates over the future of innovation and economic growth. Technopessimist arguments from my colleague Bob Gordon (as profiled in this New York Magazine article from the weekend) join those in Tyler Cowen’s The Great Stagnation to suggest that the increase in living standards and the growth rates experienced over the past 200 years may be anomalous and not repeatable.

In the PBS Newshour Business Desk, my colleague (and former dissertation adviser) Joel Mokyr offers a different, more optimistic perspective. Joel emphasizes the dynamic aspects of new idea generation and the ensuing technological change and its effects on people and societies. Technology is never static, humans and our curiosity and our efforts to strive are never static, and that means that there’s not likely to be an “end of innovation” along the lines of an “end of history”:

Technology has not finished its work; it has barely started. Some lessons from history may show why. For one thing, technological progress has an unusual dynamic: it solves problems, but in doing so it, more often than not, creates new ones as unintended side-effects of the previous breakthroughs, and these in turn have to be solved, and so on. …

As we know more, we can push back against the pushback. And so on. The history of technology is to a large extent the history of unintended consequences. …

What will a future generation think of our technological efforts? During the Middle Ages, nobody knew they were living in the Middle Ages (the term emerged centuries later), and they would have resented a notion that it was an age of unbridled barbarism (it was not). During the early stages of the Industrial Revolution in the 18th century, few had a notion that a new technological dawn was breaking. So it is hard for someone alive today to imagine what future generations will make of our age. But to judge from progress in the past decades, it seems that the Digital Age may become to the Analog Age what the Iron Age was to the Stone Age. It will not last as long, and there is no way of knowing what will come after. But experience suggests that the metaphor of low-hanging fruit is misleading. Technology creates taller and taller ladders, and the higher-hanging fruits are within reach and may be just as juicy.

None of this is guaranteed. Lots of things can go wrong. Human history is always the result of a combination of deep impersonal forces, accidents and contingencies. Unintended consequences, stupidity, fear and selfishness often get in the way of making life better for more and more people. Technology alone cannot provide material progress; it’s just that without it, all the other ways of economic progress soon tend to fizzle out. Technological progress is perhaps not the cure-all for all human ills, but it beats the alternative.

Joel’s essay is well worth reading in its entirety. His argument highlights the decentralized, curiosity-driven process of technological change that does not proceed linearly, but is impossible to quash. These processes contribute to economic well-being in societies with good institutional and cultural contexts that facilitate and reward innovation when it generates value for others.

How did an oil and gas state come to lead in wind power?

The Great Texas Wind Rush by Kate Galbraith and Asher Price

“The Great Texas Wind Rush” by Kate Galbraith and Asher Price

Kate Galbraith, a reporter for the Texas Tribune, and Asher Price, a reporter for the Austin American-Statesman, have written a great historical review of the development of wind power in Texas.

Admittedly, the book is a little light on the kind of details that the interested energy economist wants to know, but the narrative is strong and the economic clues are there for the interested reader to follow. The book covers the emergence of the industry from the pre-1980s idealists and tinkerers to the 2000’s industrial scale wind farms. Both the hopes and dreams of designers and developers, and the frequent crashing of those dreams, are reported upon. The industry has been boosted by often generous but usually uncertain policies, and challenged by sometimes high and sometimes low electric power prices. Some early California wind projects, mentioned in the book, seemed mostly about capturing generous investment incentives rather than long term power production. Many of these didn’t last long enough to meet their initial PURPA-based contract obligations. Texans tried to avoid the worst of the California policy experiences. (Turbine reliability has improved over the years, but remains an important issue in Texas and everywhere else.)

The book goes into all of these issues and more, all along keeping in touch with the characters that moved the business along.

West Texas locations and people feature prominently in the stories, and since I grew up in Amarillo and now work in Lubbock, I got a special kick out of reading about the locals. I have met five or six of the people interviewed for the book (and also met author Kate Galbraith when she was in Lubbock last year), and I’ve seen many of the wind power projects mentioned as I’ve driven around the state. Maybe I have an overly positive reaction to the book for personal reasons.

Still, I think the book provides a good review of the development of the industry. Whether you support or oppose wind power policies, this book will improve your understanding of the industry in Texas. It would provide a useful supplemental text for college courses on the wind power industry and renewable energy policy.

Department stores as economically transformative

Lynne Kiesling

Recently Virginia Postrel used the US (PBS) premiere of “Mr. Selfridge” to highlight the underappreciated social and economic role of the department store. As she notes,

Yet like railroads and telegraphs, the department stores of the late 19th and early 20th century were socially and economically transformative institutions. They pioneered innovations ranging from inventory control and installment credit to ventilation systems, electric lighting and steel construction, along with new merchandising and advertising techniques. They brought together goods from all over the world and lit up city streets with their window displays. They significantly changed the role of women, giving them new career opportunities and respectable places to meet in public. They popularized bicycles, cosmetics, ready-to-wear clothing and electrical appliances. They even invented the ladies’ room.

Decrying consumption or denigrating shopping undervalues the transformative aspects of department stores that Virginia (and “Mr. Selfridge”) emphasize. Even in cities, pre-industrial production and sales of consumer goods were artisanal, and goods generally were expensive relative to incomes. Consistent quality mass production changed that relationship, made more goods widely available while increasing widespread prosperity. The department store arises from that combination of increased average incomes, decreased average cost, and increased quantity and variety of consumer goods.

It’s a wonderful essay. Do read the whole thing.

And it also gives me a chance to reprise my little shout out from 2004 to my favorite commercial pioneer, Josiah Wedgwood, who pioneered the use of showrooms to sell porcelain goods, the distribution of catalogs, and other innovations that revolutionized the pre-department store retail landscape.

Two foreign policy initiatives contrasted

Michael Giberson

Two foreign policy initiatives, both began in mid-March, one a year old and the other started ten years ago, have had dramatically different effects on the world. Eric Shierman celebrates the wiser of the two efforts:

I have considered writing about the Iraq War on the tenth anniversary of our collective, bi-partisan decision to make one of the greatest strategic mistakes in American military history, but it’s just too depressing to put words into sentences describing the cost in lives and treasure we paid….

Thus the most encouraging anniversary to reflect on is not our invasion of Iraq ten years ago this week, but the wise implementation of our free trade agreement with South Korea one year ago. … From that body of peer reviewed literature [on foreign relations] there has emerged little empirical evidence of a correlation between peace and the pursuit of ever greater military strength among states, but there is overwhelming evidence that the single most powerful pacific force in foreign policy is trade….

The empirical evidence is just overwhelming, … the more exposed people are to complex trading economies with a higher degree of specialization and division of labor, the more empathy they employ in their decision making and the more rational they are in seeking their own selfish ends through the voluntary cooperation of others. It’s not enough to know what you want; successful exchange requires a focus on what others’ want as well. This paradigm spills over into other aspects of our lives even when we are not aware of it.

Of course this is not the primary goal of free trade agreements, economic growth is. The pacifying effects of trade are merely a positive externality….

Worth reading the full thing.

Ralph Nader on gasoline prices

Michael Giberson

If you’re looking for another point of view on gasoline prices, Ralph Nader has an article in Counterpunch, “The Gas Gougers.” In the article Nader blames speculators, a lazy media, and a business-friendly government for the recent 50-cent run up in gasoline prices.

There was a time when even a few cents increase in the price of gasoline or natural gas would provoke Congressional investigations, actions by state Attorneys General, and condemnations of the producer countries, the OPEC cartel and Big Oil from presidents and the heads of antitrust divisions of the Justice Department or the Federal Trade Commission. That is, until smooth, smiling Ronald Reagan came to Washington, D.C. with his mantra that “government is not the solution; government is the problem.”

Curiously, “Reagan came to Washington” back in January of 1981, so I’m having trouble understanding how that moment connects to a gasoline price increase in January 2013, some 32-years later.

Nader might say his point is that now the industry can raise prices and not worry about government interference. But if the industry could freely raise prices without government interference, why did they wait 32 years to claim this particular 50-cent per gallon prize? Why didn’t the oil and gas industry raise their prices this much a year ago, or two years ago, or thirty?

Each price surge in recent decades seems to have different principal causes. This time it seems to have been precipitated by surging prices of crude – easily manipulated – and in the U.S. the permanent or temporary shutdown for repairs, of too many refineries.

Believe it or not, the U.S. is now a net refined petroleum importer because of the continuing refusal by the industry to rebuild or expand refinery capacity on the very sites where many refineries have been shut down, often in favor of offshore, cheaper installations.

Whenever supply and demand for refined oil products is tight, all it takes is for one or two refineries to suspend operations, other than for repairs, and the prices surge all over the country.

The “easily manipulated” price of crude oil? So again, explain why the industry keeps manipulating the price up and then back down again? Perhaps more to the point, why did the industry tolerate 15 to 20 years of low and relatively stable crude prices starting in the mid-1980s (during the Reagan administration!)?

“Easily manipulated” and yet seemingly so hard to control.

And, believe it or not Mr. Nader, the U.S. is now a net refined petroleum products exporter–not a net importer–and has been since mid-2011. Somehow, despite the continuing refusal to rebuild or expand refinery capacity, we have petroleum products in such abundance that we can ship them overseas. I’m sure once Mr. Nader figures out his facts are exactly backwards, he will immediately revise his claim and give the oil and gas industry credit for maintaining surplus refining capacity.

And it turns out that one or two refineries (in California) can suspend production and have essentially zero effect on prices anywhere in the country (but in California, as price data from last year reveals). Similarly, disruptions of refineries in the Northeast don’t seem to spread consequences too broadly across the country.

Nader thinks political grandstanding and government participation in oil markets and refinery operations is called for: Obama should use his bully-pulpit to put the heat on Congress; Obama should release oil from the Strategic Petroleum Reserve to push prices down; the Defense Department should build it own refinery capability and sell excess products into the market to suppress prices.

Nader seems to pine for the energy policies of the 1970s–before Reagan came along–but maybe he should review that decade of periodic energy crises, government oil and gas price controls, import tariffs and oil allocation schemes, calls for energy independence, and repeated Presidential addresses to the nation about the seriousness of increasing energy scarcity. I don’t think it worked as well as he seems to think it did.