In 1974, responding to disruptions in world oil supplies, the Federal Energy Administration formulated plans to reduce U.S. dependence on foreign oil, plans that later became national legislation.
In the late 1960’s and early 1970’s, the economy of the United States became dependent on oil imports, especially from the Middle East. The growth of American dependence on imported oil was made dramatically clear by the disruption in world oil supply caused by the Arab oil embargo of 1973-1974. The embargo prompted Congress to pass the Emergency Petroleum Allocation Act (EPAA) of 1973,
American oil companies had been developing oil and gas reserves in the Middle East since the mid-1930’s. By the mid-1950’s, American domestic demand began to outpace domestic oil production. At the end of 1955, imported oil accounted for less than 15 percent of U.S. domestic energy consumption, but the figure was growing rapidly. As the American economy began to demand increasing amounts of petroleum, the relationship between the United States and the Middle East continued to grow.
In 1972 and 1973, oil production in the United States (excluding Alaska) declined by about 360,000 barrels each year. This came at a time when American demand for oil was increasing dramatically. The American population had increased 30 percent since 1950, but energy consumption had doubled. Almost all the increases in U.S. energy consumption were filled by oil imports. In 1970, foreign oil accounted for 22 percent of domestic consumption; by 1973, 36 percent. In 1970, the United States imported 3.2 million barrels of oil per day; by 1972, that figure had risen to 4.5 million barrels. In the summer of 1973, months before the Arab oil embargo, the United States was importing 6.2 million barrels of oil each day, largely from the Middle East.
In 1971, federal control of oil and gas prices was instituted as part of the federally mandated general freeze on wages and prices. This action was a response to an inflation rate of nearly 5 percent per year. Although most of the price controls ended by 1974, continuing public disenchantment with oil and gas shortages and price increases meant that price controls on the domestic petroleum industry would continue in various forms until 1981.
The members of the Organization of Petroleum Exporting Countries
The prospect of the exhaustion of domestic oil stocks, together with the Arab oil embargo, portended disaster for the American economy. On November 7, 1973, President Richard M. Nixon announced that if preventive measures were not taken, the American economy would soon fall 10 percent short of its energy needs. Nixon called for Project Independence,
Nixon called for voluntary conservation of energy and lower thermostat settings, lower standards for air quality to aid factories and the auto industry, reduced highway speeds, acceleration of the building and licensing of nuclear power plants, incentives to increase the production of coal and lignite, a halt on changing utilities from coal to oil, increased oil production on the Outer Continental Shelf, and increased production from the federal naval petroleum reserves. Although the coal, lignite, and nuclear power options were slowed by environmental concerns, in the next two years Congress passed legislation calling for a national 55-mile-per-hour speed limit and tax breaks for home insulation. Congress also passed legislation to speed up the Alaskan pipeline project.
More comprehensive legislation was needed, however, to address the immediate problem of the shortage in petroleum supplies. As domestic oil supplies became scarce in late November, 1973, political action groups representing the independent and smaller refiners, transporters, and marketers called for the federal government to allocate limited crude oil stocks for the immediate future, a plan that would be designed to ensure fairness in crude oil stocks while also preserving competition.
On November 27, 1973, Congress passed the Emergency Petroleum Allocation Act. A primary goal of the EPAA was to aid vulnerable end users of oil. This meant federally mandated allocations of crude and refined oil to small and independent domestic refiners, transporters, and marketers. This policy often meant that integrated companies with large crude oil stocks had to sell oil at controlled prices to their less-well-supplied competitors. The EPAA also continued the complex series of price controls on domestic oil and provided for gasoline rationing. To implement, administer, and enforce these policies, the EPAA authorized the president to create a federal energy agency.
Accordingly, President Nixon created the Federal Energy Administration to implement and enforce the provisions of the EPAA. The FEA also endeavored to develop a workable set of policies from the energy initiatives proposed in Project Independence. The FEA devised a number of proposals to reduce U.S. dependence on foreign oil and completed its report in November, 1974. Some of these proposals that would soon become federal legislation included higher fuel efficiency standards for automobiles, higher efficiency standards for electrical appliances, and standards for home and office insulation and heating and cooling equipment.
Gerald R. Ford became president of the United States in August, 1974. He proposed federal decontrol of oil and natural gas prices in the hope that rising prices would spur domestic oil production. To maintain some control on oil prices, Ford proposed a Windfall Profits Tax. Ford also proposed large-scale development of coal mines, coal-fired power plants, and synthetic-fuel plants. Ultimately, these plans were canceled or scaled down.
Congress included some of Ford’s proposals in the Energy Policy and Conservation Act (EPCA) of 1975. Instead of decontrol of petroleum prices as Ford advocated, however, the EPCA continued the complex and controversial price controls on oil and gas. Federal allocation of domestic oil and natural gas continued as well. The FEA was given authority to implement and enforce the new regulations. The attempt to control prices and allocate oil and gas proved to be just as complex, controversial, and difficult as under the EPAA.
The EPCA gave increased powers to the president to intervene in the domestic petroleum industry. The president could require power plants to use coal, if available, rather than oil; order the development of new coal mines; and further allocate and appropriate domestic stocks of oil and gas. The president could also order mandatory conservation measures and rationing of oil and natural gas.
The EPCA required higher fuel-efficiency standards for a host of products, including automobiles and electrical appliances, and it required manufacturers of electrical appliances to label their products with information on their energy efficiency. The EPCA also mandated fuel-efficiency standards for automobiles that later became the Corporate Average Fuel Economy (CAFE) standards.
Another significant aspect of the EPCA was the establishment of the Strategic Petroleum Reserve
President Jimmy Carter came into office in 1977 also committed to reducing American dependence on foreign oil. In April, Carter announced several goals, including a reduction of oil imports to one-eighth of total energy consumption by 1985. In an effort to reduce demand for energy, Carter proposed the Crude Oil Equalization Tax, which would have taxed oil at the wellhead and instituted a new pricing system. The Carter administration hoped that this new pricing system would let oil prices rise gradually to discourage consumption and reduce dependence on foreign crude oil. Carter also submitted to Congress the Department of Energy Organization Act; Congress approved the bill in August, 1977. The bill created the Department of Energy
The Iranian revolution of January, 1979, removed large amounts of petroleum from world markets, pushing prices up to $30 per barrel and bringing on a second oil price shock and supply disruption. OPEC used the opportunity to raise its prices. By December, 1979, the price was above $30 per barrel; in some spot markets, it was $45 per barrel.
The whirlwind of congressional activity and executive actions taken during the Nixon and Ford administrations had done little to reduce American dependence on foreign oil. The complex set of energy regulations was of little help to President Carter in the crisis of 1978-1979. The American economy was still dependent on imported oil for nearly half of its energy consumption in the last years of the 1970’s.
In the midst of the severe worldwide inflation of oil prices, pressure increased for the Carter administration to decontrol U.S. prices. The ensuing price increases would, the government hoped, make domestic exploration economical. In April, 1979, Carter announced a phased process of decontrol of oil prices over thirty months. To satisfy consumers, Carter proposed a new tax on American oil companies that became the Windfall Profits Tax Act of 1980.
Ronald Reagan assumed the presidency in 1981 strongly committed to reducing federal regulations. In his first month in office, Reagan formally ended the federal pricing system, lifting all the controls on oil and gas. The Reagan administration also pledged to reevaluate the Department of Energy, which had become a political symbol of overregulation. President Reagan considered abolishing the DOE but finally decided to reduce its budget.
It was not long after federal decontrol of prices occurred, however, that world oil prices began to fall. Beginning in 1981, world oil prices began a five-year deflationary trend. By 1983, oil prices had fallen to below $30 per barrel. Price deflation also reduced the political and economic threat of high prices and gasoline lines. As the American economy recovered from the oil shocks of 1973 and 1979, controversy over imported oil also abated. The Reagan administration, previously concerned with removing federal hindrances to economic growth, took the opportunity to push through Congress a measure that increased the federal tax on gasoline by five cents. It was hoped that this act would check potential increases in consumption caused by falling prices while also raising revenue to meet mounting federal expenditures.
Ironically, falling oil prices on the world markets in the early 1980’s resulted in large part from OPEC’s success in raising prices in the 1970’s. Higher prices made oil production in non-OPEC areas, such as the North Sea, Alaska, Mexico, and the southwestern United States, more economically feasible. The U.S. national economy still depended on foreign oil for approximately 25 percent of its petroleum requirements. Greater non-OPEC production, however, was creating a glut of oil on the world market, leading to price deflation. American drivers turned to purchasing larger and less efficient automobiles during the decades of cheaper oil.
With the price of oil falling and supply on the rise, public and private alternative fuel programs became uneconomical. In 1981, the Reagan administration slashed federal funding for solar energy programs as well as the Synthetic Fuels Corporation, established by Carter. American oil companies cut back their shale oil and coal gasification projects. However, oil prices began rising again, especially as Middle East politics became more volatile in subsequent decades and as new demand for oil was generated by the economic boom in China. As these new factors provoked an increase in international oil market prices, attention once again turned to the feasibility of alternative energy sources.
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Bradley, Robert L. Oil, Gas, and Government: The U.S. Experience. Lanham, Md.: Rowman & Littlefield, 1996. U.S. government intervention in the oil and gas market is the main focus of this book. Accessible to the specialist and general reader. -
Energy Information Administration. Twenty-Fifth Anniversary of the 1973 Oil Embargo: Energy Trends Since the First Major U.S. Energy Crisis. Washington, D.C.: Author, 1998. Describes the embargo and its aftermath. Includes bibliographic references. -
Feldman, David Lewis, ed. The Energy Crisis: Unresolved Issues and Enduring Legacies. Baltimore: The Johns Hopkins University Press, 1996. Investigates the underlying causes of the energy crisis of the 1970’s and contends that a number of short-sighted American policy decisions, rather than the Arab oil embargo, brought about the crisis. -
Krueger, Robert B. The United States and International Oil: A Report for the Federal Energy Administration on U.S. Firms and Government Policy. New York: Praeger, 1975. Presents policy options considered in the 1970’s. Also contains brief but informative histories of federal and state regulation of the petroleum industry and of U.S. diplomacy with the oil-producing nations of the world. -
Nash, Gerald D. United States Oil Policy, 1890-1964 Pittsburgh: University of Pittsburgh Press, 1968. Although Nash’s work does not cover the 1970’s, it is a good source for readers seeking an introduction to the subject of public policy regarding the oil, coal, and natural gas industries. -
Sherrill, Robert. The Oil Follies of 1970-1980: How the Petroleum Industries Stole the Show (and Much More Besides). Garden City, N.Y.: Anchor Press/Doubleday, 1983. The best source for a detailed treatment of the politics of petroleum regulation in the 1970’s. Shows the ways in which the divergent segments of the American political economy shape energy policy. -
Vietor, Richard H. K. Energy Policy in America Since 1945: A Study of Business-Government Relations. New York: Cambridge University Press, 1984. This work covers the oil, coal, and natural gas industries and their regulatory relationships with federal and state governments. Contains useful and detailed analysis of the issues of imports, price control, and allocation. -
Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. New York: Simon & Schuster, 1991. Covers many aspects of petroleum issues, including actions and policies of oil producing and consuming nations, international relations, and the business strategies of oil firms. Best in its treatment of the international aspects of the petroleum industry, this work also has concise coverage of domestic regulatory policy.
Iran Announces Nationalization of Foreign Oil Interests
Arab Oil Producers Curtail Oil Shipments to Industrial States
Alaskan Oil Pipeline Opens
U.S. Congress Creates the Federal Energy Regulatory Commission
Iranian Revolution
U.S. Congress Lifts Regulations from Public Utilities
Carter Orders Deregulation of Oil Prices