Oil and August 15th: An unintended consequence of the three days at Camp David: the complete reconstruction of the global petroleum system.

• Author: Verleger, Philip K.

Jeffrey Garten's new book, Three Days at Camp David: How a Secret Meeting in 1971 Transformed the Global Economy, focuses on international finance. However, his insights about what was discussed and decided by President Richard Nixon and his advisers at that meeting also provide a clear explanation of what happened with oil in 1971, developments that eight years later would cause the 1979 Tokyo economic summit to limit its discussion almost entirely to that subject.

The key events for oil in the United States that followed President Nixon's August 15, 1971, speech to the nation were the ninety-day wage and price freeze and, as explained by Garten, Nixon's efforts to win the cooperation of the Democrats in Congress.

The 1971 wage and price freeze (phase I) was followed by three additional phases. In June 1973, Nixon instituted a second freeze, this one for sixty days. Then came a two-tiered system of price controls. The terms "old oil," oil from wells producing before 1973, and "new oil," oil from wells that had just begun to produce, entered the lexicon.

Old oil prices were frozen at about $3 per barrel and would remain near that level until 1981 even as world prices rose to more than $30. The architects of the price control program included an incentive to boost production, allowing any incremental output from old oil wells above 1973 levels to receive a higher price. Those writing the regulations, though, failed to recognize the laws of physics and geology, which cause output to decline over time. Thus, the perceived economic incentive was absent.

Garten's comment regarding President Nixon's desire to bring the Democrats with him in the program offers a hidden insight into the longer consequence of the crude oil and other petroleum regulations: the Democrats were waiting for an opportunity to get oil. The Democrat-majority Congress elected in 1974 was determined to punish the oil industry for decades of perceived harm. Following the October 1973 oil price increase noted by Garten, the Democrats passed legislation to extend limits on oil price increases, constrained the ability of refiners and other processors to raise margins, and prevented firms from changing historical contractual relationships. The legislative actions were justified as being necessary to dampen price rises to consumers and prevent large firms, principally the multinational oil companies, from using their market power to destroy smaller competitors.

No doubt some...