By Dr. Bernard L. Weinstein
The Deepwater Horizon incident in the Gulf has moved our country into crisis mode, and the public’s attention is, not surprisingly, focused on Washington’s response. Certainly, our government has the responsibility to mitigate a disaster with such devastating economic and environmental consequences. However, lawmakers should tread lightly and be careful not implement punitive policies that would inflict further economic harm on the Gulf region and the nation. Unfortunately, the administration and Congress’ response to the spill may well amplify the economic distress already afflicting the Gulf Coast states. And it could impose significant costs on the entire American economy as well.
Interior Secretary Ken Salazar got the ball rolling by calling for a six-month moratorium on current drilling activity in the Gulf, in contradiction to the recommendations of seven drilling experts he had consulted for advice. President Barack Obama kept it moving by reiterating support for the House passed cap-and-trade bill in his June speech regarding the disaster and advocating “the need to end America’s century long addiction to fossil fuels.” And now Congress has stepped to the plate with members proposing a variety of new legislation to tax oil profits at higher levels, to impose a 49-cents a barrel fee to be used to replenish and expand the accident liability fund, and to require new regulations to drill relief wells.
None of these initiatives is cost free, and most will do more harm than good.
Obama’s renewable energy plan won’t end America’s need for fossil fuels anytime soon according to the Energy Information Administration. And therein lies the problem of moratoria and bans on oil development in America’s coastal waters. Offshore oil operations in the Gulf of Mexico currently generate US $85 billion in annual economic activity as well as $6 billion in royalties to the federal treasury. The loss of this spending will destroy thousands of jobs in Gulf Coast communities, and the ripple effects will be felt across the nation.
History tells us that governments tend to react to crises and disasters with bad public policies. In the case of energy, this has been proven over and over. Take, for example, gasoline rationing and price controls.
J. Howard Marshall II, who had proposed price fixing in the petroleum industry while still in the academic world, found that they didn’t work when he tried to impose controls in the real world while working for the Roosevelt administration during the Great Depression. Instead, they created an untraceable black market of so-called “hot oil” that led to serious overproduction. With Marshall’s recommendation, the Roosevelt White House abandoned price controls and instead implemented a system of tenders at refineries.
That lesson was lost by the time Marshall returned to government service in World War II, where the Office of Price Administration set up a rationing system with coupons to control prices. “In almost no time flat, we had coupon inflation … and favoritism, corruption, black markets and futile enforcement efforts,” he writes in his autobiography, Done In Oil. In both letters and in person, Marshall also tried to warn the first Secretary of Energy James Schlesinger, appointed by President Jimmy Carter, that price controls wouldn’t work. In the conclusion to his autobiography, he states “As proof of the proposition that you cannot fix oil prices, a Harvard Ph.D. named James Schelisnger and his staff at the Department of Energy tried it and ended up putting the country in the gasoline lines.”
The 15th Anniversary of Marshall’s death will be celebrated this August. A leader and pioneer in the industry, Marshall fought for sensible energy policies. But did government learn from his experiences? Apparently not.
Much as Secretary Salazar wants a drilling moratorium in the Gulf in response to the BP incident, so the Carter Administration and Congress imposed a moratorium on new nuclear power plants after the overblown Three Mile Island scare. Much as US oil companies today face punishment for BP’s mistakes, so the Congress imposed a windfall profits tax on US producers in response to the Arab oil embargoes. And just as Obama wants to spend billions on additional subsidies for renewable energy to wean us from our oil addiction, so President Carter and Congress in the 1970s doled out billions for alternative energy in the name of making America energy independent.
A policy of “no more nukes” resulted in our burning much more coal for power generation that, in turn, has helped create the current sense of climate crisis. As the Congressional Research Service has documented, the windfall profits tax only served to make the US more dependent on imported oil. And the massive subsidies for renewable energy have to date done nothing to reduce the demand for fossil fuels while adding to America’s large and growing budget deficits.
Rahm Emanual, Obama’s chief advisor, has said, “You never want a serious crisis to go to waste.” But Marshall’s lessons inform us that it isn’t a wasted crisis we have to worry about but the waste government will create from the crisis. When will we ever learn from history rather than repeat it?
Weinstein serves as associate director of the Maguire Energy Institute at the Southern Methodist University’s Cox School of Business.
