Originally posted by Merge:
Originally posted by Old_alum:
Prime example: Jimmy Carter's energy laws which virtually caused the second oil crisis in 1979, as well as billions of dollars misspent in bad but government subsidized investments which soon become nothing more than environmental albatrosses.
The 1979 oil crisis was due to the Iranian revolution and decrease in the overall oil supply.
Yeah, what an idiot Jimmy Carter was by seeing that relying on other countries for oil was a bad idea and wanting to invest in alternative sources of energy......
Thank you, Merge, for your very
welcomed response.
I had earlier admitted that I have no special expertise in health care---other than being a consumer thereof and having scores of friends in the industry. That said, I spent over 20 years as a professional analyst of the political economics of the energy sector, so I am more confident of my facts in energy.
As Merge said, the Shiite overthrow of the Shah of Iran ---- coupled more importantly in the opinion of many experts with the Camp David peace accord between Israel and Egypt ---- were, in fact, political catalysts in 1979. Iran taking the American embassy employees as hostages was also a political
crisis, but these are merely infamous facts, facts which even the learned and analytical like Merge usually take as the obvious 'cause' of the coincident oil crisis.
This is in microcosm the exact conservative-liberal expertise-ignorance dichotomy I am pleased to explore. On this board over the years both sides have trumpeted the risks of 'unintended consequences'. Jimmy Carter was the King of these Consequences.
When the Georgia peanut farmer and nuclear submarine officer was elected it happened IMHO not because the American people preferred him to Ford but rather to punish Ford---and, through him, Nixon--- for Watergate and the pardon. That being said, in 1976 the world economy was still staggering from the first oil price crisis of 1973, precipitated by another political event, an Arab-Israeli war.
The price of crude oil had been static for about 30 years (thank you Texas Railroad Commission) at roughly $2.50 per barrel. Opec, led by the militant Arab members, jacked the price up to $8/bbl and then it meandered up to about $10-12/bbl.
The energy markets, almost all 'regulated', were in shambles, as utilities had to go to their PUC for rate relief, as there did not yet exist any FAC---fuel adjustment clause---to pass through purchased fuel.
The ever egalitarian Democrats agonized that the evil oil companies with prior-existing oil and gas reserves would earn "windfall profits" thereon. They also fretted over the small, inefficient oil refiners who found it hard to compete with the huge financial resources of the "major" oil companies.
Nixon --- before 1973 --- had taken the foolish and very unconservative action of wage and price controls. After 1973 his administration tried to ward off hoarding and assure equitable access to scarce gasoline by allowing no more than $1 of gasoline (stet) {about 2.3 gallons then} at a single visit to a service station. These 'liberal' policies in the Nixonian clothing
were horrible! But before 1977, for disastrous, you ain't seen nothing yet!
Carter was the default victor in 1976 and he went to work on an oil policy. He put in a split between pre-1973 US oil reserves and post 1973 discoveries. He floated the price of "new" crude (doing at least one good thing) albeit with a regulatory lag, but he froze the "old" reserves at inflation-adjusted pre-1973 prices. Those were
not horrible.
To keep the "integrated" major oil companies from feeding their "old", low priced crude to their own refineries (a sort of windfall), Carter came up with the Crude Oil Equalization Tax (COET or Windfall Profit Tax --- WPT). Under WPT all American refineries recorded the price of every barrel of crude purchased and reported them to the DOE. At the end of the fiscal period (I think it was annual) the DOE would calculate the average cost of refiners' crude acquisitions for the nation. Then, any refiner who purchased crude below that average would pay the difference to the DOE who would send it out to any refiner who paid more than the average---thus the "crude oil equalization".
To assure viability during uncertainty Carter guaranteed that every refiner would sell its refined products (e.g. gasoline, diesel and home heating oil) at a profit of no less than, I believe, $2.50 per barrel.
Then to diversify the country away from the Rockefeller "Standard Oil" progeny, Carter gave Federal subsidies to any "small" refinery ---the "Small Refiner Bias". Then there was a plethora of capital sunk in inefficient but "small" new refineries --- "tea kettles" --- now all closed.
There were myriad of other foolish but less cancerous regs as well, but I shall focus on the BIG three.
Tell me, if you were a refiner who was guaranteed a $2.50/bbl PROFIT on each and every barrel of crude oil you refined, what would be the highest price you would pay for a barrel of crude oil to refine?
Unless you were an old timer whose brain was programmed in the ultra competitive free market for NYC residual oil (like Leon Hess, who dropped out of negotiations with Dubai when Arab Light hit $18/bbl because Leon said he couldn't figure out how he could make a profit selling resid at that price! LOL), you would adapt and pay ANY price for every barrel needed to fill your refinery, and thus maximize profits, right?
That is the only intelligent thing to do. When in 1979 the markets had a shiver from the Ayatollah Ruhollah Komeini, where do you think American refiners stopped their bid-price? NO WHERE!!!! The price spiked from about $12/bbl to over $40/bbl in DAYS!!! It didn't stop until the US refiners were all filled! There was no market risk and thus no buyers' restraint! Thank you, Jimmy Carter!!!
Now some might want to argue that the crude price probably would have spiked that high without the COET, but there was NO WAY! Less than 19 months later, the new President, Ronald Regan, in one of his very first official acts,
decontrolled US crude oil, which Carter's regulations had then priced at about $32/bbl of NEW oil. Amoco immediately raised its "posted price" to the then "free market" $36/bbl for WTI (West Texas Intermediate)!
But a funny thing happened on the way to a free market! Within a few months the
decontrolled price
dropped to the high-$20s:low-$30s/bbl.
In 1986, with the "free market" no longer "controlled" by the hated government regulators, the price of WTI then
plummeted to about
$8/bbl ($6/bbl for Arab Light) when Opec was temporarily shattered as Saudi Arabia --- the 800 pound gorilla --- went to
Net-Back pricing (the opposite of cost-plus, this was receipts-minus). But that is a story for another day, boys and girls.And such are the inefficiencies that almost ALWAYS result when a government interferes with the immutable laws of supply and demand (or price and demand). Economic laws which are almost as immutable as the scientific law of gravity.
The risk of unintended consequences!
This post was edited on 11/5 1:23 PM by Old_alum
