Having beaten the synfuel bandwagon two years in a row, opponents thought they had put the monster away for good. I was not so sure and I held on to all the files I had accumulated on the legislation. This paid off in 1979 when another Arab oil embargo and long gas lines reignited interest in energy independence. A new effort was launched to subsidize synthetic fuels and build a strategic petroleum reserve, with a cost of well over $100 billion.
Fighting this effort was harder because gas lines made people think there was a large absolute shortage of oil. In fact, the falloff in supply was not very great. The gas lines resulted entirely from stupid Carter Administration policies. In particular, it imposed price controls, so that prices couldn’t rise to market-clearing levels, and allocation controls that make gas plentiful on some places and virtually non-existent in others. Basically, the Carter people did just about everything wrong that was possible to do wrong.
Unfortunately, few people recognized that U.S. policies were almost entirely at fault and they focused their ire on the Organization of the Petroleum Exporting Countries (OPEC). What better way to punish oil producers than by eliminating the need to import from them by making our own oil out of plentiful coal and oil shale, most people thought.
In the end, the need to appear to be doing “something” got Congress to establish the Strategic Petroleum Reserve and the U.S. Synthetic Fuels Corporation. Tax credits and other subsidies were enacted to make synfuels competitive.
The program never really got off the ground, however, because one of the first things Ronald Reagan did after taking over the from the hapless Jimmy Carter in 1981 was to completely decontrol the prices of oil and gasoline. Once prices were free to clear, producers invested in new supply and consumers reduced demand by investing in more fuel-efficient autos.
Prices spiked at first, but after a few years fell to pre-embargo levels. Since synfuels were barely competitive, even with massive subsidies, when oil was at $30 per barrel, they were obviously uneconomical at $10 per barrel.
Today the price of oil is well above $60 per barrel—far higher than the price that synfuel producers have always said they needed to be competitive. Yet they are back again demanding subsidies before they will undertake the effort. One can only conclude that the price of oil will never reach a price at which synfuels can be produced without government subsidies.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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