The Public Policy / Oil Conservation: Some Historical Reflections
Meyerson, Adam
THE PUBLIC POLICY by Adam Meyerson Conserving Oil: Some Historical Reflections In 1924 President Calvin Coolidge faced an energy problem remarkably similar to the one confronting President...
...D0O~DO0~OIUg00O0Q~0~QiQIQQ~0O~DDbQQQIOD~00009QQD~0o~Q~Q~I0OO~Q~D~06DQIP0Q00~DIQ~08~b068OO0O00O0D0000~DI~tQ0i~O0ImO~0O0QDDg~O0~00O0nD6BP P0j~D~ Joseph McGrath The Game of the Name I have here a peculiar clipping from a recent Sunday edition of the local newspaper...
...For in that year, vast oil discoveries were made at the Seminole Field in Oklahoma and Kettleman Hills in California...
...And it is also true that in the four years since the OPEC cartel quadrupled the price of crude, drilling activity has intensified around the world--to little avail...
...The world oil market once was tightly oligopolistic, but it became much more competitive in the fifties and sixties, under the pressure of an international petroleum glut and the entry of hundreds of new firms...
...from 3.5 billion barrels in 1970 to 3 billion in 1976, even though America accounts for three-quarters of all the drilling activity in the free world, and even though the wellhead price for crude from new wells has quadrupled to $11.28 a barrel...
...See The OilCrisis (Norton, 1976...
...the The Alternative: An American Spectator June/July 1977 25 impetus for these measures came instead from independent drillers who feared that in a price war the majors would have an unfair advantage...
...Finally, an enormous change has taken place in policy expectations: The FOCB was not to promdgate c a . - , - , -~ ,e,,~ra, regumuons but to encourage state ones, and Coolidge gready feared interfering with state prerogatives...
...In 1923 Senator Robert LaFollette held widely publicized committee hearings in which he attacked the vertical integration of oil companies...
...And domestically, when we examine the historical record a little more closely, it turns out that the efforts to restrict competiton have often come from small independents rather than multinational giants...
...Ingenious techniques will no doubt be developed which will allow immersion-baptism to be carried out without loss of life...
...but in the late 1950s, when cheap foreign oil was beginning to make inroads on domestic markets, they persuaded President Eisenhower to establish restrictive import quotas, and thus to maintain domestic prices above world levels...
...When it comes to oil that is easily obtained, the outlook is bleak...
...In the short run, the most pressing need is to convince people that, given our existing information, energy prices are simply too low...
...From 1956 to 1969, Exxon could muster an average profit rate of only 2 %, and for all its concentration of wealth and power, utterly failed to repeal a quota that was disastrous to its interests...
...Form 1040 will be graced with another line or two...
...But as far as American policy is concerned, that's really beside the point...
...What is peaaliar about that, you ask...
...the bloated profits of the oil industry are only chimerical, should President Carter be so reluctant to offer opportunities for higher earnings...
...Consider the President's proposals for a tax on"gas-guzzling" cars and for a stand-by tax on gasoline if the growth of consumption does not slow down...
...So, the SchwammBukowski-Krenwinkel-Rogets multiply, naming their bouncing baby Frank...
...Admittedly the oil industry has had a checkered career...
...In this respect, President Carter's proposal to tax rather than decontrol "old" oil is not particularly objectionable: "old" oilwells by definition cannot be further developed (any oil in excess of a property's historic production levels is classified as "new"), and a higher price for "old" oil would stimulate only secondary and tertiary recovery from limited reserves...
...then in 1924 the revelations of bribery at Teapot Dome fortified popular distrust of the industry as well as calls for regulation...
...D) All metropolitan telephone directories will have to be issued in multivolume editions so as to remain portable...
...On the basis of current knowledge, these proposals seem judicious--and lovers of liberty should certainly welcome them as preferable to rationing or outright proscription-but five or ten years from now they might easily be unnecessary, perhaps harmful...
...John Smith Halloran- Schwamm - Morningside - Lucarelli-Schwamm-Bukowski-Krenwinkel -Roget it says on the birth certificate...
...Yet no immediate shortage was manifest--on the contrary, domestic production was vigorous and prices were so ~L.,,,~,, :.k.,~t f%~,l'A~- ~,,~,,v . . . . . . . . . us~ ~,~ ~fra,d American: were developing v, asteful consumption habits...
...Carter's emphasis is on demand-eliminating waste in consumption, and making the nation's capital stock more energy-efficient...
...Fifty years from now, when policymakers turn back to President Carter's energy plan for some historical perspective, there is good reason to suspect that many important metals, for example, will be becoming progressively scarcer...
...Moreover, as was evident from our glimpse of oil policy in the twenties and thirties, populist opposition to the major oil companies runs deep in our history...
...The "Big Oil" Bogeyman A second basic premise of Mr...
...of age, Frank, shunning the priesthood, takes a bride, the lovely and talented Juanita Halloran-Schwamm(no relation)Morningside-Lucarelli...
...Carter proposes to expedite conservation might turn into subsidies for special interests...
...Suppose, for example, that the Schwamm-Bukowskis conceive and give birth to a child...
...The statistics are on Mr...
...President Coolidge did not sympathize with this clamor, but he was alarmed by the prospect of depleted resources, and so, later that year he set up the Federal Oil Conservation Board (FOCB), consisting of four cabinet membeis and designed to convince the oil companies and the states to take stringent conservation measures...
...Such was the case with President Coolidge's Federal Oil Conservation Board, when the scare of depletion gave way to a glut...
...At the moment the OPEC cartel shows few signs of breaking up, and America must therefore conserve oil or find new domestic reserves: We shouldn't go on spending $32 billion a year and more for imported oil...
...There are differences, of course, between 1924 and 1977...
...Who knows what frustrating exploration now going on will suddenly produce results...
...Naturally, Janet chooses to retain her full maiden name, in the family tradition...
...First, we should not be so sure that higher oil profits will not stimulate greater supplies...
...ported for long distances...
...Investment in exploration and development will be most efficient if the market is allowed to determine prices...
...Carter's side, at least domestically...
...Of the nine largest corporations in the world, seven are oil companies...
...Under Calvin Coolidge the United States produced over two-thirds of the world's oil, and petroleum was one of our major sources of export earnings...
...We are also making precedents, however, and in doing so we should consider that energy is not the only resource with potential shortages...
...Most of this oil, however, is trapped in shale or rock formations, in scenic places where the environmentalists rightly won't let anyone touch it, or where it is so expensive that no company will undertake extraction without massive federal subsidies...
...The large companies' earnings did rise enormously in 1973 and 1974, but they plummeted by 25 % in 1975, and in the ten years prior to 1973 they averaged slightly below the median for American corporations--healthy enough but scarcely indicative of monopolistic price-fixing...
...on the contrary, if new supplies are to be developed, it will only be because oil companies have an incentive and the wherewithal to develop them...
...The rhetoric of conservation remained--and the FOCB continued its valuable service of discouraging waste in extraction--but the main function of the board shifted from conserving a scarce resource to stabilizing the crude oil market and buttressing prices for producers...
...Her doing so is simply an assertion of an individual prerogative and as such has its charms...
...But one should not infer from this that we are necessarily approaching our limits...
...They used their political clout to win all kinds of unwarranted tax breaks...
...So, too, some of the measures that Mr...
...Carter's proposal, none is so significant as the belief that easily recoverable oil and natural gas supplies are running out...
...And so the President's energy plan contains a general preference for taxation over decontrol of prices...
...F) At conventions, and other gatherings of the unacquainted, 11"X 14" placards will droop like stiff bibs from the necks of the guests, bearing the elongated legend, "Hi, My Name Is...
...President Carter obviously feels he should not imperil the acceptance of higher prices by appearing to give too much to the oil industry...
...Now, I would not for a millisecond challenge Miss* Schwamm's right to display the name posterity has bequeathed to her...
...If, however, the owners of valuable resources feel that future profits will be popularly regarded as unjust windfalls and therefore restricted, there will be little incentive to conserve over the years...
...We may judge the sincerity of the justification, however, by noticing that during this period of glut the oil producers still received huge tax subsidies-both the depletion allowance and the writeoff for intangible drilling expenses-that were ostensibly designed to stimulate exploration...
...The public discourse, not surprisingly, buzzes again with talk of shortages and the need for conservation...
...Would we still hold onto them, however...
...It is not entirely clear the companies could have resisted...
...To the general distrust of size, we may add a specific bitterness that results from the enormous increase in profits that oil companies enjoyed in 1973 and 1974--prompting the widespread accusation that the companies were somehow responsible for, or at least accomplice to, the OPEC price rise...
...But Mr...
...one of the aims of the FOCB was to encourage imports, so as tc Adam Meyerson is managing editor of The Alternative...
...Think of all the fresh opportunities for those cute little computers to misspell your name...
...It took eight years of fruitless drilling before California Standard fa'st discovered oil in Arabia...
...B) If commenced at the beginning of the school day, roll calls in metropolitan " I use the archaic appellation "Miss" only to distinguish, in my own mind, the lady in question from one "Manuscript" Schwamm, a proof-reader of my acquaintance...
...There are sound political reasons for his hesitancy...
...Even Calvin Coolidge thought the oil industry too important to be governed by the forces of supply and demand...
...market...
...Today we have come full circle: The government is still involved with oil prices, but now it keeps them artificially low rather than artificially high...
...It's a short item, an announcement of the imminent wedding of a young couple...
...By 1930, when Dad Joiner struck oil in the still more enormous East Texas Field, the predictions of depletion disappeared...
...Janet grows up and meets the boy of her dreams who, not surprisingly, is also dual-named--Jack Krenwinkel-Roget...
...This premise is probably correct...
...President Carter, on the other hand, has proposed m regulate intrastate commerce, without provoking much outrage...
...Experts believed that domestic reserves of crude oil would be depleted within a generation, for demand, stimulated by the burgeoning automobile and aviation industries, seemed to be rising much faster than new reserves were being discovered...
...In the early thirties, the governors of Texas and Oklahoma called out the National Guard to enforce the anticompetitive quotas, and in 1935 President Roosevelt signed the Connally "Hot Oil" Act, barring from interstate traffic any crude that exceeded state prorationing rules--all this in the name of "conservation...
...The word "conservation" had different connotations: Coolidge's emphasis was on supply--restrictions on output, eliminations of waste in production...
...Production is down in the U.S...
...THE PUBLIC POLICY by Adam Meyerson Conserving Oil: Some Historical Reflections In 1924 President Calvin Coolidge faced an energy problem remarkably similar to the one confronting President Carter...
...C) On the bureaucratic front there will be rejoicing...
...But Raymond Vernon shows the importance of competition from brash newcomers to the Middle East (e.g., Occidental Petroleum) as an impetus for the OPEC price rise: these firms, hoping to expand their share of Middle Eastern production, were willing to pay increasingly higher royalties to the host nations, thus giving them the idea that such royalties could rise much further...
...We'll call her Janet Schwamm-Bukowski...
...G) What now seems impossible inevitably will occur: The credit sequences of 26 The Alternative: An American Spectator June/July 1977...
...This nice young couple, being sentimental, name their fast issue after a favorite great.grand-uncle, the quaintly-named John Smith...
...We know both the country's and the world's resources far better than we did in the 1920s: Geological knowledge and drilling techniques have greatly advanced, and we have had the benefit of fifty more years of exploration...
...Senator LaFollette's crusade in the 1920s was itself a throwback to earlier crusades against the Standard Oil trust...
...Once Joseph MeGrath writes from Boston...
...And outside the United States the three largest companies operated for many years a quasi-cartel (based on the "Achnacarry" or "As Is" agreements of 1928) which divided up markets and coordinated facilities in order to keep prices stable...
...There are ample precedents, moreover, for avoiding the marketplace...
...Government programs have a tendency to continue on their own momentum, often after their original rationale has long been abandoned...
...Yet for all these differences the two Presidents have shared a common perception of emergency: Coolidge, in fact, was so disturbed by the squandering of petroleum that he was willing to abandon his cherished free-market principles...
...Carter's energy plan is that the oil companies are widely feared and resented, and that it would be politically foolish to grant them the opportunity for much higher profits-especially when he is calling for sacrifices from almost everyone else...
...cuttingmand thus opened one of the tawdriest chapters of business-state collusion in American history...
...even more than the automobile industry, "Big Oil" is subject to all the suspicions that concentrations of wealth and power, and huge multinationals in particular, incur...
...Five or ten years from now, a technical innovation or a major new strike could render our talk of an "energy crisis" as obsolete as Calvin Coolidge's fears in 1924...
...The expansion of reserves, however, did not bring an end to the Federal Oil Conservation Board...
...Because of the secondary social uses of telephone books, planning in this area is especially important: why should our lack of foresight embarrass our shorter dinner guests ? (IS) It will become increasingly difficult to design monogrammed items such as towels, pillow cases, blankets, and handkerchiefs which look anything but gaudy...
...preserve our domestic reserves...
...It is true that the world's oil resources are finite...
...Geological Survey our national reserves amount to an estimated 440 billion barrels, enough to last some eighty years at present consumption rates...
...Let us not forget, however, that experts in the early 1920s were also predicting an imminent exhaustion of domestic resources, and that by the end of the decade their predictions were overwhelmingly proved wrong...
...Oil is still abundant in America: According to the U.S...
...In 1924 the major worry was about dwindling oil...
...and President Carter, declaring "the moral equivalent of war," has proposed a national plan to slow the growth of fuel consumption...
...ducers found themselves with both unsellable crude and seemingly limitless reSelVes...
...Well, nothing, except that it goes on to record that the couple has agreed, for ideological reasons, to retain both of their surnames after they are hitched and to be known collectively thereafter as the Schwamm-Bukowskis...
...If we institute tax credits for insulation or solar heating units, let us not forget that certain industries will benefit from them and lobby for their retention, and that such credits could become the loopholes and oil depletion allowances of the future...
...24 The Alternative: An American Spectator June/July 1977 Implications o fig norance Of all the premises informing Mr...
...And the clear evidence of anticompetitive behavior in the 1930s became, to those convinced of the oilmen's wickedness, a rallying cry for decades to come...
...The Administration seems to be on shakier ground in its international estimates, based on a much-disputed CIA report that previous studies grossly exaggerated world reserves and understated the growth in world demand...
...It is hoped that monogrammed tie-clips, earrings, and cufflinks, rather than expand to absurd proportions, will simply drop from sight...
...The largest producers, for example, did not push for the prorationing quotas that started in the 1930s...
...A) Baptismal fonts will have to evolove along with this practice, becoming large enough to accommodate the floods required in the lengthier ceremony...
...Similarly, in the 1950s, the internationals like Exxon (then Esso), Gulf, and Shell vigorously--and unsuccessfully-opposed the institution of import quotas, for they wanted to sell their foreign crude on the lucrative American * The major oil companies are often accused of aiding and abetting the OPEC cartel, and there is evidence that they did not strongly resist moves to cartelization...
...Carter's partial decontrol of "new" oil is not enough...
...The big problem now was a glut: Wellhead prices dropped from $1 to ten cents a barrel, and as the Depression cut demand, oil pro...
...Under Jimmy Carter, by contrast, America imports over 40 % of its oil, and the petroleum bill is solely responsible for our worsening trade deficit...
...The public, meanwhile, thought prices too high, and suspected the oilmen of chicanery...
...classrooms will last until lunchtime, which may force the abandonment (if any vestige of them survives till then) of reading, writing, and arithmetic...
...When considered as an emerging social custom, though, the practice compounds its interest, so to speak, geometrically...
...Even the oil from Alaska--2 million barrels a day are expected to be flowing next year--will only stop the decline temporarily...
...This scarcity need not be a serious problem: If the market is permitted to work, prices will rise over the years and producers will hold back their output in the expectation of greater future earnings...
...The oil industry, he wrote, was too "intimately linked with the industrial prosperity and safety of the whole people" for it to be "left to the simple working of supply and demand...
...And President Carter's energy planners are correct in saying that, according to the best available knowledge, domestic reserves just aren't there to be found...
...The fear of"Big Oil" profits is really a bogeyman, however...
...It took nine years of similar frustration before Atlantic Richfield first struck oil on Alaska's North Slope...
...The second implication is that policies should be flexible enough to take into account any new information that should emerge...
...In 1926, two years after the FOCB was established, the emergency was over...
...His plan is generally sensible, but in assessing some of its features, we might profit from some reflections on our country's earlier experience with conservation policy...
...What are the policy implications of this ignorance...
...Thus the overwhelming emphasis on conservation, and the relatively slim use of price incentives to encourage greater development of energy resources: Higher profits, the energy planners apparently feel, are more likely to generate populistic resentment of higher prices (which are felt necessary for conservation) than they are to find new supplies...
...Even so, we must confess that of our actual petroleum supplies we still are ignorant...
...This had dangerous implications for national security: World War I had demonstrated the strategic necessity of plentiful reserves, as the supplies of English and French oil had been cut off in the Middle East by the Turks, and American producers had single-handedly to fuel the Allied war effort...
...Quite apart from the fact that a person's name is to some extent a handle on his identity (and therefore reality) and that such a proliferation of monikers might tend to diffuse one's self-awareness, there are far more practical matters awaiting our young John Smith Halloran-SchwammMorningside-etc., and his generation...
...In that case, be prepared to conserve your moral energy, for there will be many "moral equivalents of war" to come...
...Not only did producers --with the help of the government--artificially limit output in the 1930s...
...If, then...
...but technology often makes new resources available and today we worry as much about natural gas, which fifty years ago could not be trans...
...Most experts feel that there is plenty of oil, particularly in the Middle East, and certainly enough to last for the next hundred years or so...
...The FOCB began compiling forecasts of refinery demand, to assist state agencies in setting "prorationing" production quotas that would prevent competitive price...
Vol. 10 • June 1977 • No. 9
