Energy prices have gone through boom and bust cycles in the past, and there is a real possibility that current prices could decline as they did in the 1980s, which fueled rapid economic expansion. Even though presidents have little control over energy prices, many voters blame the president for high prices and credit the president for low prices. Another round of energy price reductions would provide economic benefits to consumers. Many voters will give the sitting president’s policy preferences and party credit for the good times, as commentators continue to do with President Ronald Reagan. In fact, however, crediting Reagan with falling energy prices of the 1980s exaggerates the roles of both Reagan and deregulation and obscures the larger influence of conservation and increased production outside the US.
Energy prices fluctuate for many reasons, but sustained high prices motivate energy producers to invest in discovery and development of more energy resources, which is unpredictable and can take years to deliver to market. Consumers can respond more rapidly and reduce demand by changing behavior and adopting more efficient technologies. By the time producers bring more supply to the market, the diminished demand can allow prices to drop substantially. This played out in the 1970s and 1980s.There are signs suggesting the world may be at the end of an energy price spike and heading into a bust that could be like the 1980s. While many forecasters are expecting little change in oil prices, Julian Jessop, chief global economist at Capital Economics, predicts oil prices will decline about 20 percent over the next year and another 5 percent in 2014.
During Reagan’s presidency international oil prices declined from $101 to $30 per barrel (in 2012 dollars). Gasoline prices fell from $3.60 to $1.60 per gallon. Ben Bernanke and other economists have noted that imported oil prices are analogous to a tax. Higher prices put a drag on the US economy; lower prices are similar to a tax cut. The combination of lower energy prices and increased energy efficiency in the 1980s reduced US expenditures on energy by nearly 6 percent of GDP (more than twice the amount that Reagan’s income tax cut had reduced federal revenues):
Reagan and some of his admirers argued that oil prices fell largely due to the president’s deregulation of domestically produced oil. Writing in Forbes in 2011, Peter Ferrara claimed that after oil price deregulation, “Production soared, and aided by a strong dollar the price of oil declined by more than 50 percent.” But the actual increase in US oil production was too small (360,000 barrels per day, about one half of one percent of world supply) and too short-lived to have significant or sustained impact on oil prices. According to the data of the US Energy Information Administration, after deregulation, US oil production increased only in 1984-85, after oil prices had already declined 35 percent (adjusted for inflation) during the previous 3 years. Furthermore, it was President Jimmy Carter who in 1979 announced that oil price controls would end in October 1981. Reagan merely ended them eight months earlier than Carter’s plan specified.
President Richard Nixon originated price controls on domestically produced oil to keep prices low for the benefit of consumers. Presidents Carter and Reagan both considered the controls to be a disincentive to production, even though US oil production had increased by a half million barrels per day during 1977-78, mostly due to the opening of the Alaska oil pipeline in 1977. In 1979, Carter initiated a 28 month process to gradually eliminate oil price controls, but he also proposed and Congress passed a windfall profits tax on oil producers. In January 1981, Reagan ended only the oil price controls. In early 1982, Reagan claimed “decontrol… gave us more supply, more conservation, and lower prices.” But US oil production in 1981 and 1982 was slightly less than in 1980.
In a 1986 weekly radio address celebrating the low prices of oil and gasoline, Reagan again emphasized the importance of price deregulation for unleashing oil “gushers”. He did not explicitly mention conservation, but in reality world oil prices declined during the first three years of Reagan’s term largely because of reduced demand — world consumption declined 15 percent (9 million barrels per day) between 1979 and 1983. In the US, oil consumption declined 20 percent (3.6 million barrels per day) between 1978 and 1983 due to a variety of factors, including economic recession, restructuring of industry, improved home insulation, and more fuel efficient cars. Electrical utilities dramatically reduced oil use in favor of coal and natural gas. In addition to reduced demand, Mexico and Europe increased oil production by 2 million barrels per day which diminished the market share of higher priced Organization of Petroleum Exporting Countries (OPEC) oil.
After 1983, oil consumption and production increased at a slower pace than during previous decades because of improvements in energy efficiency. Even as the price of gasoline declined, the average fuel efficiency of cars in the US increased from 16 to 19 miles per gallon between 1980 and 1990. US oil consumption did not exceed its 1978 peak until 1998 and has recently declined to similar levels.
During Reagan’s time in office, expenditures on imported oil declined by over $60 billion per year in 2012 dollars, which significantly reduced the widening trade deficit. By 1986 expenditures on all forms of energy declined $240 billion per year — $1000 per person– which created about twice as much opportunity for savings, investment and economic development as Reagan’s tax cuts. Energy price deflation was also a factor in moderating overall inflation by reducing costs for production and transport of goods, as well as reducing inflation expectations. These economic benefits were largely due to conservation and energy efficiency, measures that President Carter advocated, in addition to increased oil production abroad. The US deregulation of oil prices played a minor role, and would have occurred regardless of who won the 1980 election.
Reagan’s other major policy initiative, tax cuts, likely stimulated some economic growth. Although the reduction in energy expenditures was much larger than the reduction in taxes, the complexity of the economy makes it impossible to precisely quantify the roles of these different factors. Bruce Bartlett and others have noted that there was favorable economic growth during the 1990s even though taxes increased. President George W. Bush’s tax cuts reduced federal revenues more than Reagan’s but the economic results were far less favorable than either in the 1980s or 1990s. Meanwhile, energy expenditures were relatively low and stable for most of the 1990s, and started to increase substantially in the 2000s. Energy is only one of several important factors influencing economic growth, and fluctuations in energy expenditures as large or larger than variations in tax revenues deserve at least as much attention as taxes in attempts to account for economic growth and contraction.
Falling energy prices and more efficient energy use in the US provided substantial economic benefits during the 1980s. Whoever wins the White House in November 2012 could enjoy a similar benefit as well as the incentive to take credit for it.