After the 1973 OPEC oil price shock the goal of U.S. energy policies shifted from the attainment of abundant and cheap energy to that of secure and clean energy. Where regulatory measures had failed to achieve earlier policy objectives, successive administrations relied on market forces—an approach that has often yielded poor results. In the search for energy security and in the interest of environmental protection, a greater stress on government intervention seems inevitable.
There is a perennial debate over whether the country has ever had—or now has—an energy policy or merely a collection of policies, each applying to a specific segment of the industries that comprise the U.S energy sector. Whatever the answer, it is arguable that the early seventies constitute a dividing line between an era for which the second characterization holds true, and an era that saw a closer approach to an energy policy with broadly defined goals applicable across the board. In the latter era energy policy appears to have been driven initially by concern for supply security and stability, including diversification of source; by efforts to use energy more efficiently; and, increasingly, by the need to reconcile energy production and consumption with the maintenance of environmental integrity. It is fair to say that few realized on Earth Day 1970 how difficult it would be to understand the underlying complexities of that last-named goal; agree on specific targets; make the required measurements; and shape appropriate, effective, efficient, and equitable policies.
To appreciate the change in the focus of energy policy that began in the early seventies, it is useful to review the 1960s, during which the United States was on an energy binge. In that decade energy consumption averaged 5.2 percent per year as compared to 1.4 percent per year between 1970 and 1980. Oil consumption soared 4.8 percent per year in the sixties but slowed down to an average annual rate of 1.6 percent between 1970 and 1980. Electricity generation rose an average 10.3 percent per year in the sixties and decreased to a rate of 4.9 percent annually between 1970 and 1988. This trend continued into the 1980s.
Obviously the rate of growth in demand that prevailed in the 1960s could not long be sustained. A number of factors suggested that in the future energy would no longer be in abundant supply and at low cost from domestic sources. These factors included a turnaround in the decline of the Btu/GNP ratio, which indicated a worsening in the efficiency of energy use; the failure of oil and gas reserves to grow commensurate with increases in consumption; the declining efficiency of power plants; environmental deterioration requiring remedies that would entail higher energy costs; and doubts about the availability of nuclear energy supplies at the low costs previously predicted. In the case of oil imports, many expressed concern about their future cost and reliability.
Pre–OPEC energy policy
It has become conventional wisdom that late 1973 constitutes the great divide between "pre-OPEC" and "post-OPEC" energy. It is convenient to think in these terms as long as one realizes that the 1973 OPEC oil price shock merely accelerated the consequences of worsening supply and demand trends and aggravated the impact of rising environmental concerns.
On the whole, energy policy in the pre-OPEC era addressed separately the issues of each energy system, without any attempt to produce an integrated policy system. Moreover, policies were heavily directed at controlling the fiscal environment in which the energy industry operated, and employed regulatory measures to do so. For instance, oil policies addressed matters such as the industry's tax situation and the extent and nature of state regulation of the industry's output. Beginning in the late fifties, these policies were supplemented by attempts to curb oil imports that were perceived as threatening to domestic producers because they cost less than domestic oil supplies. Ironically, the control system collapsed just months before the OPEC oil price shock. Among other things, it had encouraged the depletion of domestic energy resources and disturbed oil exploration and development decisions.
Regarding coal, pre-OPEC policies addressed principally three areas: the conditions under which federal land was to be leased for mining purposes, the health and safety of miners, and the fate of surface-mined land. All three affected coal prices, the location of mining activity, and the financial condition of coal companies—none of which were the policies' objectives. No attempt was made to link policies concerning coal to those affecting oil. As for natural gas, the third fossil fuel, policies primarily addressed the price that gas producers could charge.
Hydro and nuclear energy were relatively small contributors to the nation's total energy supply in the pre-OPEC era. With hydro energy, the issue had long been the power of the federal government to fix the conditions, including rates, under which a given hydro project could be built and operated. With nuclear energy, the main issues were, in the early years, safety, health, proliferation, and management of nuclear waste, all within the purview of the federal government.
The above sampling suggests that policies for each of the energy systems were separate lots, related to the others at best inadvertently. At times the policies conflicted. Nonetheless, they reflected a common goal—the supply of abundant, cheap, and reliable energy to support a growing economy and allow a reasonable profit to producers. A secondary goal was to retain, or where necessary establish, a role for the federal government, initially as steward of the nation's resources, and later as provider of acceptable conditions of life for those involved in the production process. The government's role as steward of the nation's resources had wide ramifications, as indicated by the establishment of a prorationing system for oil production, the regulation of shipping rates for coal transported by rail, and the regulation of natural gas prices, to name only three. The government's regulation of the electric power industry affected everything from the siting of plants to allowable returns on investment to rates charged to different classes of customers.
The 1973 OPEC oil embargo led to long lines at gas stations and energy policies aimed at supply security
The government's role was strong throughout the energy system. Yet there was no mechanism to assess whether energy policies, either singly or jointly, in fact favored cheap, abundant, and reliable energy supplies, or whether low cost, abundance, and reliability were indeed consistent objectives. For example, the prorationing of oil coupled with the setting of output targets only served to make oil more, not less, costly, though not necessarily so for the long run. Land reclamation policies no doubt raised the price of coal. Certainly the restrictive leasing of federal land containing oil made energy supplies less abundant.
Post–OPEC energy policy
By the 1970s it was obvious that the goal of abundant and cheap energy was becoming obsolete. The OPEC embargo of 1973 undermined the goal of reliability. As a result the post-OPEC era generated energy policies that directly addressed both the supply of and demand for energy within the context of the performance of the overall economy. These policies have been driven by the search for supply security and a concern for environmental protection. In particular, security acquired a priority status. Legislation now aimed at both reducing the consumption of energy and increasing the supply of energy sources that could replace oil. There was a good deal of ambiguity regarding these policies, for the idea of suppressing demand and letting prices rise was indeed alien to a country richly endowed with energy resources. The government's gut reaction to OPEC's price-boosting enterprise was to control prices. However, the cure was worse than the disease. By holding down the price of domestic oil and thus confronting the consumer with an average domestic/import price that was lower than the OPEC price, the government masked the high OPEC price and prevented demand from responding adequately. Moreover, keeping prices low slowed oil exploration and development. This counterproductive policy was not abandoned until 1981. Freeing the price of natural gas took even longer and was accomplished by a highly complex regulatory regime.
Pre–OPEC energy policies focused separately on each energy system without attempting to forge an integrated energy policy.
Attempts to reduce demand took various forms, all of them laid down in elaborate statutes. Indeed, the 1970s were the most intensive years of energy legislation. Starting in 1974 Congress passed a series of laws that aimed at imposing efficiency in the use of energy, reducing the consumption of oil and gas, establishing tax and fiscal incentives for the use and research and development of renewable energy sources, strengthening supply security by building a strategic petroleum reserve, and so on. Some laws were short-lived and others proved ineffective, but increasingly the goal of energy policies shifted from the attainment of abundant and cheap energy to that of secure and clean energy with prices shaped by market forces.
Congress first attempted to address the need for energy security in 1974 when, ignoring coal's adverse impact on the environment, it ordered oil- and gas-burning power plants to convert to coal—provided they were equipped with coal-handling and transportation facilities. The effort accomplished little, as few plants made the switch.
In 1975 Congress tried to promote conservation by setting automobile efficiency standards and mandating a ten-year reduction in energy consumption in federal buildings, as well as efficiency standards for household appliances. Unhappily, this measure also greatly broadened the oil price control policy that began in 1971 under President Nixon, thus frustrating conservation. Appliance standards never became law, and improving energy efficiency in federal installations remained a minor effort.
Congress made still another stab at conservation in 1976 by requiring the establishment of energy-efficient building standards and by authorizing so-called "weatherization" grants for low-income households. The first of these measures was stillborn. The second had minimal results.
One of the early actions of the Carter administration was to develop the National Energy Plan, which called for conservation and fuel efficiency, rational pricing and production policies, reasonable certainty and stability in government policies, substitution of abundant energy resources for those in short supply, and development of nonconventional technologies for the future. Its targets for 1985 were to reduce gasoline consumption by 10 percent, establish a petroleum reserve of one billion barrels, increase coal consumption to more than one billion tons per year, bring 90 percent of the existing U.S. homes and all new buildings up to minimum efficiency standards, and use solar energy in more than two million homes. Monetary incentives and disincentives associated with specified standards were to bring about these changes. While the plan reflected a lack of realism in such areas as buildings and solar energy and overestimated industry's willingness to switch to coal, it correctly diagnosed price controls as counterproductive and called for their demise.
Congress responded by establishing the gas guzzler tax to penalize grossly inefficient automobiles and by authorizing subsidies for alcohol fuel. It also authorized residential energy audits by utilities, ordered the Department of Energy to set appliance standards, and set rules for phasing out price controls. In addition, Congress required utilities to purchase independently generated electricity and encouraged them to institute rate reform. It extended the existing restriction on oil and gas-burning in power plants and large industrial facilities, and authorized federal loans for investment in pollution control equipment, as well as assistance to areas with increased coal and uranium mining.
Collectively, this legislation aimed at the promotion of energy efficiency and security through diversification of sources; environmental considerations were a minor feature. Indeed, by stressing coal use it was apt to aggravate environmental stress.
One unhappy legislative initiative rounded out the major energy actions of the post-OPEC era. The Energy Security Act of 1980 is notable because it established the ill-fated Synfuels Corporation, though it also provided additional assistance to alcohol fuel plants and established a Solar Energy Bank. None of these provisions bore much fruit, especially as this kind of federal activity was anathema to the incoming Reagan administration. The rise and fall of the Synfuels Corporation is important not so much for failing to lead to a viable alternative fuel as for leaving a bad taste for federal enterprises that get involved in "picking winners and losers"—a cliche that figures in the ongoing tug-of-war between interventionists and free marketeers.
Post–OPEC energy policies have been driven by the search for supply security and a concern for environmental protection.
What has survived since the legislative frenzy of the 1970s? There is the strategic petroleum reserve, not at the legislated 1-billion-barrel level, but approaching a respectable size of 600 million barrels. Lengthened daylight savings time and a reduced speed limit have also proved sturdy survivors. Price controls are gone. Automobile efficiency standards continue to be in force, but are not being tightened. Federal aid to nascent technologies has continued, though the fitful nature of annual appropriations has tended to slow research efforts.
There are other encouraging developments. Recently President Bush requested a $19 million congressional appropriation to construct a new laboratory to advance the work of the Solar Energy Research Institute. Photovoltaics may be on the threshold of commercial viability in special utility applications.
Successes are matched by the failures noted earlier. Looking at this ledger, one is tempted to say that consumer- or demand-oriented legislation has fared poorest. Conservation is hard to foster by government fiat. Trying to motivate millions of consumers is a daunting task. But then, some would argue, so is commercializing new technologies.
No easy solutions
What will the 1990s bring? Most likely a return to more regulation, and that for several reasons. Perhaps the most important is the ever-increasing significance of environmental issues associated with energy. Acid rain, greenhouse gases, and urban smog are three examples. Though there are attempts to manage acid rain through the use of market forces, regulation appears unavoidable. Urban air pollution will require tighter tail-pipe emissions standards, possibly modification of cars, and life-style changes—none of which will be "demanded," in the market sense, by fuel users. Use of market forces appears even less promising in the management of greenhouse gases.
Connected with these issues is the need to de-emphasize coal; yet coal is the most abundant, most widely distributed, and cheapest source of heat and electricity. Nothing short of government intervention will make its users abandon it in favor of oil and gas, which are more costly, less abundant, and, in the case of oil, subject to supply perturbations outside the nation's control. Nor does nuclear energy offer a way out unless or until nuclear reactor designs meet with public approval and waste disposal problems are satisfactorily resolved. Despite continuing advances in technology, the diffusion of renewable energy sources will be years in coming. Nor will the ongoing restructuring of the electric power industry proceed without major government participation.
Looking back on the seventies and early eighties, one finds a broadly spread technological optimism. Nuclear fission, the breeder reactor, fusion, coal liquefaction, oil from shale, gas from unconventional sources, and other technological advances were widely believed to bring relief in the foreseeable future. They have so far failed to do so. At the same time, we have run out of easy solutions. Above all, environmental considerations no longer allow us to regard coal as the universal alternative fuel.
The big question remains: How can we tell when government intervention is indicated? During the Reagan years the federal government sanctioned intercession when the task in question had a high risk, an extended time horizon, and, if successful, a high payoff. It now seems that this triple test holds true for more and more initiatives—a test that therefore becomes increasingly useless. Thus, more than ever, technological enterprises will, like it or not, call for greater government intervention. So will attempts to motivate consumers, as well as increased international collaboration concerning energy matters. The tendency in the 1980s to rely on the market to bring about desirable results is likely to be reversed in the 1990s—no matter one's ideological inclination.
Hans H. Landsberg is a senior fellow emeritus and resident consultant in the Energy and Natural Resources Division at RFF. After joining RFF in 1960, he served as director of the former Appraisal Program and former Energy and Materials Division. Before his tenure at RFF he was a consultant economist.
A version of this article appeared in print in the May 1990 issue of Resources magazine.
