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Lessons learned and forgotten: following two decades of applying market forces to energy, the United States is returning to ominous government intervention. (Energy).

Article Excerpt
AT THE TIME THAT THIS ARTICLE IS being written, in the spring of 2002, U.S. energy policy stands in fairly good state as compared to the heavy command-and-control policies that dominated the twentieth century. The largest and worst government interventions in the energy markets were eliminated in the 1980s, though many misguided programs of micromanagement remain.

Unfortunately, the state of the energy markets will deteriorate in the coming years following congressional passage of a revised version of President George W. Bush's energy plan. The plan, and Congress's changes to it, underscores the persistence of the flawed belief that energy markets are somehow "unique" and require public intervention to operate efficiently. The Bush plan offers a bitter illustration of how much we learned, and have now forgotten, about energy and economics.

BEFORE 1970

Prior to 1970, U. S. energy policies mainly aided politically influential sectors of domestic energy extraction. Most pre-1970s policies were special tax favors to mineral production including oil and gas (bequeathed in the 1920s), state production controls on oil and natural gas (from the 1930s), and oil import controls (from the 1950s). The only major policy that did not assist the industry -- and thus did not receive industry favor -- was federal price controls on natural gas (introduced in the 1950s).

Encouraging entry but limiting production As part of the phase-in of federal income taxes, Congress allowed oil and gas companies to deduct 27.5 percent of gross revenues (up to half of net income) for corporate income tax purposes. Characteristically, a tax policy that began as a technical adjustment of the tax code turned into a deliberate measure to stimulate oil and gas production. The deduction was a big hit with the industry because it far exceeded the depreciation needed for capital recovery and lowered the cost of doing business, and thus the consumer cost of oil.

Restraining "Big Oil" Though federal tax law encouraged entry, the states adopted policies that limited oil and gas production. Following a number of court decisions from early in the twentieth century that allowed such practices as "slant drilling," the states stepped in with production controls that proponents claimed were intended to prevent "waste" from those practices. The limits inevitably increased scarcity, which boosted the price paid to small producers because small, high-cost wells did not face production limits. To make matters worse, the controls failed at their purported objective and the states eventually moved to the preferable alternative of promoting private actions to control waste.

The rent's recipients -- the small producers and their employees --soon coalesced into a visible voting bloc that prevented the controls' removal, even when their negative effect on consumers became obvious. Some researchers have argued that the production controls also benefited big oil companies because of higher prices; however, the big companies' losses from curtailing output and refraining from importing cheaper foreign oil undoubtedly offset any benefits for the large companies. Ironically, but not uniquely, the affluent small business owners and their employees had more political influence than the anonymous stockholders of large corporations.

The state-imposed production restrictions increased prices above market levels and induced a rising tide of imports that policymakers initially tried to discourage informally. In 1959, President Dwight Eisenhower made...