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Energy Crisis DéJà Vu, Or Not

Climate change may be game changer that keeps U.S. on conservation path despite tumbling gasoline prices

by Jeff Johnson
November 10, 2008 | A version of this story appeared in Volume 86, Issue 45

Credit: Shutterstock
Conservation got a boost earlier this year, when gasoline prices soared to record levels.
Credit: Shutterstock
Conservation got a boost earlier this year, when gasoline prices soared to record levels.

TODAY'S PUSH for solar and wind energy tax breaks, ethanol production mandates, big energy research and development demonstration projects, appliance standards, and energy-project loan guarantees looks a lot like the 1970s to Phil Sharp, president of Resources for the Future (RFF), an energy and environmental think tank in Washington, D.C.

Sharp, an energy maven with 20 years of congressional experience under his belt, was elected to the House of Representatives in 1975, soon after the 1973 energy crisis hit and before the 1979 energy crisis began. Both were largely driven by constrained petroleum supplies and subsequent high oil and gasoline prices, and both led to new government energy policies and programs, Sharp noted during a daylong RFF symposium on Oct. 29.

During the 1970s, the government initiated a host of energy reforms, trying in vain to lower oil prices. Most important among these reforms, Sharp said, was the implementation of oil price controls. Although the controls failed, he said, prices eventually did decline in the 1980s, and the U.S. soon returned to its wasteful ways.

Today, as gasoline plummets below $2.50 per gal from a high of more than $4.00 and as oil drops to $65 per barrel from $140, Sharp wonders whether the present will be a repeat of the past and whether the U.S. will return to its consume-more-than-ever trajectory.

This was the main topic of discussion explored at the RFF event in Washington. By bringing together energy crisis old-timers to discuss the '70s experience, RFF aimed to generate clarity and guidance as decisionmakers strive to shape U.S. energy policy for the 21st century.

According to Sharp, the U.S. has had no shortage of energy policies. "Historically, there has been much hand-wringing by economists and academics over the lack of a U.S. energy policy," he said. "In fact, we have a plethora of energy policies, and we make and remake them from time to time as the government attempts to influence energy issues.

"What this means, however, is that we lack a coherent energy policy with clearly thought-out goals that are strong enough to make a major change in energy markets," he stated.

A look at the 1970s bears this out. The early '70s brought some regional gasoline shortages to the U.S. But the 1973 energy crisis kicked into high gear with the Arab-Israeli War in early October and the subsequent Arab boycott of oil sales to the U.S. because of the U.S.'s support of Israel. The embargo was short-lived, however, ending in March 1974. Even so, the era of cheap imported oil was over.

The impact of the 1973 crisis and limits on imported oil reverberated through U.S. energy markets. The price of Middle Eastern oil went from $3.11 per bbl before the embargo to $11.65 after it; the U.S. stock market took a dive (with the exception of oil stocks); and President Richard Nixon initiated the Emergency Petroleum Allocation Act in November 1973, authorizing oil price, production, allocation, and marketing controls.

"We lack a coherent energy policy with clearly thought-out goals."

Early in 1974, Secretary of State Henry Kissinger—presaging today's politicians—announced a national plan to make the U.S. "energy independent."

The embargo and high oil prices led to long lines at gas pumps, various rationing techniques, and personal and economic energy-related stress. But the crisis also created an environment that encouraged development of non-oil-based energy sources—solar, wind, and nuclear energy as well as nonpetroleum fuel alternatives and synthetic fuels. Conservation became part of the mix, and vehicle gas economy standards were introduced in 1975.

In 1979, the U.S. experienced a second oil crisis, driven by turmoil in the Middle East, this time by a regime change in Iran and the deposition of the U.S.-backed shah. Iranian oil production dropped, and a year later, matters got worse as Iraq invaded Iran and Iranian oil production came to a halt.

Meanwhile, President Jimmy Carter had moved ahead with various attempts to influence energy policy by such actions as promoting conservation and encouraging solar energy development. Despite attempts to control oil price and allocation, prices continued to float up, and Carter began a phaseout of Nixon's oil controls.

By the early '80s, oil prices had climbed to $39 per bbl, the highest oil prices in real dollars ever—until this year. U.S. efforts to increase oil production began to work, and prices declined in the '80s. Along with prices, interest waned in the national focus on conservation, renewable energy, and other efforts to reduce energy consumption.

William W. Hogan remembers this well. As he explained at the RFF meeting, Hogan joined the federal government in the months before the 1973 Arab-Israeli War, working in the newly created Office of Energy Data & Analysis at the Department of the Interior.

THE MESSAGE Hogan took away from that time is that price controls don't work. The system, he and Sharp agreed, was impossible to control. The lesson was learned, they noted, and there has been little interest today in repeating errors of the past by imposing oil price controls as a solution to an upsurge in oil prices.

When asked whether Americans will again lose interest in alternative fuels and renewable energy and jump back in their SUVs as oil prices drop, Hogan said, "The lessons from the past say the answer is mostly 'Yes.' It will become harder to develop alternative energy sources."

But the difference this time around, Hogan pointed out, is the specter of climate change and how Americans choose to address it. This factor may help stop history from repeating itself.

Climate change and global warming were discussed in the 1970s and '80s, Hogan and others at the conference noted, but without the intensity and sense of urgency of today's discussions, with both presidential candidates having embraced a need to act on climate change.

The question, however, is how President-Elect Barack Obama and Congress will act. For his part, Hogan backs a system of market incentives to reduce energy use and greenhouse gas production, a tack that he notes will take a toll on consumers' pocketbooks.

"In the 1970s, we had this huge debate about the role of markets or price controls, whether we should let prices go, and what people would respond to," Hogan explained. "We tried all kinds of mandates and had allocation programs and entitlement programs and everything else that went with them. Finally, we decided that these just weren't working.

For the future, he said, "my shorthand answer is you have to put a price on carbon. There are lots of ways to do that, such as a cap-and-trade system or carbon taxes." These actions are unlikely to be sufficient to handle all climate-change issues, he added, but marketplace incentives are absolutely necessary.

"These may not solve the problem, but they are needed and must be in place soon. Pressure for climate change is constantly building, and that will make solutions harder," Hogan said. "The situation is dramatically different than in the 1970s.

"If you think you can deal with climate change by creating a massive set of mandates that are going to create green jobs, grow the economy, and reduce CO2 levels and not have costs and prices increase, you have not been paying attention," Hogan pointed out. "Prices will go up and up significantly, and that is a good thing because it will cause people to change."

At the RFF meeting, Robert Fri—who was the first deputy administrator of the Environmental Protection Agency as well as of the Energy Research & Development Administration, both of which were created in the 1970s—recalled another lesson from that decade.

IN TIMES OF energy stress, new technologies become "the holy grail of energy policy," Fri noted. However, he added, government, particularly the Department of Energy, has had a "checkered past" of bringing government-backed technologies to the market.

"The government is very good at starting energy projects that it believes will solve energy problems, but it is not very good at generating the intended results," Fri said. He illustrated his point by noting the failure of several government-supported large-scale projects during the 1970s: the synthetic fuels program, breeder reactor development, and Nixon's push for pollution-free cars.

Nearly a decade ago, Fri oversaw a National Research Council study that examined 25 years of DOE-funded R&D. It found that 75% of the research returns on investments from energy R&D projects could be traced to three projects that took up a mere 0.03% of the overall R&D spending. In addition, the study found that half the overall investments generated no returns. The three most successful R&D projects—electronic ballast for fluorescent lighting, energy-efficient windows, and better refrigeration—appeared mundane when they were selected for funding, according to Fri.

As the U.S. begins to gear up for future energy R&D efforts, especially ones related to climate change, Fri warned, "if the government tries to develop technologies for markets that don't yet exist, it better be prepared to lose its shirt. It may turn out that no market will show up—which was the case with the synthetic fuels program—or if the market does develop, the marketplace might embrace a product different than the one the government hoped to invent."

Fri backs government support for carefully selected carbon capture and sequestration research projects. In particular, he pointed to the need for government research support to characterize the vast number of possible sites for sequestering CO2 underground. He also noted that large-scale CO2 sequestration would require the development of a new federal regulatory framework.

But Fri said that industry should be left to continue its work on carbon-capture technologies, pointing to several industry pilot projects to capture CO2 at operating power plants.

Coloring the atmosphere at the conference was the recent financial crisis, which Sharp described as "Katrina hits Wall Street." In the end, almost every speaker at the symposium noted there may be little funding available for R&D, and consumers may complain loudly if energy prices blast upward. That response, the participants acknowledged, may determine energy policy much more than the views of energy experts.


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