Energy Shock

The major event in energy of the 1970s was the first oil shock, which resulted in the quadrupling of world oil prices and fundamentally changed the outlook for energy supplies. In effect, the 1973-74 Arab reduction in oil output and embargo transformed Middle East oil from a low-cost, secure supply to a high-cost, insecure source. That event meant that the United States needed to adopt an energy policy that would recognize the increasingly higher value and cost of energy supplies.

Unfortunately, the U.S. has yet to adopt a policy that is appropriate to that challenge. However, it is not surprising that it has taken so long to make relatively little progress in the energy area because of the vast sums of money involved, the varying perceptions of the Another major complicating factor is that different regions of the nation are fighting one another over the money involved.

The second oil shock, which was brought about by the shutdown of the Iranian oil industry, has resulted in a telescoping of events that most experts thought would take 20 years to occur. In other words, the doubling of world oil prices last year was not expected to take place until the year 2000 or beyond.

There are only two choices before us in dealing with our energy problems. One is to rely solely upon high energy prices to bring demand and supply into balance. This policy would take quite a while to accomplish the nation's energy goals because, even with oil price decontrol, energy prices paid by the consumer will still be too low to reflect the real costs to the Moreover, taking this route would result in slower economic growth interspersed with recessions.

The alternative policy is to increase the emphasis on raising the efficiency with which we use energy--in other words, place greater stress on conservation measures in addition to higher energy prices. Police would mean instituting very substantial financial incentives to encourage individuals and businesses to installing home insulation, storm windows and more energy efficient equipment, as well as investing in solar energy installations.

A variety of solar energy installations would be included, such as roof panels for the heating of water; passive solar installations, in which buildings are designed to take advantage of the sun; small-scale hydroelectric plants; woodburning; and gasohol. The financial incentives need to be coupled with an educational program, perhaps along the lines of the Agricultural Extension Service. This second route, that is, the emphasis on energy efficiency, would be economically much healthier and result in substantially more economic growth than the first route.

Right now, Congress would be willing to move much faster toward emphasizing greater energy efficiency if it received stronger leadership in this area from the White House. Even though President Carter has emphasized the importance of conservation, conservation programs were sidetracked because of the massive synthetic fuel program that Carter proposed in mid-1979. To the president's credit, however, he did make a tough, but very desirable, policy decision to decontrol oil prices.

Keeping oil prices unrealistically low is an unsatisfactory way to aid the poor. The rich use more energy in absolute terms than the poor, and, in relative terms, they consume almost as much when one counts indirect uses of energy, such as airplane travel. It is better to pinpoint aid directly to the poor. In fact, unrealistically low energy prices hurt all consumer because, over the long run, they cause the price of energy to be even higher than it would otherwise be. As an explicit example, the price controls on oil since the 1973 "OPEC Revolution" are one of the reasons why the world oil price is as high as it is today.

Robert B. Stobaugh is professor of Business Administration and co-edito, of Energy Future. This interview was conducted by Richard Strasser.