Conservation played a key role in reducing demand for oil in the early 1980s. With improved technology, primarily 3D seismic and diagonal drilling, both the cost of exploration and development dropped and the response time to bring on new fields declined. The combined efforts of conservation and improvements in technology offset the efforts of OPEC to control oil markets. Conservation efforts largely ended with the drop in the price of oil in the mid-1980s. Since that time conservation has become a lower priority, witness the decrease in the average mpg of new vehicles.

Exploration and development costs dropped from about $10 a barrel in the mid-1980s to less than $5 a barrel by the late-1990s. In addition, both the short-term and long-term response to prices changes were shortened considerably. Short term supplies from existing fields could now be increased within three months and new fields or expansion of existing fields were possible within a year.

Why then hasn't the supply of oil increased? Although the potential for cheating by OPEC countries has been reduced as production quota have increased, the major independent oil companies have failed to respond to higher prices by increasing investment and increasing oil output. Why?

With the consolidation of the oil industry the economics of competition has changed. In the past, when OPEC tried to force up the price of oil, the majors quickly responded by increasing supply. Before consolidation, when oil prices increased the oil company would realize additional profits by increasing output. While the price of oil would drop with this increased output the loss in profits on existing supplies was more than offset by profits from the additional output. That is: the company would gain by increasing output, as profits realized on expanding oil production was greater than the loss of profits on existing oil production. If a company didn't respond by expanding production they risked loosing market share to competitors.

With consolidation, it is now in the interest of the major oil companies to cooperate with OPEC. The profits realized, as oil prices increase, on the greater amount of oil produced with a combined Exxon-Mobil is now greater than any increase in profits that would be realized from adding production. They also have less reason to worry about loosing market share to competitors. In this new environment, it is now in the combined oil company's interest to cooperate with OPEC than compete.

We may be seeing a similar phenomenon in the electrical power generation industry. With deregulation, electricity utilities have been forced to sell their generation capacity. There has been considerable consolidation in the generation end of the business. It now may make more economic sense for these companies to cooperate in controlling the supply of electricity, thereby driving up prices, than in competing by increasing output by better managed maintenance schedules and expanding output.

The Administration's argument that power price caps at several times the cost of providing such power would discourage new investment is inconsistent with basic economic principles. Deregulation and the slow response to approval of new generation facilities have contributed to current problems but do not appear to explain events in the supply of power.

The Administration should develop an energy strategy that includes the potential for conservation and development and implementation of new technology as well as exploring the potential for expanding traditional supplies of energy.