Bad surge.

THE surge in oil prices in recent months to $50 a barrel is arguably the leading factor behind the recent slowdown of the economy and the sagging stock market this year. There is no point in sugarcoating the reality of our current predicament: We are in the midst of a mini-energy crisis, not nearly as severe as what happened during the Arab oil embargo of the 1970s-when prices skyrocketed from $6 to $30 a barrel in a ten-year period-but economically disruptive nonetheless. Higher oil and energy prices have the impact of a tax on the American economy. Given that we import 3.7 billion barrels of oil a year, the rise in prices from $30 to $50 a barrel will cost the U.S. economy about $75 billion this year alone.

The most imminent danger we face from this mini-crisis does not come from the Arabs but from U.S. policymakers and, alas, many conservative Republicans, who seem hell-bent on resurrecting all of the failed Jimmy Carter policies of the 1970s. Recently, a group of well-meaning national-defense experts with sterling conservative credentials, including Frank Gaffney, James Woolsey, and Boyden Gray, concluded that because our reliance on foreign oil is a security and economic threat, we need to have more Carter-era energy programs to reduce our reliance on Middle East oil. They could not be more economically or fiscally misguided. As energy expert Jerry Taylor of the Cato Institute warns: "If conservatives follow their lead, the U.S. government will waste tens of billions of dollars on corporate-welfare boondoggle energy programs destined to fail again."

Jimmy Carter had a perfect record on energy policy: Every reform he enacted, from the creation of the Energy Department to price controls on oil and gas, exacerbated the crisis of surging prices and drops in domestic supply. One of his most miserable failures was a program called the synthetic fuels corporation (SFC), a federally subsidized alternative-energy program that cost American taxpayers about $2 billion and never produced a single kilowatt of electricity. One of Reagan's first official acts as president was to lift all energy price controls. In 1985 he pulled the plug on the SFC.

No one understood the geopolitical importance of oil more than the Reaganites at the height of the Cold War. What Reagan knew instinctively was that America did not need a national energy policy because we already had one, and it was called the free market. The Reagan economists understood that by lifting energy price controls, prices would temporarily rise, but that would inspire consumers to conserve (without the aid of government bureaucrats to tell them to do so) and cause domestic producers to go out and find and pump more oil. That is precisely what occurred, and eventually oil prices fell from $30 a barrel in 1981 to $12 a barrel by 1986, thus breaking the back of OPEC.

We don't need government subsidies to encourage energy conservation or oil alternatives: Energy conservation in the face of high and rising prices is precisely what the market accomplishes on its own. One result of the higher oil prices since the early 1970s is that the United States has become the most energy-efficient society in the history of the planet. We now produce roughly two times more output per barrel of oil we import than we did in 1970. The National Center for Policy Analysis finds that "the amount of energy needed to produce a dollar of GDP has declined by 1% per year since 1929." We also have nearly twice the global oil reserves today that we had in 1970.

When prices of a product rise appreciably, this sends signals to businesses and entrepreneurs to innovate and find substitutes. This private innovation in the field of energy explains why it is much more likely that over the next decade oil prices will fall than that they will rise. I urge those who doubt this to read Julian Simon's classic The Ultimate Resource. As for those well-meaning conservatives, we should ask them why, when government has proven itself an utter failure in running trains, delivering mail, operating schools (even mediocre ones), and fixing potholes in roads, we should believe that Uncle Sam can develop 21st century electric cars or new cost-efficient energy sources.

AMERICA
THE ENERGY-EFFICIENT SOCIETY

       BTUS PER
        DOLLAR           WORLD
YEAR   OF GDP *   RESERVES ([dagger])

1970     18.0        --
1980     15.2       650 billion
1990     11.9     1,050 billion

2000     10.1     1,100 billion
2004     9.3      1,150 billion

* THOUSANDS OF BTUS PER DOLLAR OF GDP ([dagger]) BARRELS

SOURCE: ENERGY INFORMATION AGENCY, 2004