The heating oil spike.

WASHINGTON, D.C.-where was that greenhouse effect when we needed it? December, the U.S. Weather Service calculated, was the coldest month in about seventy years on the East Coast. The 12 million Americans who warm their homes with heating oil found their furnaces were using about half again as much as their normal gallonage-and when the price roughly doubled, many saw their bills tripling.

Fortunately the Arctic December was followed by an unseasonably warm January. Heating-oil consumption for the whole winter may not be far above normal, and prices have dropped sharply. However, the price spike gave politicians the occasion for some extraordinary demagoguery.

Two hearings on Capitol Hill were the setting for the worst of the rhetoric-cries of price gouging and market manipulation by Big Oil, charges that speculation was the cause of the price rise, and strident demands for antitrust investigations, government-ordered price rollbacks, and establishment of emergency stockpiles for the future. Our elected representatives, playing to the network cameras in their competition for the 15-second soundbite, demanded repeatedly to be told, "Who got the money?" despite explanations that there is a difference between gross margins and profits costs of things other than raw materials vary too), and that quarterly profit data take some months to compute and collate. Interestingly, a couple of Republicans outdid Democrats in their displays of populist indignation and their demands for government intervention. Congressman Toby Roth (R., Wisc.) appearing as a "witness" before the House Committee on Energy on January 9, said that one story after another had been "concocted by energy-company pr people to cover their tracks." They had made "every excuse in the book," but he added darkly, "We all know what is occurring . . . the big producers have made sure there aren't enough supplies on hand."

The weather as a factor? Not for Toby Roth. According to him December was "not unusual." Perhaps the U.S. Weather Service too was co-opted by Big Oil? Matthew Rinaldo (R., N.J.) insisted that supply and demand could not account for the December price rises and said consumers had been bilked" and "gouged" and accused oil companies of "predatory" behavior. The argument that the price spike was caused by the very cold weather "doesn't impress anyone," he said, adding, Mat is the government doing?"

Energy Committee Chairman Jim Cooper (D., Tenn.) assured us that everyone believes in a free market" but it had "not worked" in December. Edward Markey (D., Mass.) said the "facts speak for themselves" and that the oil companies were the "culprits" because their prices had gone up far more than the costs of their crude.

In Senate hearings Joseph Lieberman (D., Conn.) opined that as a "necessity" heating oil should not be allowed to be traded in commodities and futures markets like such presumably frivolous luxuries as wheat, meat, cotton, and gasoline. He demanded government regulation of heating oil, suggesting establishment of minimum inventory levels for each company and government emergency reserves. John Glenn (D., Ohio) saw collusion in the fact that all sellers raised their prices together. Never mind that Economics 101 describes that as evidence of competition, a point neatly made by one of the industry men, who said that anyone who tried to undersell the market in December would quickly have been out of product.

There is depressing irony that precisely when the whole Communist world is being convulsed by the realization that governments simply cannot plan and command a lively economy, and are grasping that free markets are the only productive way to go, apparently intelligent United States senators and representatives should be scraping the bottom of the Marxist garbage can for their villains.

By contrast, various consumers' groups are more realistic. Citizens Energy Corporation Chairman Michael Kennedy (of the political Kennedys) quietly deflated the demagogic rhetoric against Big Oil at the Senate hearing, saying, You must understand the reality of how oil prices are set. The international oil market is comprised of many different participants. It is not possible for the industry to be 'controlled' by a few oil companies ... we have seen from past experience that unregulated energy industries are generally more effective at meeting consumer needs over the long term than are regulated energy businesses. Unpredictable occurrences like December's cold should not prompt us to abandon sound business practice and good public policy, and we should not revert to the energy regulations of the 1970s."

Kennedy said the Federal Government should help the poor through its Low-Income Heating Assistance Program (LIHEAP), but another part of the remedy is encouraging heating-oil consumers to be smarter shoppers, comparing price and service more actively. The administrators of LIHEAP could negotiate fixed-price deliveries, or secure options on the futures market to offset any sharp price spikes, he suggested.

Consumers forced to buy at the peak of a price spike like the one in December feel acutely the pain of buying when a commodity is scarce, but they should consider, also, what the high prices do for them. During December the refineries adapted their equipment to squeeze out the maximum proportion of distillate at the expense of gasoline and jet fuel. Normally they produce three times as much gasoline as distillate, but in December many had their refineries rejigged so as to produce about equal quantities of the two fuels.

Over half the Gulf Coast refineries had operating problems from the icy conditions, including frozen valves and broken pipes, but the companies drove their people around the clock to fix them. According to Robert Sharp, the Los Angeles correspondent of Platt's Oil newsletter, at least five enterprising traders chartered tankers on the West Coast, where fuel oil was plentiful, and quietly sent it through the Panama Canal-at the height of the Panama invasion-and delivered it to the needy Northeast. The high prices there also attracted an unusual number of tankerloads of heating oil from Western Europe, South America, and the Caribbean. With fuel oil available on the West Coast of the United States and in Europe at around 65 to 70 cents a gallon in mid December, and tanker transportation costs to the Northeastern ports at about 4 to 5 cents a gallon, the wholesale market prices of just over a dollar in New York and Boston provided a powerful lure to entrepreneurs to help sate the Northeast's thirst.

The huge profits to be made also gave suppliers the incentive to scrounge every available lighter and barge and work them hard, despite horrendous tie-ups at harbor terminals. At the householders' end of the distribution chain, retailers worked enormous hours overtime and weekends to maintain the supply. (There were deliveries where I live on Christmas day.) About half the increased demand was met by producers' and wholesalers' running down their inventory. On the demand side-my dealer told me when I called him to defer a regular delivery-the high prices had encouraged many of his customers to stretch out their own underfloor household inventory.

Government-regulated prices would wreak havoc with the incentives to make all these constructive efforts. If the price is capped, producers and transporters have no incentive to make the extra effort to supply. Hoarding of inventory and topping up is encouraged, instead of judicious rundown. And the consumer has no incentive to economize the scarce commodity. That's a surefire formula for highly distressing, disruptive runouts, few of which occurred in December 1989. By contrast, under regulated conditions in the early 1970s, it was common for there to be no fuel at any price, even though the weather was much less severe.

The idea of government-managed reserves is a dumb one from the viewpoint of the public interest, though the industry might like it as a way of transferring to the taxpayer the costs of carrying inventory. Government mandated reserve levels would be arbitrary and costly. If civil servants and politicians have better judgment about the future than businesses with their money at stake, why stop at controlling inventories?

There are some positive things politicians can do. First up they could repeal the Jones Act, which mandates use of scarce American-owned and manned tankers in intra-u.s. trade; this law has prevented a number of tankerloads of fuel oil from getting to the Northeast in December. And they could encourage a new look at the effects of years of successful activist opposition to new pipelines, storages, and refineries in the Northeast. Environmentalist and not-in-my-backyard opposition has been stopping these, not sinister companies scheming to make shortages. There is not a single oil refinery in New England, although this is a huge market for oil products.

With many activists successful in curbing additions to the nation's energy infrastructure, it is inevitable that weather-produced price spikes will be sharp and painful.