Markets vs.'Crises': How energy problems get solved-or worsened.(the US seems on the verge of another energy crisis)

'Happy families are all alike," wrote Tolstoy at the beginning of Anna Karenina. "Every unhappy family is unhappy in its own way." The same could be said for markets. Every working market is happy in that it functions smoothly, efficiently, and without conscious effort. It is only when people become unhappy with the market and try to manipulate it through conscious control that everything goes awry. The name for one of these malfunctions is an "energy crisis."

For the second time in 30 years we are going through what appears to be an energy crisis. This one hasn't reached the proportions of the one Richard Nixon, Gerald Ford, and Jimmy Carter presided over-yet. But all the elements are there. Suddenly, every politician and his brother have a better idea of how the market should work; there are calls for price controls-just temporary, of course, but enough to get us through the current emergency, in which "a true market no longer exists."

But the market does, in fact, exist; and it must be understood. A market is what spontaneous-order theorists call a "complex adaptive system." It has a basic integrity and stability, but is also highly sensitive to external change. If a fungal disease strikes the coffee crop in Brazil, Starbucks customers in Seattle will know it within a few weeks.

The market takes both past and future into account. For decades, conservationists like Teddy Roosevelt argued that markets couldn't handle the problem of future consumption; they warned that we would eventually "run out of resources." But, as Julian Simon so boldly predicted in his 1981 book The Ultimate Resource, we will never run out of resources. Key commodities actually get cheaper as substitutions occur and we learn to use them more efficiently. (In his famous wager with doomsayer Paul Ehrlich, Simon won some money by betting that key commodity prices would fall over ten years.) To know how to adjust to shifting resource patterns, all we need do is follow the signals of the market: If the price of oil goes up, consumers will conserve, and wildcatters will hunt new supplies. The obscure inventor of a carburetor that burns less gasoline will find the world beating a path to his door.

There's only one problem: The public doesn't always accept these signals as legitimate. To the average Joe, the only real energy crisis is when energy is no longer "affordable." To him, rising prices are not the signal of a shift in the resources base but an indication that the energy companies are seeking "excess profits" by "gouging consumers." If there's oil to be drilled or solar collectors to be installed, that's somebody else's business; the only task Joe cares about is getting energy prices back down to where they were last year. And at this point there is always some politician-almost inevitably a Democrat-willing to support Joe's instincts. Markets are wrong, he will say. They are cruel, stupid, unfair, and manipulated by the producers; politicians can do a much better job. It is at this point that an energy transformation turns into an energy crisis.

This is what happened in the 1970s. In 1968 (in response to environmentalists' demands for low-sulfur Indonesian oil to replace coal in West Coast power plants), we started lifting the longstanding oil-import quotas that held foreign supplies at 12 percent. Imports quickly rose to 30 percent. Sensing their new market leverage, the Arabs imposed a five-month oil boycott in retaliation for Western support of Israel in the Arab-Israeli war of 1973. The OPEC nations, feeling their muscle for the first time, quadrupled oil prices. For the first time in history, the oil-producing nations-the owners of the resources-were exercising market power. The response in the West was what one would expect: a diligent new effort to look for energy resources, plus a crash program of energy conservation.

The fly in the ointment was President Nixon's wage-and-price controls, left over from 1971. Most had been phased out by 1973. Spurred by public outcry against the oil companies, however, Congress, with the consent of President Ford, in 1975 extended the price controls on oil. This was hugely counterproductive: It discouraged domestic production and encouraged consumption. The result was a widening gap between demand and supply. We filled the gap by importing more oil. From 1976 to 1979-despite all of Jimmy Carter's bluster about the "moral equivalent of war"-our imports climbed from 33 percent to nearly 50 percent. By 1979, we had stretched world supplies so tight that when the shah fell, the loss of Iran's 3 million barrels a day set off another "oil shortage." In his second week in office, President Reagan abolished oil price controls, and this "energy crisis" magically disappeared.