Continuity and Change in Oil Import Policy

OIL IMPORT POLICY over the past quarter century has been subject to a changing world oil market and a shifting role for the United States within it. Through all these changes two policy issues regarding oil imports have been debated: what costs should U.S. consumers and taxpayers be asked to pay for uncertain future benefits from greater energy security, and how are these costs to be distributed? The resolution of these issues has taken different forms at different times, but one characteristic is predominant: each decision has been heavily influenced by broad political factors.

There was no formal U.S. position on controlling oil imports until 1957, when a voluntary control program was implemented to hold back an anticipated surge in imports. Predictably, the voluntary program foundered as soon as it seriously affected private interests, and the Mandatory Oil Import Program was implemented in 1959. That program came to limit crude oil and petroleum product imports to approximately 12.2 percent of domestic production. It was designed in such a way that its costs were somewhat camouflaged, and its effects could be shifted among interest groups. It was administered with flexibility and political skill. Consequently, the basic elements and structure of this program survived great changes in its economic effects, rationale, and political impact. During its life the quota brought about substantial changes in the structure of petroleum production, refining, and consumption; effects that will far outlive its formal abandonment in 1973.

The mandatory quota program came under increasing attack in the late 1960s on two fronts: it was regarded by oil producers as badly administered because of an increasing number of special quota allocations, both inside and outside the 12.2 percent rule; it was offensive to consumer groups because its cost had become higher, more obvious, and the inefficiencies of its discriminatory application were better recognized. A Cabinet Task Force on Oil Import Control was formed in 1969 to study oil import policy and make appropriate recommendations for changes. The task force recommended in 1970 that the quota program be abolished in favor of a less restrictive and more neutral import tariff.

The quota instrument was not abandoned, but quantitative restrictions were eased to allow more imports during the period from 1970 to 1973. Relaxation of controls owed less to a change in import policy than it did to the Nixon administration's willingness to abandon restraint in order to relieve the upward pressure on prices. On April 18, 1973, the mandatory quota program was suspended and a license-fee system was imposed—but at rates which actually lowered the total levy below the previous tariff. Oil imports returned to the formerly uncontrolled status that they had known before 1957.

The Arab oil embargo of October 1973 revived general support for a policy of limiting U.S. dependence on imports—or in any event, for a policy which would avoid the vulnerability which had so forcefully been exposed. President Nixon responded with the Project Independence Program, promoted initially as a series of actions which would eliminate U.S. dependence on foreign energy supplies by 1980. It was soon clear that the cost of any such program would be far higher than the public would tolerate, and, moreover far higher than the present expected value of any benefits it might yield.
Denied easy solutions, the nation agonized over how much energy security it was worth buying, how efficiently it was to be provided, who was going to pay for it and in what way.

The debate regarding energy security is likely to continue for some time. As it progresses, however, inaction means that the course chosen, in effect, is one of increased imports of Arab oil. Oil consumption is rising relative to domestic oil production, a process that will not be reversed until the long-term world transition away from oil and gas is well under way. The debate, in the meantime, will return over and over again to the basic issues of the amount of security that should be purchased, how it is to be acquired, and who is to pay for it.

The changes in oil market conditions and the corresponding changes in the nature of the security problem suggest that the policy option appropriate to the Cold War thinking of the 1950s was not an appropriate response to the fears of a selective embargo of the early 1970s, and certainly is even more inappropriate for concern over exploitative cartel pricing behavior in the future. A new approach to the new energy import problem is required.

Conclusions regarding the course of oil import policy. A survey of the formulation and administration of public policy toward the oil industry reveals a number of themes that, despite changing circumstances and issues, are repeated again and again. Perhaps the most striking of these is that public policy drifted consistently toward direct government intervention in the process by which energy decisions are made.

Strikingly, however, this drift toward government control over energy supply and consumption (which, for our purposes, culminated in the Energy Policy and Conservation Act of 1975) occurred despite great shows of reluctance. Import controls, and price controls as well, were imposed by administrations ideologically opposed to them, not by politicians who perceived these acts to be a "good" in themselves. The Eisenhower administration "studied" the oil imports question interminably before even adopting "voluntary" controls, and put on a public face, at least, of surprise and dismay that mandatory controls were later required. The nation, and especially the administration, agonized over the 1973-75 decisions to maintain price controls on oil. Government control of the petroleum industry has been implanted and expanded by those who would not accept the results of a free market in energy, but who were unwilling to embrace the idea of government control. As a result, the nation got centralized decision making and free market rhetoric.

The mandatory quota program appeared to offer general but unmeasurable benefits to all citizens in the form of greater energy security. It clearly provided substantial and tangible, though not readily visible, benefits to some groups, and its costs were largely hidden. Unlike Sherlock Holmes, who was alert to the significance of the nonbarking dog, the consumer failed to notice the nonfalling oil price. It was only when oil prices had to rise if import restraints were to be maintained that the opportunity costs of import controls became politically intolerable. A similar process occurred with price controls on petroleum. The cost of the resulting inefficient resource allocation was spread unobtrusively throughout the economy (though energy resource owners bore an obvious transfer burden), but the lower consumer prices were obvious. The future holds substantially higher imports or energy rationing or greater government expenditures. When those results become obvious, that is, when the opportunity costs always present become more visible, a reversal of the present policy drift will become feasible. However, it is by no means certain that this will occur, as the dogged continuation of natural gas field price controls attests.

Multiple goals, complex instruments. When viewed as a means to achieve energy security, oil import policy was a collection of diverse and loosely articulated instruments. The regulations were cumbersome, awkward, and, in some cases, silly. Far more efficient means existed to achieve greater energy security.

The point is, of course, that the policy goal was not energy security. Indeed, there was no one goal for import policy. Many goals existed; they were subsumed under the security rationale while the policy process labored to fulfill each. The very concept of energy security is murky. A program to enhance it provided, therefore, a convenient "Christmas tree" on which all sorts of special advantages could be attached in sometimes jarring juxtaposition. If the goal of the mandatory quota program is defined as promoting energy security at a minimum cost, it must be judged a failure. It did remain in force from 1959 to 1973, however, and in terms of simple survival power must be judged a success.

One reason for the "success" of the mandatory quota program was that its provisions mollified those groups whose special interests were identified, and failed to alert those groups whose interests were harmed. A roll call of the special interests in energy policy would find most of them the recipient of at least some favored treatment: small refiners, inland refiners, Northern Tier refiners, major oil companies, oil producers, petrochemical companies, north-eastern utilities and other identifiable and isolatable consuming interests, deep water terminal operators, islands' (Puerto Rico, U.S. Virgins, and Guam) interests, West Coast consumers, and so forth. The coal interests lost their benefits after the mid-1960s when residual fuel oil imports were relaxed, but by that time, with the emphasis on air quality, there were few markets coal could retain on the basis of slight economic advantage. The major large group which paid for the benefits of the greater energy security achieved under oil import controls was the undifferentiated portion of the consuming public. With one possible exception, other identifiable functional groups were either unaffected, or actually made better off.

The "possible exception" is the international operations of major oil companies and, perhaps, those oil companies themselves. The overall restriction on imports lowered their potential market, and its administration forced them to share the already limited market with newcomers. The special provisions further eroded their position. The sliding scale, the petrochemical quota, the Islands program, the resid program, and the overriding fact that traditional importers were required to share the quota with the inland refiners all reduced the advantage of owning overseas production. Virtually every controversy was resolved against the best interests of the original major company importers, a fact with important implications when the political economy of oil is examined. The political power of oil may be great, but based on the record of the mandatory quota program, this power is not found in the international giants of the industry.

This discussion highlights the general proposition that in oil policy it was income distribution issues which dominated. While the import quota program had as its public interest rationale the improvement of energy security, the impetus for its adoption came from those interests directly benefited. A careful analysis of allocations was not performed, or at least not publicized by a public body, until the 1970 report of the Cabinet Task Force. The battle lines over provisions of the controls took on regional, sectoral, and parochial dimensions, not analytical ones.

One lesson from oil import controls is, then, that oil policy was not concerned with achieving a single goal, and hence the criteria for success or failure were not well defined. Consequently, the pattern of shifting goals and conflicting ends can be judged irrational only if irrelevant ex-post values are superimposed upon the policy process. Oil policy has accommodated the special interests involved, and it has done so while avoiding conflict which might have threatened social stability. In this light, the broader lesson is that the failure to satisfy the criterion of economic efficiency will not prove fatal to a program unless and until that criterion is adopted by substantial groups which find its violation harmful to their interests.

The executive and oil policy. Oil policy has been a constant source of difficulty, frustration, and failure for the Executive Branch. No president has benefited politically from his administration's efforts to deal with the oil issue, and most have suffered. Eisenhower, with great reluctance, was forced into mandatory oil import controls. Kennedy faced extreme pressure from the New England interests and was embarrassed by having to give way to it. Johnson tried to banish import policy from the White House because of sensitivity to charges of manipulating it to benefit his parochial Texas interests, at a time he was trying to meld a national consensus. Nixon returned the matter to the Executive Office, where he was soon forced to make a number of no-win decisions. For a time he thought energy security was a candidate for an issue around which the country could be gathered and Watergate forgotten. Ultimately, however, the obvious helplessness of the government in the face of OPEC and the chaos surrounding oil policy making contributed to the impression that his administration was incompetent to govern. President Ford was wounded by his failure to secure his chosen energy policy. His failure to prevail, coupled with strong words and a grand design, contributed to the image of political ineptness and lack of presidential bearing.

Why, it may be asked, did oil policy consistently prove so detrimental to the political fortunes of a long line of very different chief executives? Primarily, we would suggest, because there was never a national consensus on what that policy should be. The only truly national purpose, energy security, was clouded because of the pervasive suspicion of the oil industry and because this national goal coincided so exactly with certain of its special interests. For the chief executive, then, oil policy was a political disaster. Any action which satisfied a single group inevitably angered many more.

These problems were not so serious for Congress. Congressmen, by the nature of their limited constituencies, could evolve and support positions which led to political benefits to them. The balance of power in the Congress with reference to oil policy shifted over time, but Congress was not beset by the ambivalence that tortured successive administrations.

Continuity and change in energy policy. These are the consistent themes that can be inferred from the record of public policy toward oil and oil imports, despite the superficial appearance of discontinuity and chaos. In a sense, the charge that the nation has not had an energy policy is false. It has not had an oil policy on which all, or in fact any, could agree in its entirety. It has not had an oil policy which met any ideological test. It has not had a policy which achieved any single goal efficiently. But it has had an oil policy which accommodated a range of private interests in a manner which the nation has found satisfactory.