The "energy problem" is now the longest-running show in Washington. It was pretty good theater for a while: lots of motion, a constant stream of new actors, and a change of villains from time to time. But the plot is beginning to seem a bit repetitious. Nixon, Ford, or Carter puts forth a solution, then Congress tears it apart. Set 'em up and knock 'em down, just like a Punch and Judy show.
There are a variety of conflicts and confusions behind the congressional opposition, but four deserve special mention: the conflict over automobiles versus mass transit, the confusion over the role of energy prices, the conflict over decontrol of oil and the windfall profits tax, and the confusion over the goals of the synthetic fuels program.
Automobiles vs. mass transit
The received wisdom on this topic is easily stated: 1. It is self-evident that public transportation is vastly more energy-efficient than automobiles; 2. It is selfevident that investing money to improve transit facilities will attract many more passengers. Therefore, the national energy policy ought to give major attention to building new transit systems and revitalizing old ones. Unfortunately, both of these "self-evident" premises turn out to be false. Let's take them in order.
Relative energy efficiencies. If we compare the actual measured operating efficiencies of the average car being sold this year and a modern rail transit system (say, BART in San Francisco), we find that the difference in efficiency between them is much less than the energy efficiency difference between the average imported car and a standard-size American car. That is, people who switch car sizes can save more energy than those who switch to trains. Not only is the energy saving greater, but it is also considerably easier to persuade people to change car sizes than it is to persuade them to abandon cars altogether.
Attracting people onto transit. The history of transit patronage in modern times has been one of continual decline. Most academics and policy planners assumed that this decline could be reversed, and that substantial numbers of people could be brought back to transit, if attractive service were provided. So Congress passed a law and the Department of Transportation spent billions of dollars over the last decade trying to discover what might attract passengers. I think it is fair to say that they tried an enormous number of different and imaginative experiments, and that none of these has generated a substantial increase in patronage.
The Department of Transportation has used as incentives lower transit prices (even free transit), higher parking charges, higher bridge tolls, more attractive buses, more convenient schedules. It has also experimented with every conceivable kind of new technology. None of these innovations attracted a significant number of people away from cars.
Each transit innovation—from sophisticated, computerized heavy rail to light rail to people-movers—was to be the solution. The latest idea is a bus that lowers its body when it approaches a curb to make it easier for passengers boarding—the so-called "kneeling" bus.
The auto has easily resisted all these challengers because, from the point of view of its users, it is a greatly superior form of transportation: it takes people where and when they want to go and by the fastest, most direct route. It does cost the user more than transit but, given our high level of income, almost everyone can afford one. Except for a few situations, involving very high density cities or very long distance commuters, it is economically impossible to produce any form of public transportation that will be capable of luring a significant number of people out of cars.
While these failures to revitalize transit are discouraging from the urbanologist's point of view, they should not be viewed as especially discouraging from the perspective of energy conservation. The fact is that transit's potential contribution to solving the energy problem was always insignificant. To understand why this is necessarily so, we must understand a generalization which I call the Law of Large Proportions. In its briefest form, this law states: "The biggest components matter most."
To change something (such as energy consumption) inside a system, we must concentrate our attention on its largest components. A small improvement in a major component makes more difference than a large improvement in a minor component. The application of this law in transportation is particularly striking because of the enormous difference in the relative size of the two components: only 3 percent of passenger trips are made via public transportation. That is, cars use most of the energy, and we ought to concentrate on improving their efficiency. Instead, public policy has been totally preoccupied with transit: policy planners count it a major victory for energy conservation when some heroic set of policies increases transit patronage by 30 to 40 percent. But this ignores the fact that even a 100 percent increase would not make a noticeable dent in the energy consumption picture.
Alternatively stated, if we increase the fuel efficiency of the average car from 15.0 mpg to 15.2 mpg, we save more energy than we do by doubling transit patronage. Public transportation cannot make any significant contribution to energy conservation in the near term, and even in the long term its contribution is likely to be insignificant.
Why, then, our continued preoccupation with transit, and our spending of billions of dollars to increase transit patronage? I think the answer lies in a set of deep-seated prejudices concerning the automobile, rather than in any real hope for radically improving transit patronage. One of the major intellectual currents of our time has viewed the automobile as some kind of evil demon which is threatening to destroy urban civilization. And so urbanologists have been searching for a silver bullet to slay the demon. Rail transit was the first candidate; alas, people still insisted on ignoring transit and using their cars. So the trusty old bus was given a new suit of armor and sent into battle: free transit was tried and failed, and is apparently to be tried one more time.
Given that we cannot devise anything capable of exorcising the demon auto, perhaps we ought to accept the monster as a given and concentrate on civilizing it. From the energy perspective, this means we should improve auto fuel efficiency; from the urban perspective, it means we should curtail auto emissions, and decrease auto size to reduce parking requirements. Along these lines, the Department of Transportation has recently proposed a joint effort of industry and government to "re-invent" the automobile. The basic goal is a safe, clean, 50 mpg auto, and the first steps toward a cooperative research effort have already been taken.
Of course, none of this is an argument to discard transit. That would be an absurd policy, since public transportation is vitally necessary for our high-density cities, and for many segments of our population in all cities. We do need to preserve, and even improve, transit for these people. But let's keep our goals straight: we obviously need to preserve mobility for the transit-dependent fraction of the population, and we obviously need to preserve the viability of our downtowns. The energy goal is just not a relevant argument.
The role of energy prices
Economists and energy experts want to increase prices in order to cure the energy problem. Everyone else seems to believe that high prices are the problem. This conflict over raising prices is at the very core of most of our energy policy arguments, and it merits a detailed examination of the underlying logic. The dialogue between economists and skeptics runs something like this.
Economist: "Higher energy prices create an incentive for people to reduce energy use."
Skeptic: "No, any price-induced conservation effects will be trivial because energy is a necessity."
Economist: "But look at Sweden. They produce a dollar's worth of GNP with only half our energy input. They have had high-priced energy for a long time, and so have adapted their technology and consumption to become more energy-efficient."
Skeptic: "Yes, they are more energy-efficient than we are, but only because the Swedes have a greater level of environmental consciousness. Their high energy prices are irrelevant; they are simply more virtuous than we."
So we have two competing explanations: comparative prices and comparative virtue. How do we resolve the issue? Well, the Swedes themselves attribute their energy-efficient behavior to self-interest rather than to ecological awareness: people buy fuel-efficient cars because gasoline is very expensive; industries choose energy-efficient processes because electricity is very expensive, and they use the surplus heat from their manufacturing processes to generate extra electricity (cogeneration) because high electricity prices provide an incentive to do so.
The skeptics try to counter the Swedish example by pointing out that higher oil prices have not had any effect in the United States. Unfortunately, their perception is confused by the effects of inflation. The reason there has been little conservation behavior is that the real price of gasoline (corrected for inflation) has dropped continuously since 1940, and was actually 5 percent lower in January 1979 than it was in 1960! The OPEC price jump did raise the real price of gasoline temporarily, which caused a substantial shift toward the purchase of fuel-efficient cars; but the subsequent inflation quickly reduced the real price back to the 1960s level, and consequently the market share of fuel-efficient cars began to fall again.
As an additional example, European countries have historically used high taxes and high import duties to keep their gasoline at two to three times the U.S. price. And the effect of these high prices is easy to see: the average European car had more than double the fuel-efficiency of the average American car in the pre-OPEC period.
The gasoline lines in Los Angeles in the spring provide a final example. On weekdays, gasoline was available in unlimited quantities to anyone who was willing to pay the additional price: waiting in line. But an increase in waiting time is, in fact, an increase in the real cost of gasoline: studies of transportation choice have established that commuters are willing to pay about 40 percent of an hour's wage to save an hour of travel time. That is, the increase in waiting time was equivalent to a real price increase of 50 to 100 percent, and motorists responded by reducing their weekday travel by about 15 percent. If this had continued, their long-term response would have been even greater since they would have had the time to make more important adjustments, such as changing automobiles or residences.
Would raising energy prices affect our supplies of energy? Well, we have a host of alternative energy sources waiting in the wings, ready to come on stage as soon as they are cued by higher prices: everything from solar energy to tar sand conversion to underground gasification of coal to exploration of geologically difficult basins. All of these alternatives become economically attractive given a reasonable price for their end products. Higher energy prices provide the incentive to develop and discover alternative sources of energy. Even a casual reading of technological history shows the way in which high energy prices spurred entrepreneurs to develop energy substitutes in the past: from wood to coal, and from coal to oil.
During the five years since the OPEC embargo, we deliberately kept U.S. prices far below the level of world energy prices, by means of a variety of government subsidies. Are such policies reasonable? If higher energy prices could do so much for us—simultaneously curbing consumption and increasing supplies—why is there so much opposition to an energy price rise? The answer to this lies in our confusion of energy goals with social goals: people worry about the effect of higher energy prices on the poor, or even the effect on industry. Should we be concerned?
As for the effect on the poor, this is the subject where energy policy and social goals are most mistakenly intertwined. An instance is cited where higher energy prices caused real harm to a poor family, and the conclusion is that energy prices must be kept down. So we have low prices for everyone, to avoid harming a few. But if a policy is good for most people, at the expense of a few, wouldn't it make more sense to implement that policy and then direct special help toward those few? There are many ways to do this: President Carter proposes to give direct income supplements to the poor to compensate for the rise in heating oil prices; or we can have "lifeline" rates; or even, God help us, energy stamps. We have ignored this possibility of targeting energy subsidies to the poor, and instead we manipulate energy prices for everyone. This makes as much sense as burning down the barn in order to get roast pig.
There are a number of reasons for believing that industry and the economy will not be harmed by energy price rises. 1. Pro-business publications, such as the Wall Street Journal, argue that price rises will actually help the economy. 2. Valued at the minehead or wellhead, energy amounts to only about 5 percent of our GNP, hence even substantial price increases will not have gross effects on the economy. 3. What businessmen seem to fear is shortages rather than high prices, and, even more than with shortages, they are concerned with the uncertainty created by contradictory government energy policies. They dare not commit investment capital in the face of such uncertainty, and this in turn is responsible for much of the current economic slump.
Imagine yourself, for example, in the plight of a well-intentioned manager of a public utility. After the OPEC oil embargo, the government tells you to stop using oil and natural gas and convert to coal-fired boilers. So you make plans to comply. Then another federal agency says you may have to put stack gas scrubbers on your new plant even though the low-sulfur coal you plan to use does not require them. So you tear up the first plans and start new ones. Then another federal agency tells you to forget coal and use natural gas because it is in surplus at the moment. So you scrap another set of plans, but this time you don't start new ones. Even the most public-spirited businessman has some limit to his gullibility when he is asked to undertake a large, very expensive investment in the face of such government vacillation. Is it any surprise that businessmen react by sitting on their capital?
Decontrol of oil prices and windfall profits
Government policies have kept the price of oil artificially low over the past five years, and the oil companies have fought these policies, using the argument that higher prices would provide more incentive to search for oil. It's a good argument, but the oil companies wanted to apply it to all oil, not simply newly discovered oil, and the distinction between new oil and old oil is crucial to understanding the debate about President Carter's energy proposals.
To begin, let's set out the goals dictated by economic logic. 1. Consumers ought to pay the world-level price of oil, to encourage conservation. 2. Oil explorers ought to be paid the world price for their new discoveries, to encourage them to take on the expensive risks associated with most of the unexplored oil basins. 3. Producers of oil substitutes ought to be paid the oil-equivalent world price for their discoveries, to spur the development of such alternative energy technologies as solar energy, synthetic fuels, and so forth. 4. A more controversial goal: oil companies should not receive a windfall profit on their old oil. This is partly a political imperative, necessary to make high consumer prices more palatable, though it also has some economic logic: the old oil was discovered and produced under the expectation of much lower prices, hence high prices would constitute a windfall gain.
The first three goals are easy to meet: we simply allow the U.S. price of oil to rise to the world price. (The higher oil price causes the price of oil substitutes to be bid up as well.) The fourth point, elimination of windfalls, seems to entail contradictory goals: consumers must pay the high, world price for the oil they buy, while at the same time producers are to receive the low, old price for the oil they sell. We need to have a substantial gap between the buying price and the selling price, and the easiest way to create it would be with a government tax. Carter's 1977 proposal involved a wellhead equalization tax: the government would calculate the price difference between world price and old price and then levy a tax of exactly that amount on the old oil.
The logic of the plan was compelling, but the politics were not. The major oil companies immediately attacked the wellhead equalization tax, demanded total deregulation of oil prices, and argued that the "windfall" was necessary to provide incentives to search for new oil. Such arguments are patent nonsense, but they were easy to make given the unsophisticated analyses of most of the media. (Newsweek, for example, totally reversed the logic of the plan by calling it a "use-less, pay-more policy.") Various liberal groups opposed the plan as well because of its effects on the poor, and the unlikely combination of the major oil companies (hoping for a bigger increase) and liberals (hoping for no increase) managed to kill the proposal.
The 1979 Carter proposal has slightly less economic merit, but much greater chance of political success. Instead of asking for a decontrol-plus-tax combination, he simply decontrolled oil prices (which was within his statutory authority) and asked Congress to worry about the taxes, apparently reasoning that public pressure to prevent a windfall profit would accomplish what his original, balanced proposal had not. He did suggest an excess profits tax based on 50 percent of the difference between the old price and the world price, and Congress is currently considering a variety of possible implementations.
This time the major oil companies have asked for the right to "plow back" the taxes into new exploration, rather than paying them to the government. They claim they have a capital shortage, and need the windfall because they are "just too poor to be able to take advantage of the profit opportunities awaiting them in new oil." But, are we to believe that the capital markets will look askance at an oil company with an attractive lease that it wants to develop? And how are we to square the oil companies' alleged capital shortage with their recent ventures into acquiring so many other industries?
Some of the companies, ARCO for one, have dissociated themselves from this position; most of the others are still pushing hard, though, trying to drive an unfair bargain, using specious arguments to rationalize what is really only simple greed.
The national energy policy should not be held hostage to the controversy over the excess profits tax; simple political considerations dictate that a policy whose major impact is to raise the price of a basic good to consumers should not be used to bestow windfall profits on the oil companies. An argument for equal sacrifice by all can hope to be convincing, but an argument for large income transfers from the public to the oil companies must surely fail.
There are a variety of perspectives on the synthetic fuels (synfuels) program, but the one that seems to make the most sense is to regard it as "insurance." We may need to produce huge quantities of synfuel ten years from now, but if we wait until we are certain of the need, it will be too late to act. We don't know which of the many alternative synfuel technologies have acceptable economic and environmental costs, and it will take at least five years to construct the plants and find the answer.
Hence it makes sense to build a few first-of-a-kind synfuel plants to learn about their characteristics. If any of them prove to be acceptable, and if the need for synfuels should arise, we can make duplicates of the successful plants. By testing the ideas on a limited scale, we are readied to act quickly if we need to make large quantities.
So far, so good. The controversy centers on the President's desire to do more than test the technologies: he wants a large-scale project, with simultaneous construction of duplicate plants, a program designed to produce substantial amounts of fuel. The argument for the program is that it would help restore a sense of control over our own destiny. The argument against is that the costs would be enormously higher, and that it would still not protect us from any short-term OPEC supply interruption; only the planned strategic petroleum reserve (storing half a year's oil supply underground) could provide that kind of protection.
Finally, the smaller, insurance-size synfuel program would have less environmental impact, and hence would require less help from Congress in bypassing current permit and licensing procedures. No significant energy project is going to be completed without some kind of expediting process, however, as shown by the recent Standard Oil Co. of Ohio (Sohio) pipeline case. Sohio wanted to build a line to transport Alaskan crude from California to midland Texas, but the project was finally abandoned after five years and more than $50 million had been spent on planning and impact reports, arid more than 700 permits from the various overlapping agencies had been secured.
This past summer's gasoline lines are the most recent reminder of the energy problem, and it seems appropriate to close by pointing out their connection with our existing energy policies.
Why did we experience gasoline lines? After all, the government controls the price of oil to the refineries, the division of their output between gasoline and heating oil, and the price of gasoline at the pump, and even makes detailed allocations of gasoline supplies to each state. Surely this represents enough government power to deal with the problem. But apparently the shortages occurred more rapidly than the bureaucrats could react to them. Do we need speedier bureaucrats or less government intervention?
For the past five years we have made a deliberate decision to keep our oil prices artificially low and to ignore the general workings of supply and demand in the market, building an elaborate network of regulations and controls to apportion supplies instead. We were the only major Western country to try this peculiar set of policies, and we were also the only one to experience sustained gasoline lines. Surely this is a significant observation. Other countries are far more dependent upon OPEC oil than we are, but they avoided gasoline lines. If we insist that OPEC, rather than our own policies, is to blame, then we must explain how it was that OPEC managed to produce lines in New England and California but not in the Midwest.
The conclusion seems obvious. It took the overwhelming market distortions of our current energy policies to produce these effects, and the only way to protect against their recurrence is to remove government controls and place greater reliance on the normal price mechanism.