Carter's Oil Crisis
By INVESTOR'S BUSINESS DAILY | Posted Friday, June 01, 2007 4:20 PM PT
Leadership: Of all the errors Jimmy Carter committed, none has earned him more well-justified scorn than his handling of the 1970s energy crisis. True enough, he didn't cause it. But he did make it much, much worse.
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It might come as a surprise, but we agree with those who say it's unfair to tar former President Carter with having caused the 1970s oil crisis. He didn't.
The crisis in fact began in October of 1973, after the first Arab oil embargo, and continued for years as first President Nixon and then President Ford failed to get a grip on things.
The resulting four-fold jump in oil prices wasn't Carter's fault.
But let's be clear: OPEC ended its embargo in 1974. Despite that, government-imposed price controls on output and prices remained in place. They weren't fully removed until 1981. And that is Carter's fault.
When Carter came into office in January 1977, the price of a barrel of oil was about $14. When he left a mere four years later, oil — the lifeblood of the U.S. and world economy — stood at more than $35 a barrel, a 154% rise.
The resulting double-digit inflation and surging interest rates cut into Americans' real incomes. Rosy predictions that higher inflation would at least boost employment — a mainstay at the time of Keynesian economic thought — proved disastrously false. Unemployment rose, and the resulting "stagflation" became entrenched.
Worse, the rate of productivity growth, the engine for future growth in standards of living, plunged by nearly two thirds from its postwar average of nearly 3% a year.
Pressure on oil prices built early in Carter's term in office as OPEC jacked up prices. But oil really took off in 1979, after the Shah of Iran was toppled by fundamentalist Islamic revolutionaries led by Ayatollah Khomeini. President Carter's weak and vacillating support for the Shah of Iran encouraged the rebellion.
Things went from bad to worse.
With oil prices rising out of control, Carter in June 1979 canceled his vacation and gathered dozens of mostly Democratic leaders at Camp David to discuss what to do. The address to Americans that resulted, made in July 1979, became known as the "malaise" speech.
In it, Carter suggested high oil prices weren't the problem; just Americans' tendency "to worship self-indulgence and consumption." Further, he said Americans suffered a "crisis of confidence."
He began, conspicuously, to wear a cardigan sweater. He put solar panels on the White House. He turned down the thermostat, and started burning wood in the fireplace.
None of the high-handed symbology worked, however. Later in 1979, Carter's weak response to Iran's radical regime taking 52 Americans hostage sent oil prices soaring again. Carter cut off oil imports from Iran and the mullahs imposed an oil embargo, leading to a global market panic and a surge in prices — the second oil shock of the decade.
Within weeks, gas lines formed in cities across the U.S., with cars snaking up and down streets and around city blocks. Americans left idling in gas queues felt both angry and helpless, as they watched prices soar and shortages emerge — and saw a government unable or unwilling to fix the problem.
And what was Carter's response? Mostly symbolic stuff. He had a number of chances to correct the situation. He didn't.
In his malaise speech, Carter had laid out six proposals to end the energy crisis. They included simply telling people to stop using so much energy, the creation of the Synthetic Fuels Corp. and a handful of other costly alternative energy schemes, and the formation of the Energy Department. Despite billions spent, none did the job.
Unfortunately, he waited far too long to do what he really needed to do: Namely, completely end price controls on domestic oil, kill off oil import quotas, and veto the Windfall Profits Tax Act.
All of those policy moves had, taken together, sharply curtailed U.S. oil output, boosting our dependence on foreign oil and giving OPEC's unelected potentates a virtual stranglehold over the world economy.
As a result, by the end of his term in office, Carter was less popular than Richard Nixon was during the depths of the Watergate scandal, with an approval rating of just 25%. Remember, Nixon had to resign or face impeachment proceedings.
It's pretty clear today that, absent any other policy changes, Carter could have prevented the second oil shock if he had only stood by the Shah — who had been a staunch U.S. ally in a sea of hostile Mideast governments for 25 years.
Instead, his weakness led to the upsurge in Islamic fundamentalism and terrorism across the Mideast that continues today.
Worse, Carter erred in thinking the government — and not a healthy, functioning market with realistic price signals — could end the oil crisis. It couldn't in the 1970s, and it can't today.
It's disheartening on some levels to hear many of the same proposals for our energy ills emerging from the Democrats in Congress. Have they learned nothing? Or are they just counting on average people having forgotten the misery of the Carter years?
Regardless, we know there's a way out. President Reagan, in a few bold moves within weeks of entering office, totally decontrolled oil prices. Prices peaked, the amount of oil on the market surged, and inflation's back was broken.
