WEBVTT

NOTE Price Controls in the Oil Industry

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Ever since about 1880, there have been predictions by so-called experts, usually technologists,

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that oil will disappear in 10 years.

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In other words, in 1890, big shots in the oil industry, technologists said oil will disappear in 10 years.

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And every 10 years, since then, they've been saying the same damn thing.

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They said that the latest big thing was very popular in the 1970s during the Carter administration,

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The so-called Club of Rome, which is a very high-powered group of technologists in Italy and MIT who, using high-speed computers and all that, came to the conclusion that oil would disappear by 1980 or 1984, whatever the year was.

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They, of course, all have egg on their faces at this point, quietly went back to the woodwork.

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The basic reason why they made these forecasts is that they didn't understand anything about prices and left prices out of the system.

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In other words, basically, it's a very simple way of doing it, but it's basically what they did, and all these guys have been doing.

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If you say you have 100 million barrels, let's say, of oil in the ground, excuse me, as reserves, and the consumption rate is 10 million barrels a year,

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Okay, then in ten years we'll run out of oil. That's essentially what they did.

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They didn't, you don't need computers for this. You don't need any slide rules. Okay?

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So in ten years the forecast, my god, is only a hundred million barrels on the ground.

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It's ten million barrels a year being used. Therefore, in ten years we also cut our throat.

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And the problem with this is, one, is these reserves are only a small fraction of the

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real reserves. These are only the reserves which have been mapped and surveyed and officially

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be there. There's an enormous amount of oil down there which hasn't been napped yet.

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And two is the consumption rate depends on, and also the reserves, depends on the price

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system. In other words, prices are always tossed out of these things. Almost no engineers

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or technologies understand about prices and so that gets tossed out. And what happens

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as you all should know by this time is if this is oil or natural gas or whatever it

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As the price goes up, two things happen. One, the consumers start tightening their belts because it's more costly. They start conserving, they use less of it, as we did with water last year and stuff like that.

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The use of something that hasn't been done was done with gasoline during the late 70s.

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And then, since the price is higher, there's more of an incentive to go out and look for more, and also look for alternative energy sources.

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In other words, since the price is now higher, it's more profitable to go out and find oil and drill it, map it, you know, all the rest of it is involved.

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It's not just to find oil, of course a lot of money, you have to go out and look, you have to drill, you have to employ geologists, go around, scout around and stuff like that.

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And it's not economic to do it at this level, let's say, this price, but it does become economic to do it up here.

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The result of all this is, one, the cut for consumption, two, the increased supply later on, and the price falls, and also the supplies go up.

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So reserves, even though we've been using a lot of oil since 1890, the total reserves on the ground now are higher than they were in 1890,

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because it's an expansible thing, it's not fixed in whatever it was, 100 million barrels, it keeps growing as there's more incentive to go out and look for sources.

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So that's the basic problem with the technologists who forecast the end of resources, they don't understand about prices.

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The energy crisis really begins around 1830 or 40 when whales run out. Did I cover this last time? No.

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Whales used to be the big energy source for lamps, whale oil, and whales began to die out.

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The reason why they died out was quite simple. We can call whale communism.

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In other words, you own, you're still through with the fish, still through with the fish in general.

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Whales, the communism of whales, in other words, you can kill any whale you get.

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If you find a whale and kill it, you own it.

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You can't own the whole school or whatever the technological unit is for whales.

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You can't say, okay, I own this little group here.

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If you own the whole group, that's your economic incentive.

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Every time you kill a whale, you're trying to replace it.

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In other words, grow more whales so you have a higher capital resources, your assets grow.

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But if nobody owns the whales in general, the school of fish or the salmon or whatever it happens to be,

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then the incentive is to kill the whale before the other guy kills it.

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There's no incentive to breed more whales because somebody else could come along and kill it.

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You have no property rights in the whales.

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Basically, what the problem is, it's a whole problem of natural resources.

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We'll cover, again, later on, just the natural resources.

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Basically, agriculture used to be in the same position as oceans are now.

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There's no private ownership in land.

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You own whatever you shoot or whatever you gather.

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So there's the so-called hunting and gathering society in the old days, a long time ago.

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So people ate, you know, they hunted deer or beaver or whatever it is, and they killed

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the beaver or the deer, and they owned that thing that they'd kill, but they couldn't

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own the whole herd.

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So there was beaver communism or deer communism, and the same way with gathering, they couldn't

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own any land, they just owned whatever seeds or nuts or whatever berries that they actually

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picked.

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Obviously this means a very low productive society. You can't sustain very many people by gathering nuts and hunting on the run.

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So what happened is as land got scarcer, the population grew, etc.

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It began to develop private property and land called agriculture.

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An enormous step forward which meant that people could take the land and transform it.

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Not just pick berries off it or pick nuts or gather nuts or whatever, they can actually transform the land and sow stuff and reap and all that sort of thing

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without worrying about other people coming in and grabbing it because they own this land and they own, therefore, the fruits of it.

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So with private property comes agriculture. In other words, agriculture is a consequence of private property rights.

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And this meant an enormous development of standard of living and production and everything else, because then you could take the land and transform it.

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You don't have to be stuck with the berries that you pick and stuff like that. You can actually grow things and produce them.

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produced them. Well, we're now on the ocean.

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We're now still in the situation of hunting and gathering. We can't

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own the fish that we catch, or we can't own the actual school, or the herd, or whatever you want to call it.

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It's technologically different for every

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every kind of fish, of course.

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It's difficult to generalize, but basically that's what we can say.

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To increase the productivity of the ocean is what we need, and there's private property in parts of the ocean,

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regardless of how this works, whether it's

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the school of the salmon or whatever it happens to be.

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and we're beginning to get that because the ocean is the next great frontier of resources

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we're beginning to get private property

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the long struggle of all the sea treaty

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the UN was

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I think properly rejected by the United States because

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they didn't allow for any private property in these parts of the ocean

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essentially the UN, world UN government

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commission was supposed to own everything

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it was a little bit of a disaster

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the result of this is

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the beginning to be private property in parts of the ocean now

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of course offshore oil drilling

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you own your platform and the stuff that you drill and the rest of it, it's offshore oil

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lots of that now, there's manganese nodules in the bottom of the ocean, people are getting to mine that

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but they can only do that if they're

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the rest of the insurance that the government will protect them against people coming and grabbing the manganese nodules

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after they start mining it, obviously, that's the equipment and so forth

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the beginning to have that, and this will be more and more as time goes on, this is the next

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Great Waves of the Future. In addition to space, there's also the oceans.

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The Japanese now have oyster beds

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systematically, not owned by private enterprise, but owned by the municipalities

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offshore.

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So this is coming in more and more. You need it more and more because you have

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parts of the ocean now which have lots of things to happen to it, like

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trawlers and

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drills coming in and stuff like that. Now you can't have two or three things going at once because

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they'll run into each other. You have to have some way of allocating

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the space and private property is the easiest way to do it

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so anyway once we get that we'll have aquaculture or aquiculture

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and the

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productivity increase will be enormous

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you can't believe it

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a fish for example

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in a fish situation

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in order to increase the productivity of fish

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one simple thing, a lot of things could be done, one simple thing could make an enormous difference

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fish unfortunately haven't read the Ten Commandments, they don't understand about

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fish tend to be cannibals

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eating even their own cousins, brothers and sisters

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so

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if you segregate fish by size, in other words, small fish in this area

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medium-sized fish here and large fish there, just doing that would tremendously increase the productivity of fish

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then you feed the fish with all sorts of guck

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algae or whatever, powder, whatever they eat

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so now you can say, how can you fence all parts of the ocean, isn't that uneconomic, you can't put barbed wire down there

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but now we can do it electronically very easily

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electronic barriers separating fish by size. That in itself would tremendously increase

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the fish population. There's no incentive to do that if some other guy can come along

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and grab them.

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That's even simpler than an electronic, but it could be done that way too.

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Sure, yeah, great.

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As I say, that's the wave of the future. There will be more and more of this going on.

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A friend of mine or an acquaintance of mine did that with turtles.

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See, turtles are in bad shape. I mean, they're lovable turtles.

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The environmentalists act as if only people kill animals.

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Actually, most of the animals are killed by other animals.

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Animals haven't read the Ten Commandments either.

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The animals don't respect the rights on code of other animals. The turtles are in bad shape.

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The turtle starts off deposited on a beach somewhere in the West Indies.

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And a little baby turtle, in order to save itself, has to crawl at a low speed from the back of the beach to the ocean.

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Once it reaches the ocean, it's safe. Then it can grow and develop.

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Unfortunately, a lot of predators between the beach and the ocean, little baby turtles, birds, animals, or whatever,

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eat the turtles, so the turtle population is an endangered species, not because of man,

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but because of other animals.

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So a friend of mine decided he was going to grow turtles, breed them, and also increase

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their population.

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So he did that.

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What he did is essentially save the turtles.

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In other words, he segregated them from the birds, whatever, and ways of guarding the

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turtles.

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The turtles then multiplied in population, he then killed some turtles and made turtle

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soup out of it, and exported them to the United States, but the average turtle population

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was much higher when he was doing it than before.

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So, the environmentalists, of course, say this is a terrible thing, he's destroying the turtle population, not understanding any of this stuff, not wanting to understand it,

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and so they prohibit it, they got the United States government being very powerful in lobbying environmentalists,

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got them to prohibit importation of this guy's turtles in the West Indies of the United States, and of course the United States is a major market,

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and this went bankrupt and the turtles are now getting extinct again, okay?

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So this is another example of government intervention claiming to save a turtle and actually helping

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to destroy them.

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So this is an environmentalist lobby.

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At any rate, and there's lots of cases like this, saving populations in order to breed

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them because your profit is involved in trying to maintain the turtles or seals or whatever

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they happen to be and keep them active, can't kill them all of course but you want to have

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them reproduce and all the rest of it.

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So at any rate, so aquaculture is going to be the next frontier, private property in various ways and parts of the ocean, it hasn't arrived yet, and in 1830 the whales were getting decimated, and so what happened was, this was the first energy crisis, the first modern energy crisis, where were we going to have any lamps, we have to go back to the cave, because whale oil lamps were the major lamp. Well as, since there was no, fortunately there was no international energy commission to solve the energy problem in the 1840s, 1830s, what simply happened was the

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And as the supply of oil declined, the price of oil went up, double, triple, and then people said, Jesus, it's getting very expensive, let's look around for another energy resource, another way of having lamps.

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In other words, the incentive was there, because the price was so high, you could go around and look for other stuff.

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So there was, for many centuries, this black ooze called petroleum, which was a big waste product, it was not considered a resource, it was considered a pain in the neck.

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Because there was nothing to do with it. It was just useless. It was just a waste. It was destroyed. There was no trees grew, it wasn't that sort of stuff.

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And so they began to discover, technologically, that petroleum could be used very well for lamps.

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Kerosene could be refined into kerosene used for lamps.

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They started using oil and petroleum on the surface of lakes and stuff like that.

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And pretty soon, of course, that got too expensive. They used up and they started drilling on the rest of the history.

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1959 was the first oil well drill in the world in western Pennsylvania and they discovered

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they don't have to rely on the surface petroleum, there's lots of it underneath and that starts

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the whole petroleum industry and then of course very quickly they find that petroleum is better

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anyway and cheaper than whale oil and then of course they start using kerosene.

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So the first energy crisis was solved not by government planning, not by people worrying

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about it, writing books about it, but by simply the price going up and other people then getting

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and how to find some kind of alternative energy resource, which then turned out to be petroleum, which, remember, had no use before that at all for centuries.

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Okay, so, the, if more and more petroleum was discovered, and natural gas later, from then on, okay, it was a constant new discovery.

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First it was thought in the United States that Western Pennsylvania is the only place you can find oil. That's it.

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Standard Oil of New Jersey, which had a quote monopoly on quote, on oil refining in that period, believed in their heart and soul that only Western Pennsylvania will have oil.

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So when they discovered oil in Texas, when the first discoveries came in, Standard Oil said, ah, it's a flash in the pan.

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And then other younger companies rushed in, like Gulf and Texaco, which were originally quite small, and said, hey, no, we think this is important, we're not stuck, we don't care about Western Pennsylvania.

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and it turned out to be right, and this is the beginning of the end of the Standard Oil monopoly on oil refining.

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So, this continued, so more or less had a free market in this, in oil, until about the early 1930s,

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when during the Depression, oil prices were a big new increase, big new discoveries in Texas, Oklahoma,

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and the price of oil went down magnificently, about something like three cents a barrel.

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I mean, that was great.

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And the oil companies then put pressure on the governors of Texas and Oklahoma,

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You have to stop this. We have to do something to cartelize the system. In other words, once again, getting to the cartel part, going into later on, here the supply of oil has gone, has increased, means the price of oil has gotten cheaper.

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We have to help out the oil industry by having government in some way restrict supply and raise the price, and of course, increasing total revenue, assuming it's going to be an inelastic demand curve for the industry.

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and so they prevail, the oil industry prevails upon the governor of Oklahoma, the governor of Texas

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the governor of Oklahoma was a colorful character named Alfalfa Bill Murray

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and uh...

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and uh... the sort of people they have in Oklahoma

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named Alfalfa Bill

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and he decreed

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an immediate moratorium on oil, the ruling of oil

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making it illegal and he mobilized the National Guard and he sent troops into the oil fields

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to shoot anybody who was ruling oil

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even their own oil, not other people's oil

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I also thought I should be a movie man on this, it would be very colorful, you have the dead of night, you have the oil fires in the oil fields and all that

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and the guy in the National Guard coming in and shooting people

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uh...

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at any rate

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so this is a moratorium on oil production, of course the price

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supply goes way down, the price goes up

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uh...

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now this of course couldn't

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you couldn't have a permanent situation of a National Guard shooting oilmen

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so this is a

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They worked out a permanent solution to this, to have a stable, continuing, permanent cartel of oil, and it was called oil proration laws, and this was a system, by the way, which was then reinforced, first of all, every state had it, mostly Texas and Oklahoma, which was a major producing state, and California and a few others, and then the federal government in 1935 passed the Hot Oil Act, which decrees, first of all, ratified this oil production law.

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production agreements, oil cartel agreements, and also outlaw the shipment interstate of

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so-called hot oil.

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In other words, oil which is beyond the limited production quotas, which is more than the

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minimum and maximum quotas, and then making that a federal crime.

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So the result of all that was this fight that would force federal and state governments

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of forcing an oil cartel, which lasted from about 1933 to about, actually until the 70s.

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The way it worked, for me the most annoying part of it, well of course the system itself

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was monstrous, but the most annoying part was the philosophical arguments for it given

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by the oil industry and the guys running it, economic quote arguments unquote.

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They of course didn't say we want to cartelize the oil industry, it wouldn't fly in the

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American public.

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We want to restrict production, but actually what happened was every month the state regulatory

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Commission, and Texas for some reason is the Texas Railroad Commission, which presumably

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runs the Texas Railroad, regulates Texas Railroad, and also oil, it got shoved in there for some

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reason, and usually it was run for many years by a retired general, and the Texas Railroad

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Commission accesses about three people or five people, every month, like January the

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1st, they would issue a quota for every oil well for the next month, for the month of

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January, in other words, the maximum production quota, let's say, but there'd be quota for

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the whole state of Texas, maximum quota, let's say, I don't know, let's say 100 million barrels,

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I have no idea what the number is, let's say 100 million barrels, that'd be a max, anything

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of, if you produce more than 100 million barrels you get shot, right, or whatever the legal

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fine is, the legal penalty, each oil well then gets a share of a quota, in other words,

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Here's an oil well which gets one-tenth of one percent of the total Texas oil, its quota is whatever this is, say 100,000 barrels for the month.

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If it produces more than that, the owner gets shot.

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In other words, it's a very rigid maximum production quota, pushing the supply curve to the left and raising the price of crude oil.

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This, of course, means the price of all the other oil products went up, not because the

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course was passed through, as I'll insist on later on, but simply because the supply

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is cut.

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This means the supply of gasoline is cut, the supply of kerosene, or whatever.

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So all these prices go up, so the consumer is screwed for the benefit of the oil industry

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as a whole in Texas, or Oklahoma, or whatever, and also against any individual competitor

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who would like to break through this thing and think he can do a more efficient job of

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Everybody is stuck with a quotas of whatever is determined by the State Railroad Commission

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and as I say reinforce and enforce interstate commerce by the Federal Oil Prolation Commission

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or whatever they call themselves.

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And the rationale was the Texas Railroad Commission would put out leaflets and also the oil industry

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and they say something like this, the oil industry in the American Petroleum Institute

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which is a major trade association. We're in favor of the free market. We love the free

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market. We're against government interference. However, in this particular case, in order

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to equate supply and demand, I get this, now you should know enough to realize the fallacy

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of this right away, in order to make, we have to equate supply and demand. In order to do

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it, the Texas Rail Commission has to issue a production, we have to estimate what demand

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will be next month, what consumer demand will be for purchase of oil, and then we will set

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But the official quota, so it's equalized supply and demand, because in our wisdom we

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know we can see what the consumers will want to buy for the whole month, and then we will

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regulate it.

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And this equates supply and demand.

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These same people have the nerves to say they're in favor of the free market, because what

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they're saying here is that, gee, demand is sort of a fixed quantity, which of course

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we know is nonsense, that demand depends on price.

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In other words, if the price is cut, maybe it might be 150 million barrels.

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You can't estimate how much the consumers will buy if you don't know what the price is.

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So the consumption varies in accordance with price, number one, the first fallacy.

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The second fallacy is you need some damn rural commission to figure out what the supplies are, equate supply and demand.

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All you need is a free price system.

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If the price system, moving up and down, which equates supply and demand, without any government officials claiming to estimate, trying to bring them into equality.

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So that's the second big fallacy.

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fallacy. The supply and demand are automatically equated to each other by a free movement of

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prices, as we all know by this time. The Railroad Commission doesn't mean they can't equate

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anything. They're simply assuming the supply and demand is such and such, and the supply

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will therefore be such and such. What they wanted was a strict supply and raised prices.

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That's their whole schtick. They didn't say that, of course. I don't think the public

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would have quite gone for it. You can't tell the public you want to cut their throat, as

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This is your objective. It's all for the good of the country and the public and all that.

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So at any rate, this system persisted, I'd say, for about 40 years.

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And the result was a permanent restriction on supply and a permanent rise in prices.

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And also over-drilling, because it meant that if you can get a drill in there,

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if you had this kind of situation, instead of drill a lot of oil wells and get in on a quota if you can,

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You have a lot of excessive number of oil wells, and each one being used only like 5% of capacity or 10% of capacity.

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You have a lot of uneconomic use of resources just in that sense.

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Too many oil wells, and each oil well being used, instead of being used to the capacity, being used like three days a month or whatever,

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depending on, you know, what the quota is, how much they want to jack the price up.

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So that was the situation. It was certainly a disgrace, especially in an industry which claimed their favor of free competition and free markets.

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By about the late 1950s, after about 25 years of this, they found out, it always happens with cartels, there's a hitch.

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The hitch is we can't shut the world out. In other words, if you take a cartel price, here's the world.

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World prices tend to be about the same for the same product, oil, copper, you know, they tend to be about the same throughout because you can make a profit.

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Profit. Copper, let's say, costs a lot more in France than it does in the United States.

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The incentive is to buy copper in the United States and sell it in France, thereby tending

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to equalize prices, unless they're, you know, government-restricted or something. But the

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basic tendency is toward a uniform price in each product.

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Well, here you have a situation from 1933 on, the price of oil, crude oil in the United

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States, and therefore petroleum, and therefore gasoline, all that rest of the stuff, is being

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is being raised way above the world market price. So instead of being just about equal

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or relatively roughly equal, the price of oil is now jacked up artificially by this cartel

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arrangement, by this government-enforced cartel. Well, the people who buy oil, like oil refineries,

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let's say, or utilities, whatever, consumers, get down to the ultimate, well, they'll start

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saying, well, Jesus, you know, the hell with domestic oil, it's too expensive, let's start

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Domestic oil had a built-in advantage. First of all, transportation costs are cheaper.

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It's cheaper to ship oil from Texas to New Jersey, let's say, with a refinery, than to ship it from Saudi Arabia in New Jersey.

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Second of all, American crude oil happens to be better quality than most foreign crude oil, less sanded, whatever it is.

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In other words, the quality is such that refineries are better able to use it. So the tendency would have been to use domestic oil.

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Oil. Because of this artificial cartelization, it started then being a big boom importing

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foreign oil. So, this begins a so-called foreign oil crisis. In other words, after about 20,

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25 years of this, as more and more oil is imported because of this artificial price

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thing, the oil industry starts belly-yanking, especially the crude oil people. There's no

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monolithic oil industry, I understand. There's the crude oil people in Texas that only produce

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The oil refineries, the big refineries which often produce both, I mean, refine and produce crude, and others which only refine.

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It's a very complex industry. There's also a lot of middlemen, etc., those who transport stuff.

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At any rate, to make it very simple, basically what happens is that oil refineries start importing oil from foreign countries because crude oil is cheaper.

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So naturally, by the late 1950s, what's the response of this? The response, the rational response of this, from the point of view of the public welfare or whatever, has been to scrap the whole thing, scrap oil proration laws and allow the domestic oil price to be cheap, the falls of the foreign oil price, and then we would have stopped losing business to foreign oil producers.

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Of course, they didn't do that, because the step, the answer of cartellists everywhere is, keep out the foreign oil, goddammit.

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They don't blame themselves for making oil too expensive. They say foreigners are evil, foreign oil, bad, domestic oil, good.

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As a matter of fact, when Jimmy Carter went on the air for his famous energy speech in 1978 or 79, he almost said that.

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He held up oil as something, a symbol for whatever it was. He almost said things like foreign oil, bad, domestic oil, good.

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As if something about the quality of the oil here is going to be foreign. What kind of tank?

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Anyway, so the next step was to keep out foreign oil, as one response to that, and it was to

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separate the oil market, segregate it, so as to justify the rationalizing of cartel, in

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order to keep the cartel prices, in order to keep the competition out, say foreign oil

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is evil for some reason, and to keep it out.

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One way of doing it is by tariff sweep, you slap an extra tax, so to speak, an import

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tax on oil, which they're talking about doing now, by the way, right now, as we're sitting

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Those SOBs in Washington are saying, well, gee, you know, oil is getting cheaper. We have to do something. We have to put a big oil import tax on to raise the price so the consumers won't benefit.

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They don't put up those terms. That's basically it. I'm afraid we might benefit by cheaper oil.

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At any rate, that wouldn't have been enough. They figure a foreign oil threat, quote-unquote, is too great.

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Therefore, have an oil import quota. In other words, this means you put a physical maximum on an amount of oil that can be imported.

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You just freeze it, and just like you had the domestic oil production quota, you now have a foreign oil import quota, which is what they did in 1958.

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The Texas oil producers lobbied Texas, of course, a very powerful state politically and all that, et cetera, et cetera.

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The federal government passed the oil import agreement, which froze the, in other words, here you have oil, here's domestic oil,

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The supply is shifting to the left. The foreign oil then comes in and this shifts the foreign oil to the left. In other words, it throttles down the supply of foreign oil plus domestic oil and saves the cartel for a while.

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Now, of course, the foreign oil producers got very upset about this, obviously.

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What happens to the foreign oil producers, Saudi Arabia, Venezuela, whoever they happen

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to be, is here they had a situation, here's the price quantity, here was the demand for

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foreign oil was going up, mostly United States demand because American consumers and refiners

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were shifting to foreign oil and all of a sudden, bingo, the demand goes down again

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even more because of U.S. law and the United States says no, you can't import more than

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X amount and so all of a sudden they find their demand curve falling and the price falling

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on foreign oil and of course the profits going down, losses, etc., etc.

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So in other words, what the United States government did, they shafted two groups of

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People, for the benefit of the Texas oil cartelists, the American consumers, who of course found

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their prices going up with a supply cut, and foreign oil producers, oil producers in Arab

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countries and Venezuela and whatever, and Indonesia, whoever had oil, suddenly found

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their prices fell, the man curve fell, because of U.S. government action.

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As a result, a year later, 1959, the oil producing countries, in desperation, as a defensive measure, formed the famous OPEC, Organization of Petroleum Exporting Countries, as an attempt to form a cartel to do battle against the American cartel.

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This, of course, has been forgotten by professional anti-OPEC baiters, who claim up until very

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recently that OPEC is an all-powerful cartel which has set its own price of oil and is

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holding American consumers at ransom and putting a gun at their throats over and so on.

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Actually, OPEC begins as a purely defensive operation and horror at the American import

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quota which was levied upon them, Organization of Petroleum Exporting Countries.

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Also, OPEC, for a long time, couldn't do a damn thing. In other words, they formed a cartel, but they could not prevail against basic market forces, plus the American buying cartel, so to speak.

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And OPEC had no power whatsoever, couldn't raise the price of oil for many years. It's not as if as soon as they were formed, they then had everybody by the throat. They couldn't do a damn thing.

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So from 1959 up to 1973, the price of oil, if anything, fell, rather than went up.

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In real terms, in other words, correcting for inflation, you always have to realize that most prices are always going up because of inflation.

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Correcting for inflation, the price of oil fell very sharply from 1958 straight through to early 70s, 1973.

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It was approximately, it was probably about $2 a barrel, maybe even less than that, all

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this time.

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And a lot of that was due to the tax that the Arab countries levied on the oil firms

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that are actually producing the oil.

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So it would have been even the cost, the actual cost of oil was something like 30 cents a

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barrel, something like that, at the point of production in Saudi Arabia and all the other

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Gulf countries.

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What happened by the early 70s is that the Arab governments again nationalized the oil

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and, of course, didn't kick out the Western oil companies.

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They simply levied a tax.

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In other words, instead of owning the oil, the oil companies could then use it,

365
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but only by paying a heavy tax to the Arab governments,

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which raised the price of about $2 a barrel from like, you know, 30 cents a barrel.

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It's a big raise compared to what it is now, of course, peanuts.

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So, nothing really happened. OPEC had no economic power. In other words, it was not able to

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raise the price of crude oil on the market until the famous crisis of 1973-74, to which

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we now turn. The crisis is very heavily related to Nixon's famous price control, which I've

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where he talked about. Nixon froze prices from August 1971 until the spring of 1974.

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And so the prices were moralized and there was a heavy price control, one thing or another.

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And when the spring of 74 came along, I think I guess the 73 was the big oil crisis in the

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in the Middle East, I guess the last Israel War, Arab War I guess in 73, right? 72, late 72 or 73, yeah, 73, so the supplies began to be cut, and then it was an Arab oil embargo, and so you had a supply being sharply cut of oil coming in from the Middle East, which was then the major oil producing region, and this hits, ordinarily what would have happened as a result of the Arab oil embargo,

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and the rise in price, in other words, supply cut, the price rises, and that would be more

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or less the end of it.

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Unfortunately, this came just about at the time of the, in winter of 73-74, we still

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have price controls, and so, what then happened was, sudden scarcity of oil, due to the Arab

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embargo, the war on the Arab embargo was, reflected not so much in the rise in prices,

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prices were prevented from rising, but a sudden shortage developing, and the shortage could

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cannot be cured by prices going up because of Nixon's price control set up.

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And so there was the first big so-called oil shortage, a gasoline shortage of 73, 74, actually

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spring of 74, I guess, and it was reflected in, you know, heating oil disappeared, mowing

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on gasoline, everybody runs out of gasoline and so forth and so on.

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And to meet that, instead of allowing the price of gasoline or oil to go up, as a matter

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of fact, when Nixon removed price controls in the spring of 74, he kept them on oil and

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gas as a special bonus, special icing on the cake, because there was a shortage, right?

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It's a typical nonsense of bureaucrats.

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If there's a shortage, you have to keep the controls, not realize the controls, the shortage

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is caused by the controls.

391
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Notice what would have happened.

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Without the price controls, oil would have been scarcer.

393
00:34:56.880 --> 00:35:01.880
I have no question about that, because of the Arab embargo, the result would have been a higher price and no shortage.

394
00:35:01.880 --> 00:35:07.880
But because the price controls were on and it extended for oil and gas from then on, from then on during the 70s,

395
00:35:07.880 --> 00:35:11.880
this meant perpetuating the shortage and making it a real crisis.

396
00:35:11.880 --> 00:35:16.880
You couldn't find oil, you couldn't find heating oil, people were dying in New York because of the cold,

397
00:35:16.880 --> 00:35:22.880
and gasoline disappears on the highways and so forth and so on.

398
00:35:22.880 --> 00:35:36.880
And I think this shortage, the gasoline shortage, lasted for about two months, there were long lines, and immediately the government, in order to handle this, started off with crazy regulations, just like the water shortage.

399
00:35:36.880 --> 00:35:43.880
Except here they had an obvious, you don't have to install meters, all they had to do was allow the price to go up.

400
00:35:43.880 --> 00:35:49.880
They kept the price controls and met the shortages by the following sort of methods. First of all, establishing priorities.

401
00:35:49.880 --> 00:35:55.880
In other words, if there's a shortage, immediately the government steps in and decides who should be able to get the short rationing of gas, in other words.

402
00:35:55.880 --> 00:36:00.880
There were no ration tickets, although they started making ration tickets for the next crisis.

403
00:36:00.880 --> 00:36:11.880
And they said, by the way, one interesting thing, the next time we have gasoline rationing, it won't be like World War II when we were tyrannical and didn't allow people to sell their own ration tickets to other people.

404
00:36:11.880 --> 00:36:22.880
They'd allow a market in ration tickets, so if you don't want to use your car next week, you can sell 3 gallons or 30 gallons worth of tickets to somebody else.

405
00:36:22.880 --> 00:36:29.880
I couldn't call it a free market, a market in ration tickets, so-called white market, because it would have been legal.

406
00:36:29.880 --> 00:36:38.880
At any rate, they had all sorts of priorities set up, for example, top priorities got gasoline off the top, they were allowed to buy gasoline, others were screwed.

407
00:36:38.880 --> 00:36:46.880
One, government officials, naturally. Every government official is considered absolutely necessary for everything.

408
00:36:46.880 --> 00:36:51.880
If you're a government official, you've got an immediate priority thing, you can get gasoline at the market price.

409
00:36:51.880 --> 00:36:57.880
Two, of course, farmers, automatically beloved for some reason in American politics, everybody loves farmers.

410
00:36:57.880 --> 00:37:01.880
So farmers get the second priority, everybody else gets to scramble for it.

411
00:37:01.880 --> 00:37:07.880
I guess doctors on Sunday call or something, things like that.

412
00:37:07.880 --> 00:37:14.880
like that. Doctors on emergency. And that's about it. Everybody else has to hoof it.

413
00:37:15.440 --> 00:37:20.240
So and then they had other regulations, like anybody, you can only buy gasoline on the

414
00:37:20.240 --> 00:37:25.240
days when your license ends in an odd number, you can only buy on Monday, Wednesday, and

415
00:37:25.240 --> 00:37:28.400
Friday. If it ends in an even number, you can only buy on Tuesday, Thursday, and Saturday.

416
00:37:28.400 --> 00:37:32.520
You can't buy gasoline at all on Saturday or Sunday, except of course for doctors who

417
00:37:32.520 --> 00:37:37.560
can get special. I mean it's a whole network of nonsense.

418
00:37:37.560 --> 00:37:43.560
And fortunately, after about a month or two of this, I guess Nixon's advisor said, look,

419
00:37:43.560 --> 00:37:47.320
all you have to do is allow the price to go up and it'll cure the shortage.

420
00:37:47.320 --> 00:37:48.320
And sure enough, he did.

421
00:37:48.320 --> 00:37:52.720
He kept the controls, unfortunately, but he said allow the price to go up to more or less

422
00:37:52.720 --> 00:37:54.320
the market price.

423
00:37:54.320 --> 00:37:59.640
The price of gasoline in those days, before 1973, was a magnificent and lovely 30 cents

424
00:37:59.640 --> 00:38:00.640
a gallon.

425
00:38:00.640 --> 00:38:01.640
That was about it.

426
00:38:01.640 --> 00:38:05.840
And he allowed it to go up to about 50 cents a gallon, that was the end of it, and it cleared

427
00:38:05.840 --> 00:38:11.200
in the market even with the scarcity. So the hysteria was over but then of course the government

428
00:38:11.200 --> 00:38:15.400
starts issuing crazy, first of all they kept the controls permanently, all sorts of terrible

429
00:38:15.400 --> 00:38:21.760
effects we'll go through in a minute, and they kept all sorts of other regulations, and

430
00:38:21.760 --> 00:38:28.760
they issued all sorts of decrees to try to quote, secure the energy shortage, unquote.

431
00:38:28.760 --> 00:38:33.480
And this was the beginning by the way around 1974 of the unbelievably monstrous 55 mile

432
00:38:33.480 --> 00:38:48.480
The original rationale for the 55 mile an hour speed limit was to save gasoline, to help cure the shortage.

433
00:38:48.480 --> 00:38:54.480
It was then pointed out, after the thing was passed, that it didn't really save much gasoline at all.

434
00:38:54.480 --> 00:38:59.480
In the first place, what it did, it still does, is to waste a lot of time.

435
00:38:59.480 --> 00:39:05.680
truck driving from, carrying stuff from California to New York, you have to drive 55 miles an

436
00:39:05.680 --> 00:39:10.240
hour, you're wasting several more days' worth of cost, so the cost gets restrict supply

437
00:39:10.240 --> 00:39:16.120
and add on to price, obviously, compulsory inefficiencies, like a negative railroad or

438
00:39:16.120 --> 00:39:21.760
negative highway, like chopping up a highway, and I think you're helping out the economic

439
00:39:21.760 --> 00:39:22.760
situation.

440
00:39:22.760 --> 00:39:28.280
Secondly, it didn't really save much gas even without that because most trucks were built

441
00:39:28.280 --> 00:39:32.060
in those days, so their maximum gasoline efficiency was 70 miles an hour. If they'd forced to

442
00:39:32.060 --> 00:39:38.000
drive at 55, they were wasting more gas than they would have otherwise. The thing is still

443
00:39:38.000 --> 00:39:43.000
on, of course, the 55 mile an hour limit, and we'll deal with that a little bit later.

444
00:39:43.000 --> 00:39:48.000
It's totally crazy, and here in these highways out in the West, there's no people, there's

445
00:39:48.000 --> 00:39:52.120
no trees, there's no nothing. If you leave the highway, there's no difference in the

446
00:39:52.120 --> 00:40:01.120
The Alleged Saving and Fuel 55 mile-an-hour Limit

447
00:40:01.120 --> 00:40:11.120
The Alleged Saving and Fuel 55 mile-an-hour Limit

448
00:40:11.120 --> 00:40:18.720
Well, since only a third of total vehicle mileage runs on streets or roads, which you

449
00:40:18.720 --> 00:40:22.760
can go more than 55 miles an hour, in other words, about two-thirds is on city streets

450
00:40:22.760 --> 00:40:27.640
and places like that where you can't, nobody, one hopes goes 70 miles an hour.

451
00:40:27.640 --> 00:40:35.480
So you take that into consideration and total fuel savings, only the maximum of 2.6 percent,

452
00:40:35.480 --> 00:40:38.440
and then we realize that many of the trucks that I said were geared towards 70 miles an

453
00:40:38.440 --> 00:40:44.680
and the most efficient gear ratios and stuff like that, the saving was minimal, more than

454
00:40:44.680 --> 00:40:48.240
offset by the amount of time wasted, the fact that they had to spend several days more on

455
00:40:48.240 --> 00:40:55.880
driving, etc., etc., so then came the next rationale for keeping this thing was the alleged

456
00:40:55.880 --> 00:41:01.440
saving of lives, which turns out to be a lot of nonsense also.

457
00:41:01.440 --> 00:41:07.440
The actually, traffic deaths per, the statistic is traffic deaths per 100 million miles driven.

458
00:41:07.440 --> 00:41:15.440
These have been going down steadily since 1925, and nothing to do with mile an hour limits.

459
00:41:15.440 --> 00:41:20.440
They were essentially due to the fact that cars got safer and roads got safer.

460
00:41:20.440 --> 00:41:49.440
For example, this is a statistic of traffic deaths, traffic deaths per 100 million miles driven and 1925 was 19, 1935 was 15, 1945 was 10,

461
00:41:49.440 --> 00:41:58.160
1960 was five, and 1973, before the fifty-five mile an hour limit, was about four.

462
00:41:58.160 --> 00:42:02.320
It went down later, in the seventies, to about 3.6 or something like that, but most of that

463
00:42:02.320 --> 00:42:06.080
has been figured out, nothing to do with the limit.

464
00:42:06.080 --> 00:42:12.920
First of all was a general trend, a general kind of downward trend in traffic fatalities.

465
00:42:12.920 --> 00:42:19.920
in the 70s, also the fact that the same reduction took place in city streets where there never

466
00:42:19.920 --> 00:42:24.400
had been any 70 miles an hour, there was a limit, the change of the limit in 1755 does

467
00:42:24.400 --> 00:42:28.720
not apply to city streets, suburbs and all that, and there was more of a reduction there

468
00:42:28.720 --> 00:42:34.500
than in the interstate highways, so it's figured out that most of the reduction, whatever

469
00:42:34.500 --> 00:42:38.960
reduction took place, there wasn't much, in other words, it went down from 4 to 3.3 or

470
00:42:38.960 --> 00:42:45.360
at the end of the 70s, most of that reduction was due to things like more highway, more

471
00:42:45.360 --> 00:42:51.380
interstate highways, quiet please, more interstate highways, most of the fatalities of traffic

472
00:42:51.380 --> 00:42:56.920
accidents do not take place at high speed, they take place in local streets and roads,

473
00:42:56.920 --> 00:43:03.160
the interstate highways are the safest place, and there were more interstate highways per

474
00:43:03.160 --> 00:43:08.880
local road during the 70s than before, more got built, also better tires, safety barriers,

475
00:43:08.880 --> 00:43:16.320
In West Germany, where there's a magnificent tradition of no speed limits at all on interstate

476
00:43:16.320 --> 00:43:17.320
highways.

477
00:43:17.320 --> 00:43:18.320
It's magnificent.

478
00:43:18.320 --> 00:43:23.040
As a matter of fact, when you drive on Autobahn, which is a German interstate highway, when

479
00:43:23.040 --> 00:43:27.240
you drive on, at 90 miles an hour, you're in a slow lane, but you're being passed very

480
00:43:27.240 --> 00:43:28.240
rapidly.

481
00:43:28.240 --> 00:43:30.160
The other car is zipping along at 100.

482
00:43:30.160 --> 00:43:32.600
The accidents are minimal, almost none at all.

483
00:43:32.600 --> 00:43:35.800
Most of the West German traffic deaths take place in local roads where there are speed

484
00:43:35.800 --> 00:43:36.800
limits.

485
00:43:36.800 --> 00:43:52.800
So, uh, huh? What? I thought it was unlimited. It's not unlimited? Huh? It's still unlimited.

486
00:43:52.800 --> 00:44:02.800
At any rate, the, uh, according to the traffic, uh, I had, according to the traffic experts,

487
00:44:02.800 --> 00:44:10.800
What reduces fatality, keeps it at the minimum, is a constant flow, constant speed, regardless of what the speed is.

488
00:44:10.800 --> 00:44:15.800
The real problem comes in changing speed, which of course takes place in local roads and things like that.

489
00:44:15.800 --> 00:44:19.800
It therefore makes no sense at all to have a uniform speed limit for the whole country.

490
00:44:19.800 --> 00:44:25.800
Every local condition is different, and a speed limit should be changed in accordance with a local condition,

491
00:44:25.800 --> 00:44:31.800
like 25 mile an hour in a school zone, and lots of other stuff, which we're used to in local roads.

492
00:44:31.800 --> 00:44:37.520
And so keeping the speed limit is a lot of nonsense for interstate highways on the west

493
00:44:37.520 --> 00:44:42.440
where there's hardly any people, hardly any cars, hardly any houses, nothing.

494
00:44:42.440 --> 00:44:46.320
And so anyway, this whole thing becomes absurd.

495
00:44:46.320 --> 00:44:50.000
By the way, on safety belts, something I should tell you about something which is being carefully

496
00:44:50.000 --> 00:44:55.480
kept from us by the establishment, it's true that the use of safety belts has reduced fatalities

497
00:44:55.480 --> 00:45:00.040
of people in cars to some extent, however, it's also increased the fatalities of pedestrians

498
00:45:00.040 --> 00:45:07.040
Because it's made people, drivers a little bit more reckless and so they zip around and hit pedestrians more than they did before.

499
00:45:07.040 --> 00:45:11.040
That's the sort of stuff the National Safety Council never tells you.

500
00:45:11.040 --> 00:45:19.040
Anyway, kind of might have done a study on that and it's the other side of the coin of the safety belt.

501
00:45:19.040 --> 00:45:31.840
To get back to the alleged energy shortage, when they allowed the price of gasoline to

502
00:45:31.840 --> 00:45:38.480
go up from 30 cents a gallon to about 50, the shortage was over.

503
00:45:38.480 --> 00:45:42.320
However, they kept the whole structure of controls, all during the 70s.

504
00:45:42.320 --> 00:45:48.160
They kept allocation controls and price control for crude oil and for gasoline.

505
00:45:48.160 --> 00:45:55.120
And they also set up a typical cartel or rationing arrangement where everybody was supposed to

506
00:45:55.120 --> 00:45:56.120
be supplied.

507
00:45:56.120 --> 00:46:01.960
If you're a gas station, let's say, you had to be supplied by your alleged employer, whatever

508
00:46:01.960 --> 00:46:07.280
it was, Exxon or whatever it is, by a certain quota, a minimum quota of gasoline every month.

509
00:46:07.280 --> 00:46:13.240
The quota was set on conditions of 1973 before the Great Crisis, and this continued all during

510
00:46:13.240 --> 00:46:15.240
the 1970s, this quota system.

511
00:46:15.240 --> 00:46:26.240
As a result, you have something like this, let's say there's a gas station in upstate New York, which in 1973 sold, I don't know, I have no idea how many gallons of gas they sell every month, let's say 2,000, right?

512
00:46:26.240 --> 00:46:39.240
And upstate New York, what happens of course over time, when you set the quota in the spring of 74, it makes a little bit of sense because the quota, the conditions are very similar to the base year.

513
00:46:39.240 --> 00:46:44.240
However, as time goes on, it always changes, especially in the United States as a fast-changing society.

514
00:46:44.240 --> 00:46:50.240
And over the 1970s, upstate New York begins to collapse from a not too high a level to begin with

515
00:46:50.240 --> 00:46:56.240
The economy begins to collapse, New England begins to collapse, and people move from New England and upstate New York to California and Texas

516
00:46:56.240 --> 00:47:08.240
There's been a big trend of population shift from places like upstate New York, from middle west, West Virginia, whatever, Iowa, to Texas, Oklahoma, Florida, and California

517
00:47:08.240 --> 00:47:16.240
Well, as a result of quotas, gas station quota in upstate New York, they might have a minimum

518
00:47:16.240 --> 00:47:20.240
quota of 2,000 a month, they might be only using 1,000, they have 1,000 excess gallons

519
00:47:20.240 --> 00:47:25.240
sitting around, which they can then return at the end of the month, let's say, to Exxon.

520
00:47:25.240 --> 00:47:30.240
Another thing that happens is the refineries were compelled by law, by federal regulation,

521
00:47:30.240 --> 00:47:34.240
to keep shipping the same amount of gasoline every month, regardless of the quality of

522
00:47:34.240 --> 00:47:36.240
the service of the gas station.

523
00:47:36.240 --> 00:47:43.040
In other words, essentially, before that, the Exxon or Mobil were employed, employers

524
00:47:43.040 --> 00:47:46.640
sort of speak of these franchise gas stations, they didn't shape up, there were complaints

525
00:47:46.640 --> 00:47:49.560
by consumers or the vice president of Exxon or something, they cracked down on the gas

526
00:47:49.560 --> 00:47:50.560
station.

527
00:47:50.560 --> 00:47:53.280
Now the federal government said, no you can't do that, regardless of what happens, you have

528
00:47:53.280 --> 00:47:55.120
to supply the same 2,000 gallons a month.

529
00:47:55.120 --> 00:47:58.200
As a result, the gas station, the individual gas station began to, the quality of service

530
00:47:58.200 --> 00:48:00.000
began to go down.

531
00:48:00.000 --> 00:48:05.080
This is very visible, the, I remember in the 70s, I asked a friend of mine who was an expert

532
00:48:05.080 --> 00:48:09.080
on Economics of Gas and Oil, etc., and I said, why are they not giving me any free maps anymore?

533
00:48:09.080 --> 00:48:16.500
I'm a big map fan. I like lots of maps. Free maps began to disappear by the mid-70s, and

534
00:48:16.500 --> 00:48:21.080
also the lovable washing of windshields and the general snapping of attention when you

535
00:48:21.080 --> 00:48:24.320
drive up, all this began to collapse, especially, of course, in New York, where they're never

536
00:48:24.320 --> 00:48:33.640
very lovable anyway. But they stopped washing the back of the window, all the rest of it.

537
00:48:33.640 --> 00:48:36.680
And so, he said, well, the thing is they have this compulsory rule now where they have to

538
00:48:36.680 --> 00:48:43.160
get mobile or whatever, have to supply each gas station with the same quota, the gas station

539
00:48:43.160 --> 00:48:46.200
comes and goes as a consumer and a mobile and they don't care anymore.

540
00:48:46.200 --> 00:48:50.560
So that's the beginning of the end, the cracking up, the decline in quality as a result of

541
00:48:50.560 --> 00:48:53.400
the price control arrangement, rationing arrangement coming in.

542
00:48:53.400 --> 00:48:59.640
So another thing that happens is these guys in western Massachusetts and upstate New York

543
00:48:59.640 --> 00:49:03.640
There was plenty of gasoline throughout the entire crisis of 1979, by the way.

544
00:49:03.640 --> 00:49:05.640
So, wow, they were swimming in gasoline.

545
00:49:05.640 --> 00:49:13.640
In the meantime, in the new areas, California, Texas, et cetera, especially California, remote from the action,

546
00:49:13.640 --> 00:49:16.640
there were new gas stations all the time. They couldn't get their quota.

547
00:49:16.640 --> 00:49:23.640
In other words, they found, here's a new gas station, but they didn't have any quota from 1973 because they weren't around in 1973.

548
00:49:23.640 --> 00:49:28.640
Therefore, they were screwed, very much like new people trying to find an apartment under rent control.

549
00:49:28.640 --> 00:49:34.320
get your quota. Many gas stations began to collapse or bankrupt, go under in California

550
00:49:34.320 --> 00:49:41.320
starting about 1976 or so. And by the way, the result of this, OPEX finally getting their

551
00:49:43.480 --> 00:49:48.680
action in here, the result of this embargo etc. was a permanent rise in oil prices which

552
00:49:48.680 --> 00:49:55.680
had been something like $2 a barrel for that crude oil, now went up to about $10, approximately

553
00:49:55.680 --> 00:50:09.680
A five-fold increase in the early 70s, and the result, by the way, of this rise in gasoline prices and oil prices began to be some kind of conservation in the sense of people beginning to cut consumption.

554
00:50:09.680 --> 00:50:20.680
Not much yet, but to some extent begins then, and people beginning to insulate their homes so they spend less money on fuel, oil, etc., etc.

555
00:50:20.680 --> 00:50:28.680
and it begins to be a slight shift to our compact car as we get more for a gallon, etc.

556
00:50:28.680 --> 00:50:34.680
Anyway, so California gas stations begin to collapse and then the price controls are such,

557
00:50:34.680 --> 00:50:39.680
after they allow the initial increase to 50 cents a gallon, they say you can't increase prices anymore,

558
00:50:39.680 --> 00:50:43.680
something like rent control, like vacancy decontrol, you allow an initial increase.

559
00:50:43.680 --> 00:50:49.680
You can only increase your gasoline prices if you justify it by, say, an increase in crude oil prices

560
00:50:49.680 --> 00:51:01.680
If the crude oil price goes up by 10 percent, you're allowed to increase your gasoline prices by 10 percent. However, they do not include labor costs, they do not include rent charges, that sort of stuff.

561
00:51:01.680 --> 00:51:05.680
So as a result, gas stations are going to go out of business in California for that reason.

562
00:51:05.680 --> 00:51:11.680
In other words, they're going to be losing money because they weren't allowed to increase their gasoline prices up to the free market level.

563
00:51:11.680 --> 00:51:18.680
And so gasoline prices went up very slowly. Remember, there was a big inflation during the late 70s, 10 percent a year, 12 percent a year.

564
00:51:18.680 --> 00:51:21.800
here. Gasoline prices are only allowed to go up a little bit. They went up to about

565
00:51:21.800 --> 00:51:31.800
70 cents by, say, the late 70s. 60, 70 cents. So you begin to have this peculiar situation

566
00:51:31.800 --> 00:51:39.960
where gasoline shortages in California begin to show up, or Texas, and particularly California,

567
00:51:39.960 --> 00:51:44.840
but lots of surpluses here. Finally, in 1979, a second great crisis, which lasted even longer

568
00:51:44.840 --> 00:51:51.160
on the 1973, the Iran, I think the Iran Revolution, which was an excuse for that, cutting off

569
00:51:51.160 --> 00:52:06.160
of Iranian oil for a while, and so as a result of that the supply again gets cut, but we

570
00:52:06.160 --> 00:52:11.480
still have price controls on gasoline and oil, continuing from 1973, and so as the supply

571
00:52:11.480 --> 00:52:19.480
The supply gets cut again, and the price of oil now goes up, by the way, in the 1979 crisis, so about $30 a barrel, further tripling.

572
00:52:19.480 --> 00:52:24.480
The result of that was again a severe gasoline shortage, oil shortage, and all the rest of it.

573
00:52:24.480 --> 00:52:31.480
The same damn thing occurs in 1979, because the prices were kept at 70 cents, 65 cents, and whatever, a gallon.

574
00:52:31.480 --> 00:52:35.480
It begins in California. At the same time, New York had plenty of gasoline.

575
00:52:35.480 --> 00:52:40.480
California was the cutting edge of this, because they didn't have a quota.

576
00:52:40.480 --> 00:52:46.480
The gasoline shortage begins there in the summer of 1979 and hits here in the fall.

577
00:52:46.480 --> 00:52:52.480
And as it hits, the same sort of stuff begins to happen. Black markets, for example, if

578
00:52:52.480 --> 00:52:58.480
you're an old customer of a certain gas station, what you do is you park your car, say you

579
00:52:58.480 --> 00:53:02.480
use a certain garage, gas station, you park your car at night, in the morning you get

580
00:53:02.480 --> 00:53:06.480
there and you find that magically the tank is now filled, even though it's a big rationing.

581
00:53:06.480 --> 00:53:09.480
That's if you're an old and valued customer.

582
00:53:09.480 --> 00:53:12.480
If you're not an oligarch, then you need to whistle for it.

583
00:53:12.480 --> 00:53:16.480
So favoritism begins to come in, the old customer bit, black market charges.

584
00:53:16.480 --> 00:53:20.480
Also, in California, the gas station is closing and they don't have any gasoline.

585
00:53:20.480 --> 00:53:22.480
Also, big lines.

586
00:53:22.480 --> 00:53:23.480
Long lines.

587
00:53:23.480 --> 00:53:25.480
First, in California, everybody has to ride a car.

588
00:53:25.480 --> 00:53:27.480
There's buses and that sort of stuff, or subways.

589
00:53:27.480 --> 00:53:31.480
So you're there, you have to get to work, and there are 50 cars lined up,

590
00:53:31.480 --> 00:53:36.480
and the lines are very slow and so forth, and a lot of hysteria begins to develop.

591
00:53:36.480 --> 00:53:38.480
First of all, somebody wants to cut in.

592
00:53:38.480 --> 00:53:42.480
Cutting in line in this kind of situation causes all sorts of fights.

593
00:53:42.480 --> 00:53:47.480
You go out and punch out the guys trying to cut in, murders even took place on the gas line.

594
00:53:47.480 --> 00:53:50.480
Social conflict emerges.

595
00:53:50.480 --> 00:53:58.480
And general hatred of the gasoline station, hatred of your fellow comrades trying to get gasoline, and all the rest of it.

596
00:53:58.480 --> 00:54:01.480
And also crazy regulations come in.

597
00:54:01.480 --> 00:54:07.480
Once again, rationing was decreed by the federal government, top priority, government officials.

598
00:54:07.480 --> 00:54:19.480
and we've always had plenty of gasoline, second priority farmers, I guess the same thing, third priority surgeons, doctors paying emergency calls on Sundays.

599
00:54:19.480 --> 00:54:26.480
So again you have the same odd even license plate regulations, even more so than before, because this lasts about six months, at least in California.

600
00:54:26.480 --> 00:54:30.480
It lasted much longer than the other 73 crises.

601
00:54:30.480 --> 00:54:38.480
and situations such as upstate New York and western New England, plenty of gasoline, never had any shortage, they were swimming in it

602
00:54:38.480 --> 00:54:43.480
but they had a quota, the companies had to send them the oil by federal mandate

603
00:54:43.480 --> 00:54:48.480
in California they were closing up and after a few months New York City had the same problem

604
00:54:48.480 --> 00:54:55.480
so once again, what to do about it, big crisis, etc. etc.

605
00:54:55.480 --> 00:55:03.480
Carter goes on the air. Carter had a big crisis. He had a big energy problem. What to do about all this?

606
00:55:03.480 --> 00:55:16.480
He scheduled a big TV speech on energy for a certain night. He had everybody alerted. Suddenly, he canceled it an hour before.

607
00:55:16.480 --> 00:55:21.480
He said he had to rethink everything. This was the beginning of the view that Carter was a nut.

608
00:55:21.480 --> 00:55:28.680
which took hold to that point and continues ever since and he went up to the

609
00:55:28.680 --> 00:55:31.920
mountaintop and literally I think he went to camp there and he communed with all the big shots,

610
00:55:31.920 --> 00:55:36.240
he communed with John Kenneth Galbraith, he communed with everybody, philosophers and he came back

611
00:55:36.240 --> 00:55:40.680
with his famous moral crisis speech, moral malaise I guess it is, America's suffering

612
00:55:40.680 --> 00:55:45.760
from moral malaise, it didn't go over very well either. At any rate, the, well apparently what

613
00:55:45.760 --> 00:55:50.440
happened was the inside dope on that was his, his two big economists, Secretary of

614
00:55:50.440 --> 00:55:54.880
Treasury, Blumenfall, who was one of the big economic advisors, Secretary of Energy, Schlesinger,

615
00:55:54.880 --> 00:55:59.720
who had been an economist originally, had been hip-deep in this whole control system,

616
00:55:59.720 --> 00:56:02.840
all in favor of it, finally came to conclusion the only thing to do was to appeal, scrap

617
00:56:02.840 --> 00:56:06.800
the whole thing and go back to the free market. That was their recommendation. Apparently

618
00:56:06.800 --> 00:56:11.520
Carter was going to do it, which would have ended the whole crisis right then. Unfortunately,

619
00:56:11.520 --> 00:56:14.840
as Georgia crony said, you can't do that, you look like a weak president. Only weak

620
00:56:14.840 --> 00:56:21.520
Presidents, repeal, control, strong presidents, impose control. So purely for political reasons

621
00:56:21.520 --> 00:56:26.640
he shifted the whole thing and came up with the famous energy package, which just made

622
00:56:26.640 --> 00:56:30.760
things worse. We'll go into a little bit of that because there are all sorts of interesting

623
00:56:30.760 --> 00:56:37.760
ramifications of this oil stuff. At any rate, what finally happened in the beginning, they'd

624
00:56:37.760 --> 00:56:43.480
be ads in the paper, which gas stations that have gas today, that sort of stuff, you know,

625
00:56:43.480 --> 00:56:47.800
5 or 6 or 7 or whatever. They have them only from 9 in the morning to 11 in the morning.

626
00:56:47.800 --> 00:56:53.800
They're very scarce. I'm just in long lines trying to get it. So one heroic gas station

627
00:56:53.800 --> 00:56:58.040
illegally said, okay, we have plenty of gasoline. We're charging, however, a buck a gallon.

628
00:56:58.040 --> 00:57:03.440
So the traditional customary and lovable 70 cents. And they broke the tidal wave. They

629
00:57:03.440 --> 00:57:09.880
had plenty of gasoline, 24 hours a day. Yes, sir. Back to service. Back to no lines. And

630
00:57:09.880 --> 00:57:12.580
And this magical thing paves the way and then they all broke it.

631
00:57:12.580 --> 00:57:16.040
All the gas stations in the area started charging a buck a gallon, plenty of gasoline.

632
00:57:16.040 --> 00:57:21.640
That, I think, blazed the path for the government to start saying, okay, they finally scrapped

633
00:57:21.640 --> 00:57:26.280
and for lots of headaches, lots of recriminations, they finally scrapped the price control, at

634
00:57:26.280 --> 00:57:30.800
least the extent of allowing it to go up once again to about a buck a gallon, buck ten,

635
00:57:30.800 --> 00:57:33.520
and that was the end of the gasoline shortage for 79.

636
00:57:33.520 --> 00:57:38.240
It took longer for this to sink in because the Carter administration was more resistant

637
00:57:38.240 --> 00:57:41.600
The Nixon administration had been through a little bit of enlightenment, so to speak,

638
00:57:41.600 --> 00:57:43.600
but at any rate, that was the upshot.

639
00:57:43.600 --> 00:57:48.400
There were a lot of other, however, continued on, a lot of other ramifications here, because

640
00:57:48.400 --> 00:57:54.640
in addition to this oil problem, there's also a natural gas crisis brought about by very

641
00:57:54.640 --> 00:58:02.280
different elements, reinforcing the whole 79 problem.

642
00:58:02.280 --> 00:58:06.520
Natural gas is a competitor, of course, with oil, for energy, as is coal.

643
00:58:06.520 --> 00:58:19.520
There was also a coal problem, and natural gas is a complicated, it's transported by pipeline, and the federal government starts regulating pipelines very early.

644
00:58:19.520 --> 00:58:32.520
At any rate, in 1954, I think it is, the Supreme Court tells the Federal Power Commission, which in those days was regulating the price of natural gas, that they had to regulate it, the Federal Power Commission didn't want to regulate it.

645
00:58:32.520 --> 00:58:35.160
by the Eisenhower administration and more free market oriented.

646
00:58:35.160 --> 00:58:39.200
The three courts said, no, you have to regulate it, and then they wind up, in the late 50s,

647
00:58:39.200 --> 00:58:46.880
they freeze the price of natural gas at 1956 or whatever prices, and they kept it that

648
00:58:46.880 --> 00:58:48.880
way from then on until the late 70s.

649
00:58:48.880 --> 00:58:53.680
As a matter of fact, maybe the early 80s, so the price of natural gas was frozen at

650
00:58:53.680 --> 00:58:54.680
the old 1956 level.

651
00:58:54.680 --> 00:58:58.000
Now, of course, what had then happened is you could tell what happened, first nothing

652
00:58:58.000 --> 00:59:03.680
happens because it's a regular price, but then as the inflation proceeds, the level

653
00:59:03.680 --> 00:59:10.560
of the 1956 price becomes ridiculous and becomes more and more under the, below the free market

654
00:59:10.560 --> 00:59:11.560
level.

655
00:59:11.560 --> 00:59:18.080
So here you have a situation where you have natural gas and the price is frozen at the

656
00:59:18.080 --> 00:59:23.400
late 50s level, the price keeps going up because of inflation, and you wind up with increasing

657
00:59:23.400 --> 00:59:25.400
Changing Shortages

658
00:59:25.400 --> 00:59:28.760
And the price becomes more and more unrealistic.

659
00:59:28.760 --> 00:59:32.560
The natural gas takes a few years to change prices because the way the industry runs is

660
00:59:32.560 --> 00:59:34.600
there are long-term contracts.

661
00:59:34.600 --> 00:59:38.120
The pipeline makes a long-term contract with the producer, so it takes about three or four

662
00:59:38.120 --> 00:59:39.120
years for a price to change.

663
00:59:39.120 --> 00:59:41.920
It's like a long-term lease.

664
00:59:41.920 --> 00:59:44.360
But after a while, I began to realize there was a shortage.

665
00:59:44.360 --> 00:59:48.080
In the meantime, before the shortage developed, natural gas looks like a big, hey, let's get

666
00:59:48.080 --> 00:59:49.080
natural gas.

667
00:59:49.080 --> 00:59:52.520
It's much cheaper than oil now because natural gas price is frozen.

668
00:59:52.520 --> 00:59:58.400
So public utilities in the Northeast and other regular homes and businesses start shifting

669
00:59:58.400 --> 01:00:03.980
from oil and natural gas, and particularly from coal and natural gas, by the way.

670
01:00:03.980 --> 01:00:11.080
So natural gas becomes artificially cheap, and people, of course, find a lot more of

671
01:00:11.080 --> 01:00:15.040
it, and that's the result of increasing the shortage, which begins to develop by about

672
01:00:15.040 --> 01:00:22.240
the early 70s, and so it gets bigger and bigger, of course, and as natural gas gets, the shortage

673
01:00:22.240 --> 01:00:27.240
When the shortage gets worse and worse, people stop looking for it. The price is too cheap. There's no reason to look for more natural gas.

674
01:00:27.240 --> 01:00:31.240
The supply starts going down, which makes the shortage even worse.

675
01:00:31.240 --> 01:00:37.240
So, what finally begins to happen on the natural gas front, about the same time as the oil crisis,

676
01:00:37.240 --> 01:00:43.240
once again, the authorities understand the incentive effect. They don't understand the rationing effect.

677
01:00:43.240 --> 01:00:49.240
They start an incredible, crazy quill of natural gas regulation, much of which still exists now, by the way.

678
01:00:49.240 --> 01:00:53.040
it's a little bit better but they say okay we want more we realize that the

679
01:00:53.040 --> 01:00:56.960
supply of natural gas is falling off so what we'll do is we'll allow a higher

680
01:00:56.960 --> 01:01:01.560
price more or less a free market price let's see it's up here for new oil but

681
01:01:01.560 --> 01:01:05.760
old oil has to come in at the cheap price the old the level of old price in 1954

682
01:01:05.760 --> 01:01:10.640
so they set up a whole insane system of price regulation where we're usually of

683
01:01:10.640 --> 01:01:14.840
course new gas and old gas are the same the same gas it's the same you have the

684
01:01:14.840 --> 01:01:29.840
I have a whole patchwork of controls for the new gas, whatever it is, per cubic foot, and old gas is much cheaper, etc. You have a whole structure, an insane price structure imposed by the government.

685
01:01:29.840 --> 01:01:35.840
Well, what happens, of course, is you have an old gas well. What are you going to do? You're not going to keep producing an old gas well at half the price you can get for a new gas.

686
01:02:05.840 --> 01:02:12.840
In Texas, within Texas and Oklahoma, which are the major natural gas producers, they have a free market price for natural gas, whereas in New York or Michigan or something, they have a free market price for natural gas.

687
01:02:35.840 --> 01:02:45.840
They still have the old control price, like so, and so, as a result, the price of natural gas in Texas is like three times the amount as it was in Michigan.

688
01:02:45.840 --> 01:02:52.840
Usually, of course, the price of Michigan is higher because it costs some money to ship the gas from Texas to Michigan.

689
01:02:52.840 --> 01:03:02.080
So, usually, the price of natural gas in Michigan, say, price of natural gas, Michigan, equals

690
01:03:02.080 --> 01:03:17.400
the price of natural gas in Texas, plus the cost of shipping natural gas from Texas to

691
01:03:17.400 --> 01:03:18.400
Michigan.

692
01:03:18.400 --> 01:03:22.440
So, usually the price in Michigan is higher than the price in Texas, okay?

693
01:03:22.440 --> 01:03:27.800
And because of this crazy situation of the price control interstate, but not intrastate,

694
01:03:27.800 --> 01:03:31.880
you wind up with three times, something like a dollar per cubic foot or whatever, I guess

695
01:03:31.880 --> 01:03:35.760
30 cents, three times the amount in Texas. As a result, Texas had plenty of natural gas

696
01:03:35.760 --> 01:03:41.480
and Michigan had not. Who in here, a Texas natural gas producer, are you going to sell

697
01:03:41.480 --> 01:03:46.080
to other people in Texas for three times the amount or sell it to somebody in Michigan

698
01:03:46.080 --> 01:03:49.480
for one-third of the amount? Obviously, the answer is obvious. As a result, there was

699
01:03:49.480 --> 01:03:53.480
There's never any natural gas shortage in Texas or Oklahoma, but there's lots of shortages outside.

700
01:03:53.480 --> 01:03:55.480
It's a little nutty situation.

701
01:03:55.480 --> 01:04:01.480
So the Carter administration tried to cure that by saying that old gas, new gas didn't work,

702
01:04:01.480 --> 01:04:05.480
and slapping on controls in Texas, which didn't help much either.

703
01:04:05.480 --> 01:04:11.480
It simply created a shortage in Texas, didn't relieve the shortage in Michigan or New York or whatever.

704
01:04:11.480 --> 01:04:17.480
So anyway, natural gas is still a problem. It's been alleviated somewhat.

705
01:04:17.480 --> 01:04:21.640
In the Carter package, in addition to other nutty things that are going into the next

706
01:04:21.640 --> 01:04:30.040
time, he said, okay, we will eliminate all price controls and allocation controls, all

707
01:04:30.040 --> 01:04:37.360
these federal controls on crude oil and on gasoline and on heating oil, as of September

708
01:04:37.360 --> 01:04:38.360
1981.

709
01:04:38.360 --> 01:04:43.920
I think this passed in 1979, or 80, this was the Carter energy package.

710
01:04:43.920 --> 01:04:51.160
So, in other words, he said, okay, in September 1981, we will eliminate these controls, phase-out.

711
01:04:51.160 --> 01:04:55.520
Natural gas, he didn't do anything about, and when Reagan came in, the first thing that

712
01:04:55.520 --> 01:04:59.840
Reagan did, the first week in office, it was Reagan's free market week, and the first thing

713
01:04:59.840 --> 01:05:05.720
he did was eliminate oil price controls and allocations as of January, as soon as he came

714
01:05:05.720 --> 01:05:06.720
in.

715
01:05:06.720 --> 01:05:10.120
So, what he did was he simply advanced the date from September to January.

716
01:05:10.120 --> 01:05:16.120
He didn't deregulate any more than Carter would have, except that Carter would have taken nine more months or whatever it is.

717
01:05:16.120 --> 01:05:25.120
At any rate, so he immediately eliminated oil price controls and allocation controls, rationing controls on oil, petroleum products and petroleum.

718
01:05:25.120 --> 01:05:29.120
And the result was, you're keeping it below the free market price.

719
01:05:29.120 --> 01:05:35.120
The result was, which could have been predicted by the fact that I did predict it in economics, you know, 251,

720
01:05:35.120 --> 01:05:39.600
But you're keeping it below the market price, initially there's an increase in price for

721
01:05:39.600 --> 01:05:44.040
about a week or two weeks, then bingo, because you now have a free market, there's no problem

722
01:05:44.040 --> 01:05:48.160
about shortages, immediately people start finding more and more oil, producing more

723
01:05:48.160 --> 01:05:51.640
and more oil, and the result was a decline in price, which continues to this day, matter

724
01:05:51.640 --> 01:05:55.200
of fact it was the beginning of the great price decline, started immediately after the

725
01:05:55.200 --> 01:05:56.920
elimination of the price control.

726
01:05:56.920 --> 01:06:01.400
So here, most people are predicting, hey, it's going to be terrible, oil prices will

727
01:06:01.400 --> 01:06:08.440
will double, will triple, from $30 a barrel except in whatever the consequences in gasoline

728
01:06:08.440 --> 01:06:09.440
and fuel are.

729
01:06:09.440 --> 01:06:10.440
Just the opposite happens.

730
01:06:10.440 --> 01:06:11.440
This is the beginning of the great turn down.

731
01:06:11.440 --> 01:06:16.080
As soon as Reagan eliminated the price controls on oil and gasoline and the rest of it, the

732
01:06:16.080 --> 01:06:19.080
price started going down, both in gasoline and in crude oil.

733
01:06:19.080 --> 01:06:23.600
So it was $30 a barrel at that point, it's now down, it's magnificent now by the way,

734
01:06:23.600 --> 01:06:28.360
it's now down about $15, I think, and dropping continually.

735
01:06:28.360 --> 01:06:32.400
So this is the beginning of the breaking of the OPEC cartel, the elimination of the price

736
01:06:32.400 --> 01:06:35.400
control.

737
01:06:35.400 --> 01:06:40.120
The rise in price was very short and as soon as the free market, they realized the free

738
01:06:40.120 --> 01:06:43.920
market was developing, oil started pouring in from everywhere.

739
01:06:43.920 --> 01:06:47.680
Another thing that happened to OPEC was that as a result of the OPEC driving the price

740
01:06:47.680 --> 01:06:51.120
up to $30 a barrel, other countries began to look for oil, not just OPEC countries.

741
01:06:51.120 --> 01:06:53.960
So you have a big shift in proportion.

742
01:06:53.960 --> 01:06:57.800
One of the reasons why the OPEC cartel has now collapsed is most oil is now being produced

743
01:06:57.800 --> 01:07:02.440
by non-OPEC countries, Great Britain, the North Sea oil thing, Mexico, various countries

744
01:07:02.440 --> 01:07:07.520
that are outside the cartel, because therefore it didn't restrict their production. In other

745
01:07:07.520 --> 01:07:11.320
words, Saudi Arabia and the other OPEC countries are constantly keeping, restricting production

746
01:07:11.320 --> 01:07:14.520
so they can keep the price up. These other countries are not far off, they don't care,

747
01:07:14.520 --> 01:07:17.360
they're taking advantage, they're busting the cartel, they're cartel busters that come

748
01:07:17.360 --> 01:07:19.920
in and they lower the, they don't have to limit their production, they just lower the

749
01:07:19.920 --> 01:07:26.440
price. And the result of that is the smashing of an OPEC cartel at long last, and a friend

750
01:07:26.440 --> 01:07:56.440
And by the way, the same people who have been belly-aching for 10 years or more, that the OPEC was holding us all by the throat, creating inflation and all that, these same people are now belly-aching as their terrible thing, price of oil is falling, and it can't be a terrible thing to rise and also to fall. There's something very odd about this. Actually, we should all welcome price falls at all times. It should be if it goes down to zero, it's even better.

751
01:07:56.440 --> 01:07:58.440
Thank you for watching!