Wednesday, February 8, 2012

FRANK ZARB - The Most Important Public Policy Failure of our Time - Energy

(Speech given at the University Club, New York, Jan. 25, 2012)

During the next 20 minutes, we will talk about America’s inability to develop a cohesive thoughtful energy policy despite the fact that we have urgently needed one for decades. But the over-arching question to consider today as we contemplate energy policy is this.
Is it possible to reform our democracy so that it will be able to deliver long-term policies that benefit the national interest in the face of short-term political pain? The answer to that uncomfortable question is at the crux of almost all of the difficult policy matters this country faces.
Using energy policy to frame the question is natural. How we use energy, where we get it, how we pay for it – all drive our economic policy, both domestically and internationally. Energy shapes our global alliances and impacts our national security.
My own experiences in energy policy, began almost four decades ago, may provide useful color. Some of you may remember that in 1973, the Arab members of the Organization of the Petroleum Exporting Countries (OPEC) organized an oil embargo on the United States.

As a direct result our GDP dropped an estimated $15 billion – a big number back then. 500 thousand workers lost their jobs - also a big number in 1974. Hospitals ran out of fuel oil.  And the federal government actually took control of our ability to buy gasoline and heat our homes.
In 1973, the Unites States imported 35% of the oil it used. Today, it is closer to 60%. That’s over $400 billion leaving our country every year to buy oil from foreign sources – most of it flowing to the Middle East.
The impact of a major oil disruption to our economy and our national security today is unthinkable – but it can happen. So …
How can it be that since 1973, we have done so little to retard our exposure to oil imports from questionable areas of the world, and so little to regain some of the leverage we cede to those who may not have our best interests at heart? Here is a little history.
For a brief moment, in 1974 and early 1975 - a frightened nation seemed willing to look at major initiatives to drive down our dependence on foreign oil.
The political landscape was unique. President Ford was an unelected leader still explaining why his pardon of Richard Nixon was in the best interest of the Nation.
The House of Representatives was dominated by a liberal freshman class swept into office on the fumes of Watergate.
Long lines at service stations, hospitals running out of heating oil, and factories shutting down - all sparked broad support to do something about our energy situation.
When the embargo ended in 1974, the country was confronting inflation, recession, unemployment, some delicate labor issues and the nation was still reeling from Watergate.
Nevertheless, President Ford made energy a very high priority and asked me to lead a policy team to structure a plan that would begin a long term but steady process toward reducing imports from the Middle East.
It took us about four months in late 1974 to create a comprehensive legislative package. During that time, the President met with us regularly and went through every detail of the plan as it was being built.
He instructed other Cabinet Secretaries to be involved and to be supportive everyone got his message. This initiative was important to him and not subject to interdepartmental squabbling.
Some in the White House, especially those on the political side of the West Wing, grumbled that it gave too much ammunition to the opposition in the Congress. The grumbling was more amusing than anything else. As steady as it was, it always seemed to be just out of the President’s earshot.

President Ford introduced his plan in January 1975, by way of the State of the Union message – a quarter of which was devoted to energy policy

The President told the Joint Session of Congress that he would submit legislation which if enacted would:

1) Force conservation through a broad range of measures including - elimination of price controls that were a holdover from the Nixon Wage & Price control era and selected fuel taxes.

2) Expand the number of nuclear plants in a 10 – 15 year period.

3) Boost coal production and build power plants fueled by coal.

4) Open the outer continental shelf and other areas for domestic oil and gas exploration.

5) Support the construction of new oil refineries.

6) Develop renewable and synthetic fuels in a sensible and realistic manner. And …

7) Create a strategic oil reserve for future emergencies.

Tough stuff. And to balance some of the harsher medicine, the plan called for fuel cost subsidies for low income Americans. It was also designed to be sensitive to nuclear safety standards and environmental protection and it included a balanced “windfall” profits tax on oil companies.

The Congress and special interest groups were caught by surprise and they could not react quickly it was a wonderful but all-too-fleeting moment.

Here was this man from Michigan, drafted to be President facing his first presidential election in less than two years. This former Congressman, whose political antenna was better than most and he was proposing to increase energy costs for voters, expand controversial nuclear power and extend domestic oil exploration to areas which had been previously protected.

Here was a politician who talked about doing what he believed was right for the country even if it may not have been in the best interest of his election campaign.

When I told the President that our Legislative Proposals had managed to irritate Republicans as well as Democrats, he said “that means we have it just right.”

Eventually Congress woke up, and the opposition launched its attack but initially, they didn’t gain much momentum. The country was still bleeding from the embargo so it was hard to argue that we should not do something to guard against future disruptions. And the only way to do that would have been to significantly retard consumption through higher prices and greatly expand production of our domestic energy.

For the most part, the early opposition was shallow.

Jimmy Carter, who was getting ready to run against the President – proposed that to conserve gasoline, we should order all service stations to close on Sundays. And further, that government should allocate the available fuel supply.

He complained that the President’s tax proposals would be inflationary and of course higher fuel prices were part of the design of the Ford Plan.

Yes, gasoline would have gone from $.53 to $.70 per gallon. But the long term benefits would have been significant.

The silliness was bipartisan. A Senior Republican Senator (who was normally sober) urged that we should solve the entire problem with synthetic fuels. Never mind that he had no idea what synthetic fuels were, their state of development or whether they could compete in the market place.

Democrats in the Congress came up with some alternative ideas that were also empty and were broadly panned by the media.

So, in those early days, I truly believed that we had a real chance of getting effective legislation. But the increased flow of oil from the Mideast and flat to lower oil prices worked against us. A recession meant lower oil consumption and OPEC knowing clearly how its fortunes might be affected by our success – shrewdly influenced the debate by dropping hints about lowering prices.

As 1975 wore on, the Congress held hearings on parts of the President’s plan. The price of oil did not rise, there was ample supply and of course the ’76 elections were coming up.

Those forces resulted in a steady erosion of what initially was a limited reservoir of congressional courage.

We began to lose traction and I went to see Scoop Jackson, a Senator from the State of Washington, who was my Senate Oversight Chairman. I complained that what the Congress intended to do would be inadequate. When I asked what might push things back in our direction, he said “a new embargo.” He turned out to be right. Without a crisis, Congress was not going to do what needed to be done.

The battle continued for the rest of 1975. Strange alliances were formed as a number of trade unions sided with us. Consumer groups (led by Ralph Nader) opposed our intent to raise prices but we were surprised when he gained the backing of the environmental community.

I asked an important environmental leader – “How could you oppose a measure that would lower the use of fossil fuels?” He replied – “Nader helps us. We have to help him.” That was one of the many lessons I learned that year about how Washington works.

The President never lost enthusiasm for the plan. At one point, he told me, “we have to keep fighting for every element” but he acknowledged that “in the end, we are going to get much less than we want.”

He intended to go back to the Congress after the election and pound away for the rest of the package and I believe that if he had been elected, he would have gotten the job done.

In the end, the Congress gave us the easy stuff. They authorized the strategic petroleum reserve. They gave us the ability to mandate fuel efficiency standards for automobiles.

They also approved appliance energy efficiency labeling but punted on price decontrol and all of the other important provisions that would have angered some of their voters and you know how the election turned out.

Jimmy Carter “talked the talk” and created a government owned Synthetic Fuels Corporation to fund alternative sources of energy. It was scandal ridden, did little to advance technology wasted tens of millions of dollars, and ultimately was shut down by Ronald Reagan. But Reagan, Bush Sr., Clinton, and the second Bush did nothing significant to stop the steady expansion of our oil imports. None of them made national energy their priority.

Today, the current condition of our economy and political climate precludes any kind of major initiative. But following the election, there will be opportunity to take some positive steps.

Advanced natural gas extraction technology, and a proposed new oil pipe line between Canada and Texas, can make a major contribution to our energy supply.

Yes, both of these projects will require effective environmental standards but a good faith bipartisan effort can make them a reality.

And perhaps set the stage for a more comprehensive Energy Legislation in 2013 which, I assure you would not look anything like the 1975 plan. Today, I cannot help but wonder how the world would be different if the Ford Energy Legislation had been adopted 36 years ago.

Here are some thoughts:

1) We would have greater control over our own energy universe.

2) Energy prices would probably be lower, to the benefit of our economy.

3) We would be further along in developing competitive alternative sources of energy.

4) Our foreign policy – and defense strategy – would not be distorted by our dependence on imported oil.

I’m even willing to make the argument that we probably would not have gone into Iraq if we had achieved the higher level of self-sufficiency that the Ford Plan called for.

A few weeks ago, Iran fired rockets in the Strait of Hormuz.

One fifth of the world’s oil supply passes through that strait. Right now, our only viable response is the U.S. Navy.

Before I end, I ask you to think about today’s economic turmoil in the context of the energy crisis of almost 40 years ago.

Ultimately, there is only one way to reset the massive debt that is strangling our economy and that is to reduce spending and raise revenue. It will not be accomplished with populist rhetoric.

The continued failure to drive bipartisan legislation on urgent national needs can be summed up by an exchange I had with a highly respected Senator in 1976.

When I asked for his vote, he said, “I really support the President’s Energy Plan, but if I vote for it, and there is no emergency, my opponent will use it against me in the next election.”

So, here is the big question … how can we revise the system so that the most critical national issues can be addressed in the Congress without fear of political retribution?

Leadership, leadership, leadership on both sides of the aisle. It is entirely conceivable that party leaders could agree to carve out the few issues that are simply too important to be subjected to the usual partisan ugliness. So let’s talk about the “Carve- Out Proposition.

Our representatives, in both parties, can push these ultra-critical matters out of the political ambit.

And acknowledge up front that any bipartisan agreement will cause some shared pain. Party discipline would be less about enforcing ideological orthodoxy and more about respecting the marching orders of party leaders to address a very few important issues without primary regard for their politics.

Under this agreement, selected critical solutions could be perused without subjecting them to the very worst vagaries of the election process.

It may seem unbecoming for a man at this stage of his career to betray such naiveté about how things can work in Washington. To some of you, the notion of the “carve-out proposition” must seem inconceivable and impossible.

It should not be impossible, it can’t be impossible and it may not be as difficult as it seems to move us back in the right direction.

A good first step would be to reject the skepticism that tells us cannot be done.

Who knows? Our elected representatives may even stumble upon the epiphany that good policies are good politics and that pursuing common ground is more secure than living in the self-serving fringes.

The alternative is an unacceptable status quo. President Ford, always the optimist, would certainly share the vision of working in partnership for urgent national matters He would tell us that bipartisan cooperation on critical matters can happen but only if the voters elect and hold politicians accountable for the real value they bring to the long-term good of the United States even if their actions risk hurting their re-election.

As we head into the 2012 elections, it would be good to ask each candidate: “Which decisions have you made that risked your own personal ambitions for the greater good of the country?”

Candidates unable to point to acts of political courage in the past are unlikely to surprise us with such fortitude in the future.

Note: The author served as the US Energy Czar during the Ford Administration

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