The energy sector represents a small, but critical, fraction of the U. S. economy. In 1973 we saw the impact that even a small shortfall in the energy supply could have on the economy and the quality of life of the nation. The United States and most of the developed world have enjoyed many decades of cheap and plentiful energy—based largely on low-priced oil; indeed, our economies, transportation systems, and life-styles have become heavily dependent on low-priced energy. We know that the earth’s resources of easily converted forms of energy, such as fossil fuels and fissionable isotopes, are currently being consumed at rates that will result in their effective depletion within one or two centuries. There is also evidence that our excessive conversion of some of these stored energy resources to heat and power has environmental consequences that put the long-term habitability of our planet in question. Today, governments must face their responsibilities to assure energy security and environmental stability for current and future generations.
The authors’ generation of Americans witnessed profound swings in public and gove^rnment attitudes toward the use of energy and the security of its supply. From the early post-World War II years, when energy
supply was entrusted to large multinational corporations (including the Seven Sisters—Exxon, Mobil, Texaco, Gulf, Chevron, Shell, and British Petroleum), to Carter’s declaration that a secure energy supply was “the moral equivalent of war,” to the Reagan administration’s “hands-off, the market-will-decide” approach, to Desert Storm, we have seen our gov – e^rnment’s role undergo significant shifts.
Until 1973, the energy marketplace, as exemplified by oil, was stable and prices were low. This stability was maintained by the nearly total dominance of production and refining capacity by vertically integrated, multinational corporations. These companies controlled every step of the oil energy business from exploration to the gasoline pump. Although they competed with one another and with coal and gas producers in the consumer fuels business, they did not compete for the price of crude oil at the wellhead. Production levels were determined by consumer demand for the end products (gasoline, fuel oil, etc.). This stable market era ended in 1973 when OPEC nations, through nationalization of production and increased market share, gained control of production levels. The price of oil quadrupled in just over two months.
The response of the free world to this loss of control over oil price and production, along with dire forecasts of imminent oil and gas resource depletion based on faulty models of the resource base as well as demand growth, ■ was to question the ability of the marketplace both to manage the remaining resources and to adopt renewable energy supplies in time to avoid serious energy curtailment and economic collapse. The fear that the world was quickly running out of oil led governments—especially in the industrialized countries—to take unprecedented measures to assure continuity of their energy supplies. That the dire forecasts turned out to be wrong, that our understanding of the response of world markets was too limited and the gove^rnment-sponsored programs, designed to meet a crisis that has not yet materialized, never achieved their goals does not, however, mean that the programs themselves were wrong. One of the lessons to be learned from the events of the 1970s and 1980s is that decision makers need forecasts and data based on more reliable and more robust models. Another is that the market does work to optimize energy use, but its lag time is long and it plays by its own rules, not necessarily society’s. The value the market places on energy, that is, its market price, does not include the full societal costs of its use and, as a result, will not lead to a societally optimal mix of energy usage. Had the market in the mid-1970s priced energy to include the full societal costs of energy, some of the renewable energy technologies (e. g., passive solar buildings, solar water heating) would have been more successful in gaining significant market shares.
Corporate America is ruled by the “bottom line”—quarterly profits. With this mentality, it is difficult for the U. S. market, as presently structured, to move from established energy practices to those responsive to a broader spectrum of considerations. But perhaps the most profound problem with the market is pricing. The true societal costs of end-use energy from a particular resource should include the cost of discovery, production, transportation (including infrastructure development and maintenance), and refining; the cost of capital, operation, and decommissioning of the energy conversion equipment; the cost of maintaining secure and fair access to the resource; the cost of environmental or ecological impact resulting from extraction, transportation, conversion, and disposal; and the cost of loss of life or health attributable to its use. The idea of incorporating societal costs into the price of products responsible for those costs would not be unique to the energy field. Through excise taxes, we already incorporate some of the societal costs of tobacco and alcohol into their prices. Other products, such as buildings, have societal costs that are not now fully embedded in their market prices. But energy, as ubiquitous as it is, should be a major target for price reform.
The authors believe that a proper role of gove^rnment is to set policies that will encourage free market forces to minimize the total long-term societal costs of maintaining a reliable and acceptable supply of energy required for the social and economic well-being of its citizens. How would society make the transition from an economy in which energy is highly subsidized to one in which energy users pay the full cost? Clearly, a rapid transition would be disruptive, even perilous to some businesses or countries, and would be strongly resisted. But because the transition is ultimately necessary, it makes sense to begin before there is a crisis.