The Issue

The Iran war has caused oil prices to spike and has reignited worries that the United States could be plunged into a new energy crisis such as those that plagued America—and most of the developed world—during the 1970s.

High energy prices have prompted public officials and private citizens to call on the U.S. government to reduce consumer prices for oil-based products, especially gasoline.

The member countries of the International Energy Agency, which includes the United States, authorized the release of 400 million barrels of oil from emergency stockpiles.¹ Most energy price policy levers have little effect on current prices, except for the temporary price drops that can come from releasing oil from stockpiles such as the U.S. Strategic Petroleum Reserve. Some levers, however, are more useful over the long term.

Ironically, some past efforts to curb rising energy prices have exacerbated rather than resolved the problem.

The Reality

A Brief History of U.S. Energy Policy

Since the early twentieth century, the public has called on federal and state governments to address America’s energy issues. From utility regulation to natural gas and oil pricing, government has long played a highly visible role in energy markets.

The forms of government intervention have varied; some government agencies have sought to control or even punish industry participants. Other policies have included price control, quantity control, and forced company breakups. From the 1930s until 1972, the Railroad Commission of Texas oversaw most production management in the U.S. domestic oil market.² The commission manipulated oil production and, by extension, prices. This manipulation benefited, at least in part, small oil producers that often faced uncertain profitability.³

By the early 1970s, the commission could no longer determine prices because of the country’s growing need to import a larger share of its oil, thus removing pricing from the commission’s purview. In 1971, the Nixon administration attempted to respond to rising inflation with mandated wage-price controls. Initially, these controls were imposed throughout the U.S. economy; by summer 1973, the controls had been relaxed on most products—but not oil. These controls affected markets for oil and oil products for the rest of the decade because oil, gasoline, and other derived products had to be sold at government-determined prices.⁴ President Richard M. Nixon moved forward with the controls on oil despite warnings from the chairman of the Council of Economic Advisers (CEA). “It would be hard to think of a more effective way of creating a fuel crisis,” said CEA chair Paul McCracken, “than to decree U.S. price ceilings.”⁵ That was precisely what occurred in 1973, when the Arab members of the Organization of the Petroleum Exporting Countries (OPEC) embargoed the United States because of its support for Israel in the Middle East war that broke out that October.⁶

The energy crises of the 1970s, which included a similar crisis in 1979–80, affected American energy policy in two ways. First, the crises led to an explicit policy of moving the country toward energy independence, which still has not been clearly defined.⁷ Energy independence has historically involved shielding the country from embargoes, preventing oil and gasoline prices from inducing inflation, and protecting America from the influence of oil-exporting countries.⁸

Ironically, the subsequent removal of price controls on oil and natural gas in the 1980s, which many congressional leaders resisted, meant that the visible effects of the 1970s energy crises—gasoline shortages and long lines at service stations—did not recur. Had an embargo been imposed at any point after the 1980s, it would only have raised prices; it would not have created the chaos that ensued in the 1970s.

Second, the 1970s crises prompted overly ambitious government-sponsored technological change to solve American energy dilemmas. None of these technological solutions has provided an energy panacea. In fact, they have often proved to be costly mistakes—worse than if government policymakers had decided to do nothing at all.

What Happens to U.S. Energy Policy When Policymakers Believe That They Must Act

Virtually all major energy policy initiatives have been passed during, or in the aftermath of, what was perceived to be an energy crisis. The word perceived is important because there is no empirical evidence to determine a crisis.⁹ A crisis is an unplanned, unstable circumstance seeming to need urgent and immediate action.

During crises, policymakers often feel compelled to act despite the ambiguity of available information. For example, the underlying causes of energy shortages in 1973 could have been dwindling U.S. oil reserves, hostile actions by Arab suppliers, attempts by oil companies to withhold oil while market prices rose, or government attempts to control prices. All of these factors seemed relevant at the time. However, it is difficult to draw policy conclusions when the cause of the problem is uncertain or misidentified. Because the root of the problem is ambiguous, the policy choices might have contradictory effects. The Powerplant and Industrial Fuel Use Act of 1978 forbade the use of natural gas in many applications, including new electric power plants.¹⁰ If the nation had been running out of oil and gas, then enforcement of a law such as this could have prevented businesses from passing soaring natural gas prices along to consumers.¹¹ On the other hand, if the problem stemmed from price-control policies—which had artificially suppressed production of large amounts of untapped natural gas—the 1978 law would have prevented the market from delivering low-cost, high-quality fuel and harmed consumers. In this case, the policy should have been to repeal the 1978 law and eliminate price controls. The law was ultimately repealed in 1987, and price controls were gradually lifted by the early 1990s.

Crisis-driven policy development often begins with policymakers finding ways to engage with the problem without a major funds commitment. Initial policy proposals might be largely symbolic (e.g., proposals to reduce speed limits on interstate highways or to lower temperatures in public buildings). Policymakers may also choose to blame a crisis on an unfavorable group (i.e., oil companies or OPEC). Consequently, some policy propositions could establish punishments: In the 1970s, policymakers proposed counter-embargoes against Arab countries, laws against price gouging, and propositions for taxing oil companies’ windfall profits.¹²

As a crisis persists, policymakers are under increasing pressure to do something definitive to solve the problem. This reaction has led to the most dramatic and expensive energy policies: the underwriting of major technological changes. Such programs have either failed, proved too costly, or worked only because of market distortions created by the policy itself.

Nevertheless, important crisis-driven energy legislation and executive orders have called for a technological panacea—one or more technologies that could truly solve America’s energy dilemmas. These programs have been mistakenly compared with the Apollo 11 moon landing: If the country could put a man on the moon in fewer than 10 years, surely it could rebuild the energy market to the country’s lasting benefit. But as political scientist Anthony Downs noted, “euphoric enthusiasm” behind a plan to solve a major problem typically dissipates as costs rise and technical challenges are encountered.¹³

Energy Solutions

Just a few weeks after the Arab oil embargo, Nixon declared a goal of U.S. energy independence by 1980 yet offered no specific proposal to achieve it. Nevertheless, he believed that a technological answer was already in development: the breeder reactor, which was based on the concept that a nuclear power plant could create more nuclear fuel than it consumed.¹⁴ Glenn T. Seaborg, chairman of the U.S. Atomic Energy Commission, advised Nixon and explained that the breeder reactor would produce enough nuclear fuel to power the U.S. electrical grid mainly via nuclear power. Seaborg envisioned approximately 1,000 nuclear power plants in the United States by the 1990s.¹⁵ Nixon believed in the future of the breeder reactor, regardless of studies claiming that the available technology was potentially dangerous and too costly.¹⁶

During the Carter administration, the legislative reach for technological solutions accelerated. President Jimmy Carter initially settled on solar energy (which, in his view, included wind and water), hoping that this would provide 20% of all U.S. energy by 2000. He launched a major effort to replace America’s mainly fossil-fueled hot-water and heating systems with solar energy. Despite the incentives, the policy failed.¹⁷

But Carter’s major technological initiative resulted from the energy crisis of 1979–80. The return of gas lines after the Iranian Revolution convinced Carter that the United States was running out of oil and natural gas. He feared that the price of oil would rise astronomically, thereby bankrupting the country, unless he moved America away from oil and gas dependence.

The solution was synthetic fuels, or synfuels, created by a process that converts abundant U.S. coal into substitutes for liquid and gaseous fossil fuels. Congress authorized an $88 billion budget (about $345 billion in 2025 dollars) for the new synfuels program but ultimately appropriated only $20 billion. Of that, just $1 billion (about $4 billion in 2025 dollars) was spent before the program was shuttered. The program had been premised on continually rising oil prices, but prices did not soar—they collapsed in 1986. Natural gas supplies became plentiful and inexpensive after price controls were relaxed; synfuels made no economic or technical sense.¹⁸

Carter had predicted the rise and demise of synfuels. In 1977, he opined that unless the United States acted “boldly” on energy, future energy crises would lead to “ill[-]considered, last-minute crash programs,”¹⁹ of which synfuels turned out to be the best example.

After the first Gulf War (1990–91) led to an oil-price spike and fears of the return of gas lines, Congress passed and President George H. W. Bush signed the Energy Policy Act of 1992 (EPAct 1992). By the time EPAct 1992 went into effect that year, the price spike had passed and the Gulf War had ended. With the end of the war went the urgency of a major energy initiative, and EPAct 1992 seemed unnecessary. EPAct gave tax breaks for biomass and wind energy (tax breaks that later became controversial, as wind energy expanded in the twenty-first century), and it supported research and development of technologies such as “clean coal.”²⁰ But with the crisis past, a dramatic solution to the energy crises (such as synfuels) was missing.

Thirteen years later, in the face of rising oil and natural gas prices—and a belief among some in Congress that the world had reached peak oil—President George W. Bush signed the Energy Policy Act of 2005. The act contained even more tax breaks and incentives for nearly every kind of energy technology. Most important, it contained a mandate to blend 7.5 billion gallons of ethanol into motor fuel—a somewhat modest goal that would have replaced only about 5% of U.S. motor fuel at the time.²¹

Ethanol, an imperfect substitute for gasoline, had received government support since the 1970s. But as oil and natural gas prices continued to rise (eventually to record levels), Congress demanded a new, dramatic energy policy. Bush agreed, saying in his 2006 State of the Union address that the American people were “addicted to oil” and had to learn to use less.²² The speech cast this as a moment demanding decisive action.

The solution was vast quantities of ethanol, which required a new processing technology that could yield ethanol from cellulosic plants, such as switchgrass and wood chips. Bush believed that cellulosic ethanol would be market-competitive in the next six years. The Energy Independence and Security Act (EISA) of 2007 increased the ethanol mandate of 2005 to 36 billion gallons.²³ Lawmakers hoped that ethanol would replace nearly 20% of America’s annual consumption of gasoline. Advanced biofuels—mainly cellulosic ethanol—constituted about 60% of the revised mandate, and traditionally derived corn ethanol accounted for the remaining 40%.²⁴

The EISA, which was endorsed and signed by a Republican president and passed overwhelmingly by a Democratic Congress, was predicated on government-led technological advancement. Despite large-scale government support, cellulosic ethanol was not commercially viable after six years—or even after 20 years.²⁵ Nor was it needed: The development of fracking led to plentiful supplies of domestic oil and natural gas. Progress in fracking technology initially advanced through market forces, and it has led to America being nearly self-sufficient in oil and more than self-sufficient in natural gas. Incentives for cellulosic ethanol remain, but the technology is no longer at the forefront of energy development.

In the early 2020s, energy was again the focus of federal attention, as President Joe Biden sought to create a sense of crisis (around climate change) to pass an energy bill that favored an expansion of wind and solar energy technologies for electric generation. The effort at a Green New Deal failed, but many of the elements were included in the Inflation Reduction Act of 2022. The cost of the bill—if implemented—was estimated at about $3 trillion and contained large grants, subsidies, and tax credits for wind and solar energy and for electric car adoption.²⁶ But like so much energy legislation, major pieces of the Inflation Reduction Act were later repealed.²⁷

Perspective

In the past 50 years, the government has proved that market intervention—with respect to energy—often leads to unintended consequences, overreactions, and costly failures. In times of energy-market turmoil and energy-price spikes, people have looked to government for relief. However, history has shown that the only sensible policy at such times is to let the energy market naturally sort itself out.

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