A Response To George Shultz

The latest edition of the Hoover Institution’s Defining Ideas includes an essay by George Shultz, one of two individuals in American history who have served in four different Cabinet positions, entitled “A Better Energy Future.” He gets a lot wrong. Here’s a response that I’ve sent as a letter to the editor.

To the editor:

It is extraordinary to me just how little perspective George Shultz appears to have gained with respect to the energy policies of 40+ years ago (“A Better Energy Future,” August 2013). He began his involvement with energy policy as chair of the task force to consider what to about the The Mandatory Oil Import Program (MOIP), the Eisenhower-era quota on foreign oil imports. MOIP was bad economics and unworkable in practice, and did not need Shultz’s task force (which recommended replacing the quota with a tariff). Rather it needed termination.

Virtually all economists understand that the gas lines of the “energy crisis” of 1973-4 were the result of U.S. price and allocation controls not voluntary weekend service station closures, as Shultz asserts. He claims that the UK and France has no shortages because they cooperated with the Arab OPEC members. But a question he does not address is why the Netherlands, which faced the same embargo as the U.S., also avoided shortages and gas lines. The answer? They did not have Nixon’s Phase IV price controls or the Emergency Petroleum Allocation Act of 1973.

Mr. Shultz says he recognized that alternative energy technologies would take many years but on a tape of a cabinet meeting in the spring of 1973, he is heard boasting of how he warned other finance ministers of America’s ability to solve great technological challenges quickly, referencing the atomic bomb and the lunar landing. Don’t “underestimate us,” he declared.

As for U.S. dependence on foreign oil, it is instructive to note that since those price and allocation controls were lifted, there have been no lines at gas stations, only temporary price spikes in response to market disruptions. From 1980 to 2008, the U.S. enjoyed robust economic growth even as imported oil topped 50 percent of supply.

So far from advising us based on the lessons of energy policy history, Mr. Shultz should be apologizing for the part he played in bringing that sorry history about.

Peter Z. Grossman