Milton Friedman - Energy Policy - Debunking Environmental Extremism!

professor Friedman's subject today is the energy crisis a humane solution I [Applause] want to start this talk on energy by reading to you a quotation of something that was written some time ago by an eminent expert on energy and here it goes day by day it becomes more evident that the oil we happily possess an excellent quality quality and abundance is a mainspring of modern material civilization oil in truth stands not beside but entirely above all other commodities it is a material source of the energy of the country the universal aid the factor in everything we do it can be no matter of surprise at year by year we make larger drafts upon a material of such myriad qualities of such miraculous powers the question concerning the duration of our present cheap supplies of oil cannot but excite deep interest and anxiety wherever or whenever it is mentioned for a little reflection will show that oil is almost the sole necessary basis of our material power the constant tendency of discovery is to render oil a more and more efficient agent while there is no probability that when our oil is used up any more powerful substitute will be forthcoming we cannot make up for a future want of oil by importation from other countries considering how greatly our manufacturers and navigation depend upon oil and how vast is our consumption of it compared with that of other nations it cannot be supposed that we shall do without oil more than a fraction of what we do with it it is then simply inferred that we cannot long continue our present rate of progress all things considered it is not reasonable to suppose or expect that the power of oil will ever be superseded by anything better it is a naturally best source of power as air and water and gold and iron are each for its own purposes the most useful of substances and such as will never be superseded I draw the conclusion that we cannot long maintain our present rate of increase of consumption that the cost of fuel must rise to a rate injurious to our commercial and manufacturing supremacy and the conclusion is inevitable that our present happy progressive condition is a thing of limited duration the alternatives before us are simple we have to take the momentous choice between brief but true greatness and longer continued mediocrity now if I were to ask you questions about who wrote that and when I suspect most of you would say well that must have been written about five or six years ago by a very very prescient man the man who really saw the future very well well the truth to tell those words with one exception where I have taken liberty with it that I'll come back to were written in a book first published in 1865 the one exception is that everywhere I read the word oil the original had the word coal and it dealt with Great Britain and not with the United States the excerpt I have read to you are from a book called the coal question written by a great English economist W Stanley Jevons and published in 1865 and he at that time in writing about the coal question said exactly the same thing as you can see that our suppose that experts have been saying about the oil question in these recent years he was wrong as you realize and indeed I may say he was even more farsighted he went father in the course of his investigation of this he considered all possibilities including the possibility that you might use airplanes instead of as a way of economizing on coal and he wrote uncertainty will forever render eriell conveyance a commercial impossibility even if an aerial machine can be propelled by some internal power from 50 to 100 miles an hour it could not make head against a gale he went on here this was 1865 but as you may know oil and petroleum had been discovered and he wrote petroleum has of late years they come the matter of a most expensive to extensive trade and has been found admirably adapted for use in marine steam engine boilers its natural supply is far more limited and uncertain than that of coal and an artificial supply can only be had by the distillation of some kind of coal at considerable cost to extend the use of petroleum then is only a new way of pushing the consumption of coal it is more likely to be an aggravation of the drain than a remedy well that's come full circle we are now talking about how coal will save us from the shortage of oil and he was talking about how oil could not save you from the shortage of coal now as I say what conclusion do we draw from that Jevons was a very eminent and able man he was no charlatan he was one of the great economists of the 19th century but he was dead wrong should we draw the problem that therefore the conclusion that therefore no problem will arise not at all after all at least one of his predictions was correct you will remember he said we have to make the momentous choice between brief but true greatness and longer continued mediocrity and after all Great Britain has now descended to long-continued mediocrity not for the reasons that Jevons supposed but for very different reasons I don't believe we should draw the conclusion that no problem should will arise or should we draw the conclusion the two people two economists from Rand Fred Huffman and Richard nerim recently stated in an article in a publication produced by that admirable institute of contemporary studies that lori Chickering is associated with they said and I quote design of prudent energy policy under such uncertainty requires analysis of the implications of alternative resource estimates these results should be tested in more detailed calculations than those presented and for sensitivity to key assumptions that is they are saying that given such uncertainty what we got to have to do is to try to pin it down and make sure how much future resources we have that's not the right conclusion either on the contrary all that is is a proposal for a make-work project for unemployed economists and engineers it's doubtful of any amount of research of the kind that Huffman and narrowing proposed would have enabled William Stanley Jevons to foresee the discovery of North Sea oil the fact is that we cannot get out of the problem by being able to predict things that are not predictable that the right conclusion is that the crystal ball is inevitably cloudy that that is the nature of the world we live in that all specific predictions about the precise amount of this that or the other deserve skepticism that what we need is not the kind of specific detailed blueprint for the future that a Huffman and Nehring would like to produce but what we need is an adjustment mechanism that will enable us to adapt to what happens as it develops and of course as everybody in this room knows there is such a system namely the price mechanism which successfully steered us over several centuries from wood to coal to whale oil to petroleum to natural gas that is a mechanism in which you it is in the self-interest of hundreds and thousands and millions of people to make their best guesses about the future in which it's unnecessary to have single blue print in which you have an automatic adjustable mechanism as things develop if we have a problem today in the energy area as we do it is solely in my opinion because that system has not been allowed to work the price mechanism has not been allowed to work by the us at home it is not has not been allowed to work by the OPEC cartel abroad which has created a monopoly to rate and has raised drastically the price and reduced the availability of oil the problem in energy and in the approach to energy it's part of a much broader problem and the problem which we will be faced with and have been faced with in a variety of other areas and not merely in the energy area it is what you might call the difference between the economic way of thinking in the engineering way of thinking the broader problem is very much epitomized by the famous Club of Rome report limits of growth which got so much attention a few years ago you will all recall that that was a report in which engineers were saying we have finite resources a finite amount of coal a finite amount of space and and so on and so on things grow at exponential rates and so long as things grow at exponential rate their ultimate ly going to become infinite and sensory for sources are finite we're going to bump into it and therefore we are faced with a terrible future in which sooner or later we're going to run out of steel or coal or whatever you want to name we're going to run out of and and we really have to adjust our sights we can no longer take the view that we can have growth forever we must recognize that there are in their title limits to growth and reconcile ourselves it's the same approach that was developed by the late mr. Schue MA during his emphasis on the idea that small is beautiful it's the kind of an approach that underlies the appeal of zero growth of the notion that resources are finite for example in the energy case literally echoing Jevons you can almost have taken it out at Jevons a recent report of the committee for Economic Development an organization of American businessmen says and I quote the era of abundant cheap energy is over the people of the US must face the fact that there will be significant changes in the mix of energy that they use and that energy is going to cost more now this approach whether adopted by the club in Rome or by mr. Schumacher or by the C ad is completely wrong the plain fact is that from an economic point of view the volume of resources available to us is larger today than it has ever been in history we are less dependent today on natural resources and we have ever been tell me do we have more energy resources available today than Jevons thought we had at the time here overall of course we do if you go back 20 years before Jevons before the oil was discovered in any significant amount the volume of energy available was much less because as long as we didn't know about that oil it wasn't a resource available in this country in the 1920s there was a great uproar about the fact that the total volume of reserves of petroleum available would only last 10 or 20 years today the total volume of reserves have known reserves is higher than it has ever been not only in absolute barrels but relative to the and a year's consumption relative to the population how can that what's true in the case of oil is true in the case of all of these other natural resources invention discovery innovation has made has enabled us to discover substitutes for natural resources it has enabled us to learn how to use them more effectively to recycle them if you look at it from a different point of view suppose you ask yourself what fraction of the total income of the nation comes from basic natural resources well if you were going back 200 years ago that would have been a very very large fraction because agriculture would have been the dominant industry it would have been the productivity of the land that would have been the major element today the total contribution of Natural Resources to our national income is probably the order of 10 percent the great improvement has been in the in the use of services in the development of ways of getting along without natural resources or of discovering more natural resources and that process is inevitably going to continue if we look at it and stick to it in the field of oil much more important from my point of view than the evidence from these calculated figures on reserves is the evidence from prices the calculated figures on reserves I have no confidence in they have been revised over and over again and who knows where they will be next time they're revised I have no doubt that they serve some function otherwise I can't see why the oil companies would pay geologists to make the estimates but they are as history has shown extremely unreliable but the prices are much more interesting because they really tell you something about what has been happening to the availability of energy and the basic fact here is that the real cost of energy adjusting for inflation the amount you have to pay for a unit of energy expressed in terms of other goods or expressed in terms of the number of minutes you have to work to pay for it has been going down for at least a hundred years the real cost of energy relative to prices in general went down by 28 percent from 1950 to 1970 it may surprise you to know that a gallon of gas that you buy at the service station today including taxes cost less in real term relative to other goods and services today than it did 20 years ago what happened is that in the interim it went down sharply and in the last three years it's come back up sharply but it is still below the level at which it was 20 years ago I must say one of the things that amazes me is really fundamentally the low cost of this gasoline one of my favorite exam questions used to be and if I were fortunately I've gone out of the business of giving exams but if I were giving them I'd still use it it used to be the following I used to say a gallon of gasoline let me use current figures a gallon of gasoline at the service station pumped into your car cost you some including taxes cost you something like 65 to 70 cents here if you go to the supermarket a gallon of bottled water costs 79 cents how do you explain the difference in those prices in that really quite an incredible little phenomenon here's water supposedly the prime example of a free good 79 cents for a bottle of bottled water gallon of it whereas you have to put a well into the ground extract the oil send it through a refinery put the refined products rule pipeline take it to a gasoline station have a man stand there and pump the thing and you get it for less than that now the question is why is it relevant to the problem of the scarcity or the possible scarcity of energy to the energy crisis why is it relevant that the costs have been going down that the real cost has been going down and this goes back to the way in which the market operates with respect to exhaustible resources this is a very interesting and old subject in which I may say that the important most important contribution was made by a mathematical economist and statistician now-dead Harold Hotelling in a famous article back in the middle of the 1930s on the economics of exhaustible resources and he said suppose you have a resource that's exhaustible I've got a mine and there's only a certain amount of stuff in it and I own it and I'm selling it what can I say about the intelligent way for me to exploit it how should I handle how should I run it as a businessman in particular should I sell it should I produce and sell now or shall I hold it in the ground to sell later on well you can see immediately when you look at it that way what makes sense if you mind it right now you get cash in the hand you can put that in a savings bank or buy a bond and get interest on it so it will not pay you to keep it in the ground unless later on when you mine it or sell it you can get a price high enough to cover the interest that you could have earned in the mean time if you think the price five years from now is going to be a dollar let's say and now it's a dollar it'll pay in a mining now and not keep it in the ground it will only pay you to keep it on the ground if you think the price is now let's say a dollar and five years from now there will be a dollar and fifty cents well consequently if you have an exhaustible resource unless people expect to future price to be higher than the present price they have an incentive to bring it out now that tends to drive down the present price attempt to drive up the future price and therefore economically you have a very simple test of whether anything is an exhaustible resource namely is its price rising over time but if we look at the price of energy and of oil it's real cause price has been going down over time now how can that be there are only two possible explanations either the oil companies who have been selling this are extremely stupid and short-sighted and have been throwing away billions of dollars out of their ignorance or incompetence which seems to me a rather extreme assumption at any rate I would have thought that if that were the case it would have been possible to make a great deal of money by buying a few of them up and setting them on a sensible course the only other explanation is that from an economic point of view oil is not an exhaustible resource you see consider the difference between a limited finite resource of which you're never going to have any more and something of which you can produce currently consider wheat you can keep on producing constant crops of wheat or you can keep on manufacturing automobiles or producing services and where you have a reproducible product there is no reason why it's real price relative to other things should rise over time if you have a Rembrandt that's never going to be produced again well then it's real price has to rise over time there's an honest-to-god exhaustible finite resource but of course if I have the ordinary garden-variety painters who can paint pictures by the hundreds there's no reason for those prices to be rising over time and so the alternative interpretation and the only one that makes sense is that in any economic sense oil far from being an exhaustible resource is a producible resource at constant morale constant or indeed declining costs because of the improvements in the technology of drilling and exploring and so on you can find more oil and therefore the future price could not rise above the present because if attended to do so it would give somebody an incentive to go out and find more and add to the supply of course that situation may change but tell me is it sensible to talk the way so many people talk about the oil industry the way I interpret them as they say the whole history of oil is divided into two periods from 1859 when oil was first discovered in Titusville Pennsylvania to 1973 and from 1973 to 1978 well conceivably that could be true but it seems to show a very short-sighted in point of view and a lack of perspective to divide all of a hundred and twenty years of history into two parts 115 years long and one five years long and say we know that there's been a fundamental change maybe but if we allowed the market to work if there were such a fundamental change that would show up in the form of a change in the price pattern and in changing the incentives to people to find exploit and used oil if you look back over the past history the talk about the fact that this has been a nation that has been wasting energy that we have been a squandering of finite resource is utter nonsense by any relevant criterion this situation is precisely the opposite at least since the 1920s governmental policy has been making energy more expensive than it should have been relative to the real costs of producing energy we have been overpaying for if if from an economic point of view we have been doing anything we've been using too little energy and not too much the artificial pricing of energy has forced us to substitute more expensive ways of producing things for energy well then you will say to me why then is it then we have an energy crisis why does President Carter propose a major far-reaching program that would restructure the whole energy industry why does he say that this is a first priority item that fighting the energy fight is a moral equivalent of war the answer I believe is that three forces have coalesced to produce a real energy problem the first in the most immediate was the establishment of an effective OPEC cartel of an effective monopoly which beginning of 1973 was able to raise substantially the price of oil incidentally the creation and establishment of that monopoly owes a great deal to the encouragement which was given to the OPEC countries to form such an organization by the mistake and diplomacy of the United States government the second factor has been the cumulative effect over time of government controls and regulation beginning to go to the most important of them with the fixing of the price of natural gas from the 50s and of oil from 1971 and the third has been a change in the philosophical attitudes of the public toward the role of government in these affairs and I want to discuss each of these three things in turn the cartel the cumulative effect of regulations and the change in philosophical attitudes so far as the cartel is concerned there has been a great deal of misunderstanding about its behavior we read in the paper that the court was formed for political reasons in order to exploit the Middle East situation we read the paper discussions tend to be in terms of the political attitudes or the moral values or the beliefs of the country Saudi Arabia is is resisting raising prices because she's a friend of ours and maybe Libya or Iraq is trying to raise prices because they're not friends of ours in my opinion that is all extremely superficial there's a very simple interpretation of what's happening to the court in oil and in the cartel a group of nations got together and formed a monopoly now again just ads with the theory of exhaustible resources there's a well-developed theory of how a cartel should behave let's suppose you were able to form a cartel what should you do what's your practice what's your policy well in the first place you can only form a cartel effectively insofar as somehow you can restrict supplies unless you can keep down the amount available there's no way in which you can raise the price if you fix a high price you have to be prepared to limit the amount sold to the amount people want to buy at that price the feasibility of having a cartel in oil arises out of the existence of two countries in particular Saudi Arabia and Kuwait that have large flexibility in the amount of oil that they are willing and able to produce and therefore are able to serve the function of restricting output or expanding it to the necessities of the market in the second place if you form a cartel if you look at it from the point of view of Saudi Arabia as a manager of the Quartet cartel you know very well that it's much harder for people to adjust right away than it is if you give them time in the short run in 1973 when the price of oil was quadrupled people are set in their ways and their patterns they have certain methods of operation overnight the quantity demanded is not going to be much effective similarly the higher price will give other people an incentive to produce substitutes but it takes time if you're going to produce other oil wells you have to drill our wells you have to explore him you have to develop them similarly with other substitutes therefore the thing that is most obvious to you is that your monopoly power is very much greater at the time you form the cartel than it will be later on and therefore the sensible thing to do for you to do the way to exploit a cartel is first to push up the price very high and then over time as people try start to restrict their consumption and other sources and supply come in you gradually let the price come down so as to take advantage of your less favorable position until ultimately the price is not only back to where it was to begin with but it's lower than it was to begin with because when you finally come to the end of this process you have additional sources of supply that you wouldn't have had if you hadn't encouraged him during the cartel that's indeed that not only the logically rational way to run a cartel it's a way almost all cartels have been run whether you take the Stevenson rubber restriction scheme back in the 1920s which was very comparable in which rubber producing nations got together for what was then regarded as an essential item and they quadrupled the price of rubber and within something like five or six years the price of natural rubber was lower than it had been to start with or if you take the domestic example of the United States Steel Corporation and the Geary agreement at the turn of the century when US Steel played the same role in the steel industry that Saudi Arabia is playing in the in the oil industry of being the the final adjuster or leader of the cartel holding an umbrella over the other members of the cartel now that is what's been happening the real price of oil today is decidedly lower than it was in 1973 when the cartel was first formed because inflation price rises elsewhere have been greater than any rise in the dollar price of oil moreover once you look at it that way you will see immediately why you have the different countries in the cartel taking the positions they do if Saudi Arabia is the one that's holding the umbrella over the others if it's going to let everybody else in the cartel produce more or less what they would like and want to produce while it itself is going to adjust then it's clear that the other countries want high prices and Saudi Arabia is the only one that has a strong interest in not letting the price get too hard here is Iran or Iraq if you hold the price high and if they are allowed to sell all they want to produce the result of that will simply be the Saudi Arabia from their point of view will have to cut out its cut down its output sharply so it's perfectly understandable from a purely logical rational analysis of the position of the participants that Saudi Arabia has wanted has been the most moderate in trying to hold down relatively the price of oil while here an Iraq and the others have been the most the most aggressive has nothing to do with anything else and if he ran if the Shah of Iran was assuring President Carter that Iran was not in favor of sharply raising the price of oil that wasn't because he was a friend of America it was because he and everybody else could see that the market conditions and oil was changing were changing because time enough has passed for a reduction in consumption and for an expansion in production now the cartel has not been the price has not been coming down as fast as I thought it would or as it would have if it weren't for the fact that we in the rest of the world have been helping the cartel we and the rest of the world have been helping the cartel by doing everything we can to prevent people from finding it from having an incentive to discover and produce more oil it's not only the United States that's been guilty in this every country whether it be Great Britain or other countries have seen this as a great opportunity to make a killing and so they have tried to impose heavy taxes or to offer exploration on terms which would bring back to the government a large fraction of the gross receipts and the result is that you have less exploration and less intensive search for new sources and you would have but the United States has been the worst sinner it's fascinating to note that energy consumption has dropped in every major country in the world except the United States since 1973 and the reason it has not dropped in the United States is because we in the United States have been trying to prevent the price of energy from reflecting fully the higher OPEC cartel price we in fact have been subsidizing the import of oil as I'm sure all of you know the effect of the entitlement program in oil is that we are paying a subsidy of roughly $3 a barrel on every barrel of oil imported from OPEC or from anybody else outside this country incredible policy but a fan but despite the best efforts of the United States and other countries to shore up the cartel it'll break it's a question of time and you can see the signs already the newspapers have been full of stories that there's going to be a glut of oil in the next few years but they say oh of course that's temporary wait till 1985 well wait till 1985 let me turn to the second main factor which has been the cumulative effect of government controls and regulations and here the oil industry must bear much of the blame III would not want to for a moment suggest the idea that we have a wicked government on one side and ass no pure snow-white oil industry on the other very far from it there is no industry in this country that speaks more loudly about the virtues of free enterprise and does more to undermine it than the oil industry until the 1970s government controls and regulations were very strongly Pro texas-oklahoma oil industry beginning in the 1920s the oil industry induced the federal government introduced a specially favorable treatment on taxes the infamous percentage depletion arrangements beginning in the 1930s you had Pro rationing of oil by state boards the Texas Railroad Commission the Oklahoma Commission and so on essentially a government state administered cartel allocating production quotas to various outfits and that was made possible by the federal legislation the Connally hot oil act which made it a federal offense to transport oil produced in excess of state quotas across state lines incidentally that was not John Connally that was Tom Connolly the flamboyant Texan who always used to wear a black time in 1959 President Eisenhower so you can see I'm strictly bipartisan introduced oil import quotas that's an absolutely marvelous example of the perversity of government of how government has an absolute genius for doing precisely the opposite of what needs to be done here in 1959 the situation was that foreign oil was cheap and plentiful domestic oil was relatively speaking expensive and scarce so what do we do we keep out the cheapest plentiful oil and we encourage domestic oil imposing a quota on the amount of oil that could be imported from abroad the result was to make the price of oil in the United States about a dollar and a half a barrel higher than the price of oil in the world market now comes 1973 in what happens foreign oil becomes scarce and expensive domestic oil becomes relatively speaking cheap and available so what do we do in the full wisdom of the government we impose a tax on the production of a domestic oil and give a subsidy to importing the expensive scarce foreign oil if you could think of more perverse policies you have a better imagination than I do now the situation has changed Tom Connolly Sam Rayburn Lyndon Johnson who gave Texas about 68 votes in the Senate and the house have passed from the scene Texas no longer has the enormous political clout at once had and as a result these measures these governmental interventions which favored the domestic oil industry have passed from the scene percentage depletion has been eliminated the oil import quotas have been eliminated Pro rationing continues but not nearly as effectively and instead you have had a new set of interventions in imposed which benefit and harm a different group of people you had the two other sets of controls that entered in the controls on the price of natural gas starting in the 1950s after the Phillips Oil decision in which the federal energy the federal Power Commission has specified maximum prices and which get natural gas may be sold between states that was bad enough as with any price control which holds a price below the market price it Courage's consumption and discourages production and so the effect has been that consumers residential consumers in particular but also industry were very much encouraged by artificially low prices to convert to gas on the other hand producers were discouraged from finding and producing and distributing gas and it was inevitable that you were then going to have shortages and disruptions of supply but this was greatly accessor baited by the imposition of general price and wage control in 1971 by mr. Nixon August 15 1971 which included that control on the price of oil we tend to forget that really the Pro pricing wage control measures of 1971 bear a great deal of responsibility for our present oil problem they have been eliminated on every other product but not on oil it was an unfortunate accident that just at the time when those price and wage controls were being dismantled you had the oil crisis in the middle you had the crisis in the Middle East and you had 1973 the quadrupling of the price of oil by OPEC there was an oil price control in place but it was and it was not removed if that had come six months later when the oil price control had already been removed along with everybody everything else it might not have been reimpose but that's hypothetical what is that fact is that it remained and a hit has had the same effects in discouraging production encouraging consumption increasing the fraction of our energy that comes from abroad and establishing new vested interests in the maintenance of controls the third factor that entered in as I mentioned earlier was a change in the philosophical attitudes one thing is clear if we come back to our earlier distinction between economics and engineering there is no economic argument for the regulation of oil there is no argument on economic grounds for having a Department of Energy for having a Federal Energy administration for having price controls and there is almost no professional economists who will argue otherwise as Professor Edward Mitchell said in a piece he wrote on the ideology of oil and I quote the last five chairman of the President's Council of Economic Advisers spanning the Johnson to Carter administrations have supported the D control of both oil and gas now those five chairmen run the gamut of professional opinion from what would be called left to right getting every single one of them was in favor of the deregulation of oil and gas if you take another example there is no disagreement between Paul Samuelson and myself who write both of whom write columns for Newsweek and who supposedly represent different spectrums of professional opinion on the desirability of eliminating regulation of oil and gas the only difference of opinion is that having stated it would be desirable to do so Paul goes on to say but it's not politically feasible so let's look at what's the least bad alternative and I have self-restraint enough not to engage in those statements also the bulk of them formed professional opinion believes that the energy industry is effectively competitive or would be if the government got its cotton-picking hands out of it so there's no economic argument along these lines you have had a great deal of talk about obscene profits there again there is no argument there have been a number of very careful studies made of profits of the oil industry on the average they are not out of line indeed of anything somewhat low relative to invested capital by comparison with other industrial groups so there is no economic argument on any level for the regulation of oil and why then do we have it well I think again if I may quote Edward Mitchell who said about Carter's energy program and I quote the preference of houses over cars non energy over energy solar energy over oil indeed almost any other source of energy over oil is what leaps out at you when you read the national energy plan you will not find these preferences explained in any economic book the answer is to be found in political philosophy an even more striking example the philosophy is the attitude that has been expressed towards so-called windfall profits let me quote to you a sentence from mr. Carter's national energy plan and I quote the producers have no equitable claim to that enhanced value from deregulation because it is unrelated to their activities or economic contribution now to see how radical a doctrine that is how fundamentally subversive of our system that doctrine is let me translate it into another context let me apply the same principle the owners of homes or for that matter of shares of stock or of anything else you can mention but let me just stick to the owners of homes the owners of homes have no equitable claim to any rise in their value because it is unrelated to their activities or economic contribution is there anybody who would say that that was an expression of what should be the philosophy guiding America who is going to decide what change in Van you is related to activities or economic considerations if people are going to be entitled to keep a rise in value only insofar as it flows from their own activities and contributions and then somebody has to decide that that sentence in the national energy plan is a sentence declaring the alleged case for a government that owns everything if it has the right over the suppose and owners to the rise in the value of oil it has the right to the rise in the value of houses it has awry it has the right to the rise in the value of your services it has indeed complete ownership rights to you and me as well as to our property that's as I say a thoroughly subversive doctrine and yet there is no doubt that it is the direction in which philosophical attitudes have been moving so our present energy problem like our present problem in many other areas derived from the cumulative effects of the cartel of government controls and regulations and have this change in philosophical attitudes what is the present status and prospects then for us regulation many people have emphasized that Carter's energy plan would not achieve its stated objectives but that's looking at the surface of things the true and real objectives of the energy plan are not and cannot be the stated objectives again I have a very difficult choice to make James Schlesinger is an intelligent well trained economist he cannot possibly believe that the plan he has proposed would produce the results he says it would what is it what is a real objective as of so many other things you have to look beneath the surface the real objective is power in control you have many wide video and many predictions that mr. Carter will not get his way that there will come out of Congress an energy plan that will be very different than what he puts in I think that's wrong I think mr. Carter has already gotten his way in what really counts he has already gotten the major element of the whole program namely a Department of Energy a Department of Energy which has 20,000 employees and a budget of 10 billion dollars a budget roughly equivalent to the profits of all of the American oil companies combined he is going to spend what is it three dollars a barrel of oil in order to keep the price of oil from rising but more important you therefore have 20,000 full-time employees who have a strong interest to propagandize form and to work for the government takeover of the oil industry and is there any doubt that that is what they will be doing let every other element of that program be defeated in Congress be turned down and it's only a question of time until they're enacted because what really matters is having the position of power from which to move so I believe that those people who have been rather optimistic on the ground that Congress is not going to enact the measures Carter proposed are making an enormous mistake that the Congress has already given Carter what he most of what's involved and I may say the Department of Energy was established with a bipartisan vote of Republicans and Democrats unfortunately Republican politicians are no less short-sighted than Democratic politicians when it comes to matters of this kind the question next question and the final question is how come why is it that we have moved in this direction why is it that we have adopted it these counterproductive controls on the prices of gas and oil that we have enacted this enormous ly expensive boondoggle of a Department of Energy the answer is very straightforward the enactment of such intervention has been and remains politically profitable we must apply the same kind of analysis to the political system that we apply to the economic system if we try to interpret the way business acts we ask what is it what is it what is in it for business what direction of activity is profitable we have to ask the same thing on the political level that's a different market in which the people are trying to acquire votes they are trying to acquire position and influence and they will do what's politically profitable to do they have gotten political hay from professing to protect the consumers of natural gas from higher heating bills here is the senator from my front of my longtime state of residence Illinois senator Adlai Stevenson who has been in the forefront of those trying to hold to hold down natural gas I once wrote an article in which I said that was a bill he was proposing was a bill to drive industry out of the state of Illinois that's indeed what it is because if you hold down natural gas prices it's going to be first allocated to residences industry isn't going to get it they're going to move down to Texas to be able to get it interesting but nonetheless the lower price of oil was visible to mr. Stevenson's constituents the lower price of gas the fact that they were losing their jobs in the process that was invisible so he gained votes the one way and didn't lose them the other there is too much of a tendency to interpret votes in terms of what people believe human beings are amazingly adaptable the capacity the human being to adjust his beliefs to his interests cannot be underestimated again consider the present energy bill it's been an enormous source of political hay and contributions from both sides those who are opposing it contribute those who are in favor of it contribute and so it's in the self-interest of Congress to argue about and debate and discuss issues of this kind in order to have something to sell to their constituents over and above this you have had the general sentiment in society at large toward more and more government control and this is only a particular manifestation of it after all this isn't the first industry that's being nationalized passenger traffic has been nationalized through M track freight traffic is on the way to being nationalized through Conroe it's a continuation of that same trend that the energy industry is on the way to being nationalized what is the bottom line what will be the effect on the price and the availability of energy well obviously the situation is not a very favorable one but I think it's a mistake to go to the other extreme and become a purveyor of doom and gloom you shouldn't just as you should never underestimate the ability of people to adjust their beliefs to their inners you should also never underestimate the ability of people to get around controls and interfere with them there is a strong incentive for people all around the world to find ways of getting around these artificially expensive energy to find ways to produce and benefit from the artificial energy and as a result the price of crude oil will come down in real terms as it has been since 1973 sooner or later the cartel will break down now let me emphasize again that doesn't mean it was a mistake for the people who from their point of view to have had the cartel you must not confuse two different propositions the statement that the cartel will ultimately break down and disappear is one statement the implication that people sometimes draw from that that it was against their interest to establish the cartel it's wholly wrong during this temporary period of running the cartel they are amassing enormous wealth that wealth is not going to disappear when the cartel breaks down all that means is that when the cartel breaks down their regular business of providing oil will go back to yielding them the kind of income it did before but in addition they will have this enormous accumulated wealth of course like all governments they will be short-sighted too and they will dissipate much of it so it may be they won't end up much better than they would have been but they will have quite a fling in the interval so that I think that we're not going to head for doom and gloom the price of energy will come down we are not going to have a worldwide shortage of energy but we're going to pay a heavy price we shall have a lower standard of living than we could have had we shall have a lower rate of growth and we could have had and we shall end up stuck with another major government parasite sucking our lifeblood and making it more difficult to overcome the adverse effects of government controls on our lives [Applause] you [Applause]

Channel: BasicEconomics

Views: 68,548

Keywords: liberty, Milton Friedman, Economy, Economic, Freedom, Economics (Field Of Study), Inflation, Money, Taxes, Tax, Policy, Free, Trade, Free Trade, Consumer Protection, ralph nader, Gas, Oil, Energy, Environment

Id: hj1974Ek4nw

Length: 57min 38sec (3458 seconds)

Published: Wed May 16 2012