Carter Orders Deregulation of Oil Prices
In the late 1970s, the United States experienced significant challenges in its oil supply, primarily due to geopolitical events. The 1973 oil embargo by OPEC members in response to U.S. support for Israel during the Yom Kippur War led to skyrocketing oil prices and consumer panic. This situation was exacerbated in 1979 when Iran's political upheaval resulted in a sharp decline in its oil exports, causing further strain on the U.S. market. President Jimmy Carter responded to these crises by initiating a plan to deregulate domestic oil prices, aiming to stimulate production and stabilize supply.
Carter's approach included gradually decontrolling oil prices while introducing a windfall profits tax on oil companies to prevent excessive profit-taking from the situation. The administration also actively sought to bolster diplomatic relations with Saudi Arabia to increase oil exports. Despite these efforts, the energy crisis persisted, leading to weekend gas station closures and public protests. While Carter's tenure was marked by ambition to create a robust energy policy, including a focus on alternative energy sources, it ultimately fell to Ronald Reagan to complete the deregulation and shift towards a free market approach in the early 1980s.
Carter Orders Deregulation of Oil Prices
Date April 5, 1979
Faced with an energy crisis caused by U.S. dependence on foreign oil, President Jimmy Carter ordered the start of a program that would gradually deregulate the price of domestic oil, making use of economic market forces to deal with the problem.
Locale Washington, D.C.
Key Figures
Jimmy Carter (b. 1924), president of the United States, 1977-1981Mohammad Reza Shah Pahlavi (1919-1980), shah of Iran, r. 1941-1979James Schlesinger (b. 1929), first U.S. secretary of energy, 1977-1979Ronald Reagan (1911-2004), president of the United States, 1981-1989Richard M. Nixon (1913-1994), president of the United States, 1969-1974
Summary of Event
During the 1970’s, the United States was very dependent on foreign sources of oil. A crisis had occurred in1973 when the Arab members of the Organization of Petroleum Exporting Countries (OPEC) had placed an oil embargo on the United States for supporting Israel in the Yom Kippur War, causing high oil prices and long lines at gas stations for U.S. consumers. A second crisis took place in 1979 when the ruler of Iran, Mohammad Reza Shah Pahlavi, was overthrown and Iran’s oil output was greatly reduced during the ensuing turmoil. Panic buying and long gas station lines again occurred in the United States, and President Jimmy Carter responded by moving to deregulate domestic oil prices, among other energy policies.
The oil embargo of 1973 showed how vulnerable the United States was to political turmoil in the international oil market as well as how hard it was for the U.S. domestic market to adjust. Preexisting U.S. government programs seemed to make the situation worse. President Richard M. Nixon had imposed general price controls in 1971, and by 1973, an elaborate system of domestic oil price controls and entitlement programs was in place. Also by 1973, the U.S. government had established a program to allocate gasoline regionally in an effort to ensure that all areas received supplies. These policies made it difficult for the domestic market to adjust to rapidly changing conditions in the oil market, and the results were panic buying, high prices, and long lines at gas stations. Nixon responded with “Project Independence,” an effort to reduce U.S. dependence on foreign oil, but government programs to control prices and allocate supplies continued.
Jimmy Carter came into the presidency in 1977 with energy at the top of his domestic agenda. He promised to introduce new energy initiatives within the first ninety days of his administration, and he chose James Schlesinger to lead the effort as the first secretary of the new U.S. Department of Energy. Carter introduced the energy initiatives in an address to the nation on April 18, 1977, in which he spoke of the “moral equivalent of war” in dealing with the energy issue. The proposals included beginning the process of decontrolling domestic oil and natural gas prices, using more domestic coal, introducing more competition into domestic electricity markets, and developing alternative domestic energy sources. Little progress was made on the initiatives, however, for two reasons. First, the 1973 crisis had faded from Americans’ memories somewhat, and the public was not as concerned with energy matters. Second, in its hurry to introduce the new initiatives, the Carter administration had not developed any allies for its energy programs, and it found that it was facing many opposing special interest groups with little support.
Then, in 1979, the political situation in Iran dramatically changed conditions in the international oil market. During the early years of the 1970’s, Iran was the second leading exporter of oil, after only Saudi Arabia. The shah was in power and was strongly allied with the United States. However, Iranian discontent with Mohammad Reza’s rule grew during the 1970’s, and the shah was forced to leave the country in January, 1979. The Oil Service Company of Iran was directly affected by the political turmoil in that nation, and Iranian oil exports had completely stopped by the end of 1978; they began again by March, 1979, but it would be some time before production would return to normal. The stoppage in Iranian oil exports was estimated to have reduced available oil on the international market by 4-5 percent, and that was enough to cause panic buying of existing oil supplies and to create the oil crisis of 1979.
The panic buying in the international oil market quickly affected gasoline prices and supplies within the United States. American consumers saw large jumps in the domestic price of gasoline and long lines at gas stations, as in 1973. The Carter administration came under great pressure to do something. President Carter addressed the nation on April 5, 1979, about the energy crisis in the United States and U.S. dependence on foreign oil. He announced a plan to decontrol the price of domestic oil gradually while imposing a windfall profits tax on the excess profits of oil companies. The hope was that economic market forces could succeed where government price controls and allocation programs had failed in bringing about the necessary adjustments in the domestic market. A decontrolled domestic price would encourage domestic production while discouraging domestic consumption. The windfall profits tax was intended to provide assurance that oil companies would not get big financial gains from the higher decontrolled prices. The Carter administration was also working diplomatically to convince Saudi Arabia to increase its oil exports.
Significance
The gasoline situation for consumers in the United States continued to grow worse in the months following Carter’s address. By the summer of 1979, the majority of retail gas stations in the United States were closing for part or all of each weekend because of inadequate gasoline supplies. Independent truckers were snarling traffic on busy roads to protest their fuel situation. President Carter responded to the ongoing crisis by supporting the idea of establishing a large federal program to develop synthetic fuels as a long-term solution to the energy needs of the United States. In the short term, Saudi Arabia had responded to U.S. diplomatic efforts by increasing oil production by nearly 12 percent. Carter also made major changes in his cabinet, including replacing Schlesinger with Charles Duncan, Jr., as secretary of energy.
In early November of 1979, the situation worsened as Iranian students, angry that the former shah was receiving medical treatment in the United States, took the American staff of the U.S. embassy in Tehran hostage. This event was soon followed by the Soviet Union’s invasion of Afghanistan and the outbreak of war between Iraq and Iran. The resulting international situation affected the international oil market but did not lead to the same panic buying seen earlier in the year.
President Carter was not in office long enough to complete the implementation of his energy programs. It was up to President Ronald Reagan to finish the effort when his administration took over in 1981. Reagan believed strongly in using the free market to deal with U.S. dependence on foreign oil. His administration completed the decontrol of domestic oil prices and provided other market incentives to encourage domestic production. Reagan also ended the alternative energy efforts begun by the Carter administration, as interest in pursuing such efforts faded once supplies of domestic and international oil increased.
Bibliography
Coyne, Mark, and Craig Allin, eds. Natural Resources. 3 vols. Pasadena, Calif.: Salem Press, 1998. Reference set on natural resources covers many aspects of the energy crisis of the 1970’s. Includes informative entries on “energy politics” (in volume 1) and on “oil embargo and energy crises of 1973 and 1979" (in volume 3).
MacAvoy, Paul. Energy Policy: An Economic Analysis. New York: W. W. Norton, 1983. Discusses U.S. energy policies during the 1970’s with a focus on economics. Chapter 2 addresses the topic of policy on the pricing of petroleum products.
Parra, Francisco. Oil Politics: A Modern History of Petroleum. New York: I. B. Tauris, 2004. Provides an insider’s view of the politics of the international oil situation. Chapter 11 discusses the oil crisis of 1979.
Yergin, Daniel. The Prize: The Epic Quest for Oil, Money, and Power. 1991. Reprint. New York: Free Press, 2003. Well-researched, best-selling history of the oil industry. Includes extensive discussion of the events of the 1970’s.