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BRIEFING ON OPERATION INDEPENDENCE

HEARING
BEFORE

THE

SUBCOMMITTEE ON INTERNATIONAL TRADE,
INVESTMENT AND MONETARY POLICY
OF

THE

COMMITTEE ON
BANKING, CURRENCY AND HOUSING
HOUSE OE REPRESENTATIVES
NINETY-FOURTH

CONGRESS

F I R S T SESSION

M A R C H 12, 1975

Printed for the use of the
Committee on Banking, Currency and Housing

U.S. G O V E R N M E N T P R I N T I N G
50-290




WASHINGTON

: 1975

OFFICE

C O M M I T T E E

O N

B A N K I N G ,

C U R R E N C Y

H E N R Y S. R E U S S , Wisconsin,
W R I G H T P A T M A N , Texas
W I L L I A M A . B A R R E T T , Pennsylvania
L E O N O R K . ( M R S . J O H N B.)
S U L L I V A N , Missouri
T H O M A S L . A S H L E Y , Ohio
W I L L I A M S. M O O R H E A D , Pennsylvania
R O B E R T G. S T E P H E N S , JR., Georgia
F E R N A N D J. S T G E R M A I N , Rhode Island
H E N R Y B . G O N Z A L E Z , Texas
J O S E P H G. M I N I S H , N e w Jersey
F R A N K A N N U N Z I O , Illinois
T H O M A S M . R E E S , California
J A M E S M. H A N L E Y , New York
P A R R E N J. M I T C H E L L , Maryland
W A L T E R E. FAUNTROY",

A N D

H O U S I N G

Chairman

A L B E R T W. J O H N S O N , Pennsylvania
J. W I L L I A M S T A N T O N , Ohio
G A R R Y B R O W N , Michigan
C H A L M E R S P. W Y L I E , Ohio
J O H N H . R O U S S E L O T , California
S T E W A R T B. M c K I N N E Y , Connecticut
J O H N B. C O N L A N , Arizona
G E O R G E H A N S E N , Idaho
R I C H A R D T . S C H U L Z E , Pennsylvania
W I L L I S D . G R A D I S O N , JR., Ohio
H E N R Y J. H Y D E , Illinois
R I C H A R D K E L L Y , Florida
C H A R L E S E . G R A S S L E Y , Iowa
M I L L I C E N T F E N W I C K , N e w Jersey

District of Columbia
L I N D Y ( M R S . H A L E ) B O G G S , Louisiana
S T E P H E N L . N E A L , North Carolina
J E R R Y M . P A T T E R S O N , California
J A M E S J. B L A N C H A R D , Michigan
H A R O L D E . F O R D , Tennessee
C A R R O L L H U B B A R D , JR., Kentucky
J O H N J. L A F A L C E , N e w Y o r k
G L A D Y S N O O N S P E L L M A N , Maryland
L E S A U C O I N , Oregon
P A U L E . T S O N G A S , Massachusetts
B U T L E R D E R R I C K , South Carolina
P H I L I P H . H A Y E S , Indiana
M A R K W. I I A N N A F O R D , California
D A V I D W. E V A N S , Indiana
PAUL NELSON, Clerk and Staff Director
WILLIAM P. DIXON, General Counsel
MICHAEL P . F L A H E R T Y ,

Counesl

ORMAN S. FINK, Minority Staff Director
GRAHAM T . NORTHUP, Deputy Minority Staff Director

S U B C O M M I T T E E ON I N T E R N A T I O N A L T R A D E , I N V E S T M E N T A N D M O N E T A R Y
T H O M A S M . R E E S , California,
S T E P H E N L . N E A L , N o r t h Carolina
P H I L I P H . H A Y E S , Indiana
M A R K W. H A N N A F O R D , California
J A M E S J. B L A N C H A R D , Michigan
L E S A u C O I N , Oregon
P A U L E . T S O N G A S , Massachusetts
W I L L I A M S. M O O R H E A D , Pennsylvania
F E R N A N D J. S T G E R M A I N , Rhode Island
C A R R O L L H U B B A R D , JR., Kentucky
J O H N J. L A F A L C E , N e w York
T H O M A S L . A S H L E Y , Ohio
B U T L E R D E R R I C K , South Carolina




Chairman

J. W I L L I A M S T A N T O N , Ohio
G A R R Y B R O W N , Michigan
J O H N B . C O N L A N , Arizona
H E N R Y J. H Y D E , Illinois
R I C H A R D K E L L Y , Florida
M I L L I C E N T F E N W I C K , N e w Jersey

Ul >

POLICY

C O N T E N T S

STATEMENTS

Pasternack, Bruce A., A c t i n g D e p u t y Assistant A d m i n i s t r a t o r for Policy,
Federal Energy A d m i n i s t r a t i o n , accompanied b y D r . W i l l i a m Hogan,
Director, Office of Q u a n t i t a t i v e Methods, and Peter Borrel, Policy and
Analysis
ADDITIONAL

INFORMATION

SUBMITTED

FOR

THE




2

RECORD

Pasternack, Bruce A . :
Prepared statement
Response to request of Chairman Thomas M . Rees, regarding new
projections i n terms of domestic energy supply
(in)

page

7
29

BRIEFING

ON

OPERATION

INDEPENDENCE

W E D N E S D A Y , M A R C H 12, 1975
H O U S E OF R E P R E S E N T A T I V E S ,
S U B C O M M I T T E E ON I N T E R N A T I O N A L T R A D E ,
INVESTMENT AND M O N E T A R Y POLICY,
OF T H E C O M M I T T E E O N B A N K I N G , C U R R E N C Y A N D H O U S I N G ,

Washington,

D.C.

T h e s u b c o m m i t t e e m e t a t 2:10 p.m., p u r s u a n t to notice, i n r o o m
2222, R a y b u r n H o u s e Office B u i l d i n g , H o n . T h o m a s M . Rees [chairm a n of t h e s u b c o m m i t t e e ] presiding.
P r e s e n t : R e p r e s e n t a t i v e s Rees, N e a l , H a n n a f o r d ,
Blanchard,
Tsongas, H u b b a r d , LaFalce, Stanton, B r o w n , Conlan, H y d e , and
Fenwick.
Also present: B e n Crain, D a v i d Weil, J i m Sivon, and M i c h a e l
Rattigan.
M r . REES. T h e p u r p o s e o f t h i s m e e t i n g is j u s t t o h a v e a n i n f o r m a l
briefing b y the Federal Energy Administration.
L a s t year we h a d an ad hoc committee on the Domestic and I n t e r n a t i o n a l M o n e t a r y e f f e c t s o f e n e r g y a n d o t h e r n a t u r a l resources. T h e
f u l l r e p o r t is t h i s r e p o r t t h a t is b e f o r e y o u . I h a v e b e e n s e n d i n g y o u
v o l u m e s i n d i v i d u a l l y . W e n o w h a v e t h e m i n one f u l l r e p o r t . P a r t s I
a n d I I deal specifically w i t h petroleum, h o w we got i n t o the situation,
a n d w e also m a k e s o m e d o w n t h e l i n e p r o j e c t i o n s o n t h e use of f u e l ,
n e w fuels c o m i n g i n , w h a t t h e u p p e r or l o w e r b o u n d price m i g h t be.
W e t h e n w e n t i n t o o t h e r areas o f t h e i m p a c t o f o i l p r i c i n g i n t h e
i n t e r n a t i o n a l field a n d t h e e f f e c t o n t h e I n t e r n a t i o n a l M o n e t a r y F u n d
a n d t h e v a r i o u s p r o p o s a l s t o r e c y c l e p e t r o d o l l a r s . W e also d i d a r e p o r t
o n t h e e f f e c t of lesser d e v e l o p e d c o u n t r i e s , a n d w e h a d a r e p o r t o n t h e
effect of o i l p r i c i n g i n our o w n e c o n o m y a n d h o w i t affected v a r i o u s
i n c o m e classes.
A n d t h e n the last r e p o r t , or the last t w o reports, one dealt w i t h
the O u t e r C o n t i n e n t a l Shelf leasing proposals of the D e p a r t m e n t of
t h e I n t e r i o r . T h e y are n o t i n here, b u t i f y o u w a n t t h e m , t h e y are
a v a i l a b l e i n m y office.
A n d t h e l a s t r e p o r t d e a l t w i t h o t h e r n a t u r a l resources where w e
t r i e d t o p r o j e c t t h e p o s s i b i l i t y or p r o b a b i l i t y of h a v i n g c a r t e l i z a t i o n
i n o t h e r n a t u r a l r e s o u r c e s , s u c h as b a u x i t e , steel, w h a t e v e r y o u m i g h t
have.
T h e l a s t r e p o r t h e l p e d l e a d t o t h e c r e a t i o n of t h e n e w P r e s i d e n t i a l
C o m m i s s i o n o n Supplies a n d Shortages, w h i c h Representative J .
W i l l i a m S t a n t o n a n d I serve on, a n d w e h o p e one of these days t h e y
w i l l h a v e a m e e t i n g w h e r e w e are g o i n g t o t r y t o l o o k d o w n t h e l i n e
a t w h a t is g o i n g t o h a p p e n i n t e r m s of o u r d e p e n d a b i l i t y o n i m p o r t e d
resources.




(1)

2
T h e p u r p o s e of t h e m e e t i n g t o d a y , t h o u g h is n o t t o go so m u c h i n t o
t h e a d h o c c o m m i t t e e r e p o r t , b u t t o g e t a b r o a d b r i e f i n g of O p e r a t i o n
I n d e p e n d e n c e , a n d a b r i e f i n g i n t e r m s of e n e r g y c o n s e r v a t i o n .
O u r j u r i s d i c t i o n fits p a r t of t h i s because w e are c o n c e r n e d w i t h
b a l a n c e of p a y m e n t s , a n d w e are c o n c e r n e d o n d e v e l o p i n g d o m e s t i c
e n e r g y a n d lessening o u r r e l i a n c e o n i m p o r t e d p e t r o l e u m . O u r b i l l o n
i m p o r t e d p e t r o l e u m w e n t o u t f r o m $8 b i l l i o n t o a b o u t $26 b i l l i o n .
M r . PASTERNACK. $25 b i l l i o n ,

M r . REES. So t h a t is a h o r r e n d o u s increase.
So w e are g o i n g t o h a v e t o c u t d o w n , because w e h a d excessive f a r m
exports last year, and we m i g h t n o t have t h e m this y e a r ; a n d t h a t
is w h a t has h e l p e d us i n o u r b a l a n c e - o f - p a y m e n t s d e f i c i t . W e d i d h a v e
a b a l a n c e - o f - p a y m e n t s d e f i c i t , b u t i t w a s n o t as s u b s t a n t i a l as a l o t
of us t h o u g h t .
So I w o u l d l i k e t o i n t r o d u c e B r u c e A . P a s t e r n a c k , w h o is t h e A c t i n g
D e p u t y Assistant Administrator for Policy.

STATEMENT OF BRUCE A. PASTERNACK, ACTING DEPUTY ASSISTANT ADMINISTRATOR FOR POLICY, FEDERAL ENERGY ADMINISTRATION; ACCOMPANIED BY DR. WILLIAM HOGAN, DIRECTOR,
OFFICE OF QUANTITATIVE METHODS, AND PETER BORREL,
POLICY AND ANALYSIS
M r . PASTERNACK, T h a n k y o u , M r . C h a i r m a n .
W i t h y o u r permission, I w o u l d like to s u b m i t m y statement for the
record a n d t h e n b r i e f l y summarize i t , a n d perhaps spend some t i m e ,
w h i c h I h a d n o t planned to, on Project Independence and h o w t h a t
l e d 113 t o where! w e are t o d a y a n d h o w w e r e a c h e d o u r e n e r g y p o l i c y
decisions.
M r . REES. A n d w i l l y o u be d e a l i n g w i t h a l t e r n a t e sources?
Mr.

PASTERNACK.

Yes.

M r . REES. A n d I a m e s p e c i a l l y c o n c e r n e d w i t h t h e p r o b l e m of
c a p i t a l i n t e n s i v e d e v e l o p m e n t , shale a n d c o a l g a s i f i c a t i o n .
M r . GONLAN. W h o c a m e u p w i t h these q u e s t i o n s ?
M r . STANTON. I

did.

M r . CONLAN. T h e s e are d a r n g o o d q u e s t i o n s . I w o u l d r a t h e r g e t
i n t o these t h i n g s r a t h e r t h a n g e t t i n g o f f i n t o shale a n d o i l a n d gas i n
the W e s t e r n States.
M r . REES, W e l l , I w a n t e d t o g e t i n t o t h a t t o o .
W e l l , l e t us s t a r t o f f f o r a b o u t 10 o r 15 m i n u t e s a n d t h e n w e c a n
get i n t o questions.
M r . PASTERNACK. 1 a p p r e c i a t e t h e o p p o r t u n i t y t o a p p e a r h e r e
t o d a y , a n d h a v e w i t h m e D r . W i l l i a m H o g a n , w h o is t h e D i r e c t o r o f
o u r O f f i c e of Q u a n t i t a t i v e M e t h o d s a n d is r e s p o n s i b l e f o r d e v e l o p i n g
o u r l o n g - r a n g e a n d s h o r t - r a n g e f o r e c a s t s a n d m o s t of o u r e n e r g y
m o d e l s . A n d , as m o s t of y o u k n o w , o v e r t h e l a s t 15 o r 2 0 y e a r s o u r
p r o b l e m has g r o w n because e n e r g y d e m a n d has b e e n r i s i n g a t 4 a n d
5 p e r c e n t a y e a r . W e h a v e seen o i l p r o d u c t i o n d e c l i n i n g . I t p e a k e d i n
1970. C o a l p r o d u c t i o n h a s n e v e r a g a i n r e a c h e d t h e l e v e l t h a t i t w a s a t
i n t h e 1920's. A n d n u c l e a r p o w e r , w h i c h , b a c k i n t h e 1950's, e v e r y b o d y
t h o u g h t w o u l d be t h e a n s w e r a t t h i s t i m e , has j u s t r e c e n t l y s u r p a s s e d
firewood
as a source of e n e r g y a n d is n o w o n l y a b o u t 1 p e r c e n t of o u r
t o t a l energy.




3
I m p o r t s g r e w f r o m zero i n t h e 1950's t o a b o u t 2 m i l l i o n b a r r e l s a
d a y i n t h e 1960's t o w h e r e i t is n o w , 6 t o 7 m i l l i o n b a r r e l s a d a y ,
d e p e n d i n g o n t h e t i m e of y e a r . A n d t h e p r o b l e m as w e s a w i t , as w e
finished our P r o j e c t Independence s t u d y , was t h a t i n the near t e r m
w e h a d v e r y l i t t l e choice w i t h r e s p e c t t o d o m e s t i c s u p p l y because
almost all the actions we were t a k i n g were n e w actions w h i c h w o u l d
i n v o l v e a s u b s t a n t i a l l e a d t i m e , e i t h e r because of i n s t i t u t i o n a l reasons,
o r c o n s t r u c t i o n p r o b l e m s , or m a t e r i a l , e q u i p m e n t , o r m a n p o w e r
problems.
W e are j u s t finding t h e o i l a n d gas f o r some areas. I n f a c t , w h a t w e
w o u l d h a v e t o do i n t h e n e x t f e w y e a r s i f w e w a n t e d t o c u r b t h e g r o w t h
i n e n e r g y i m p o r t s w o u l d be t o c u t o u r d e m a n d f o r e n e r g y , t o conserve
m o r e . T h e P r e s i d e n t , i n h i s s t a t e of t h e U n i o n message, p r e s c r i b e d
t h r e e goals f o r t h i s c o u n t r y . O n e , a c u t i n o u r o i l i m p o r t s b y a m i l l i o n
b a r r e l s a d a y b y t h e e n d of 1 9 7 5 — a n d 2 m i l l i o n b a r r e l s a d a y b y t h e
e n d of 1977. Second, b y 1985 h e c a l l e d f o r a g o a l of i n v u l n e r a b i l i t y
t o i m p o r t d i s r u p t i o n s . T h a t has a l w a y s been a v e r y c o n f u s i n g t e r m ;
s o m e p e o p l e h a v e i n t e r p r e t e d i t as m e a n i n g t h a t t h e U n i t e d S t a t e s
w o u l d b e t o t a l l y s e l f - s u f f i c i e n t a n d n o t r e l y o n a n y i m p o r t s a t all.
B u t h e set o u t a g o a l of i m p o r t i n g n o m o r e t h a n 3 t o 5 m i l l i o n
b a r r e l s a d a y , w h i c h w o u l d enable us t o b a s i c a l l y b e i n v u l n e r a b l e t o a
c u t o f f . W e w o u l d h a v e a storage p r o g r a m capable of s u p p l y i n g a b o u t
3 m i l l i o n b a r r e l s a d a y i n case of a s u p p l y d i s r u p t i o n a n d w e c o u l d
h a v e s t a n d b y measures, r a t i o n i n g , a l l o c a t i o n , a n d o t h e r c o n s e r v a t i o n
measures i n t h e e v e n t of a crisis w h e r e w e c o u l d save a n o t h e r m i l l i o n
o r 2 m i l l i o n b a r r e l s a d a y f o r a s h o r t p e r i o d of t i m e .
A n d finally, he set f o r t h t h e g o a l of a c c e l e r a t i n g d e v e l o p m e n t of o u r
e n e r g y t e c h n o l o g y a n d resources so t h a t t h e U n i t e d S t a t e s c o u l d
p o s s i b l y s u p p l y a s i g n i f i c a n t share of t h e w o r l d ' s e n e r g y needs b y t h e
e n d of t h i s c e n t u r y . A n d , c e r t a i n l y , w e h a v e n o i n t e n t i o n o r , p r o b a b l y ,
a n y a b i l i t y t o d e a l w i t h t h e w o r l d ' s p e t r o l e u m needs, b u t , p e r h a p s ,
w i t h t e c h n o l o g y , t h r o u g h coal, t h r o u g h n u c l e a r p o w e r , solar e n e r g y ,
a n d some o t h e r n e w e r resources, w e m i g h t be able t o once a g a i n be i n a
p o s i t i o n t o d o m i n a t e t h e p r i c i n g of t h e w o r l d ' s e n e r g y , w h i c h w e n o
l o n g e r do.
A s I m e n t i o n e d , i n t h e n e x t couple of y e a r s t h e r e is v e r y l i t t l e w e
c a n d o t o h a v e a n y effect o n s u p p l y . T h e r e are r e a l l y o n l y t w o a c t i o n s
we can take.
O n e is t o d e v e l o p t h e N a v a l P e t r o l e u m R e s e r v e a t E l k H i l l s , w h i c h
c o u l d s u p p l y a b o u t 150,000 b a r r e l s a d a y of o i l b y t h e e n d of t h i s y e a r ,
a n d p r o b a b l y 300,000 t o 400,000 b a r r e l s a d a y w i t h i n t h e n e x t 2 y e a r s .
A n d second, w e c a n e x p a n d t h e c o n v e r s i o n f r o m o i l t o c o a l i n u t i l i ties, a n d w e c a n d o t h a t b y a m e n d i n g l e g i s l a t i o n t h a t F E A a d m i n i s ters—the Energy Supply and Environmental Coorindation A c t ;
t h a t c a n save a b o u t 100,000 b a r r e l s a d a y of o i l t h i s y e a r a n d , p r o b a b l y ,
300,000 b a r r e l s a d a y w i t h i n 3 years.
L e g i s l a t i o n f o r b o t h of these p r o p o s a l s h a s b e e n s u b m i t t e d t o t h e
C o n g r e s s b y t h e P r e s i d e n t as p a r t of t h e E n e r g y I n d e p e n d e n c e A c t .
B u t the s u p p l y actions w i l l j u s t b a r e l y compensate for the decline i n
d o m e s t i c e n e r g y p r o d u c t i o n o v e r t h e n e x t 2 years.
P r o d u c t i o n has b e e n d e c l i n i n g a t a b o u t 5 p e r c e n t a y e a r , a n d w e h a v e
d r o p p e d a b o u t 400,000 b a r r e l s a d a y i n d o m e s t i c p r o d u c t i o n o v e r t h e
last y e a r . T h a t w i l l c o n t i n u e as o l d fields c o n t i n u e t o p e a k a n d because




4
n e w e r ones w e r e n o t d e v e l o p e d i n t h e l a t e 1960's a n d e a r l y 1970's, as
O u t e r C o n t i n e n t a l Shelf l e a s i n g w a s n o t t a k i n g place i n t h o s e y e a r s .
I n t h e e n e r g y c o n s e r v a t i o n area, t h e P r e s i d e n t p r o p o s e d a n i m p o r t
fee, w h i c h a l l of u s h a v e h e a r d a b o u t a n d w h i c h is n o w i n e f f e c t a t a
d o l l a r a b a r r e l o n i m p o r t e d c r u d e o i l a n d zero o n i m p o r t e d p e t r o l e u m
p r o d u c t s . A n d t h e r e a s o n w e set i t as zero f o r i m p o r t e d p e t r o l e u m
p r o d u c t s w a s b a s i c a l l y t o c o m p e n s a t e f o r areas w h i c h are h e a v i l y
d e p e n d e n t o n i m p o r t e d r e s i d u a l o i l a n d d i s t i l l a t e o i l , s u c h as t h e N o r t h east, t h e east coast, a n d s o u t h e r n C a l i f o r n i a .
I n a d d i t i o n , t h e F E A has i n effect a c r u d e o i l a l l o c a t i o n p r o g r a m
w h i c h e f f e c t i v e l y m i n i m i z e s t h e cost differences b e t w e e n r e f i n e r s t h a t
c a n g e t r e l a t i v e l y i n e x p e n s i v e o l d o i l a n d those w i t h m o r e e x p e n s i v e
new oil.
T h e s e i m p o r t fees are t e m p o r a r y . T h e y w e r e p u t i n e f f e c t u n t i l
e n a c t m e n t of a m o r e c o m p l e t e p r o g r a m . T h e r e v e n u e s r a i s e d b y t h e
m o r e c o m p l e t e p r o g r a m are i n t e n d e d t o be r e t u r n e d t o t h e e c o n o m y
t h r o u g h t a x rebates a n d t a x reductions.
T h e basic i n t e n t of t h e p r o g r a m is t o increase t h e r e l a t i v e cost o f
p e t r o l e u m p r o d u c t s w i t h o u t r e d u c i n g disposable i n c o m e . I n a d d i t i o n ,
w e p r o p o s e d a 3 7 - c e n t p e r 1,000 c u b i c f o o t excise t a x o n n a t u r a l gas,
w h i c h is a b o u t t h e e q u i v a l e n t of a $2 a b a r r e l t a x o n o i l , a n d t h i s t a x
w a s p r o p o s e d i n o r d e r t o t r y t o e l i m i n a t e t h e c u r t a i l m e n t s of n a t u r a l
gas, w h i c h caused a g r e a t d e a l of u n e m p l o y m e n t i n t h i s y e a r , a n d also
t o p r e v e n t i n d u s t r i e s f r o m s w i t c h i n g f r o m o i l t o n a t u r a l gas as t h e
p r i c e of o i l increases.
W e h a v e also a n n o u n c e d t h e i n t e n t i o n of d e c o n t r o l l i n g t h e p r i c e o f
o l d o i l a n d e n a c t i n g a w i n d f a l l p r o f i t s t a x as soon as possible. T h e use
of i m p o r t fees, excise taxes, a n d d e c o n t r o l r e a l l y h a v e one m a j o r i n t e n t ,
a n d t h a t is t o increase e n e r g y c o n s e r v a t i o n a n d t o r e d u c e o u r d e m a n d .
B u t t h e r e are a n u m b e r of a l t e r n a t i v e s t o t h a t , a n d w e l o o k e d a t a l l
t h e a l t e r n a t i v e s as w e w e r e d o i n g o u r P r o j e c t I n d e p e n d e n c e a n a l y s i s ,
a n d a f t e r t h a t , as w e w e r e p r e p a r i n g t h e s t a t e of t h e U n i o n message
a n d t h e e n e r g y messages. T h e first a l t e r n a t i v e w a s t o d o n o t h i n g . W e
considered t h a t .
W e r e j e c t e d i t because w e f e l t t h a t n o a c t i o n o n l y p o s t p o n e s t h e
t o u g h decisions t h a t w e h a v e t o m a k e , a n d t h a t w i t h o u t s t a r t i n g o n
t h e r o a d t o e n e r g y c o n s e r v a t i o n , t h e r e w o u l d b e n o wa}^ w e c o u l d
a c h i e v e o u r l o n g e r t e r m goals of e s s e n t i a l l y b e i n g i n v u l n e r a b l e t o
e m b a r g o s a n d t o f o r e i g n c u t o f f s of o i l a n d t o h i g h e r p r i c e s of o i l r a i s e d
a r b i t r a r i l y . A n d i f w e c o n t i n u e t o increase o u r d o l l a r o u t f l o w f o r
i m p o r t e d o i l , w h i c h , as I i n d i c a t e d , w a s a b o u t $3 b i l l i o n i n 1970 a n d
$25 b i l l i o n i n 1974, i t w o u l d be o v e r $30 b i l l i o n i n 1977. A n d t o d a y
m o r e of o u r i m p o r t s are c o m i n g f r o m t h e M i d d l e E a s t a n d f r o m
A f r i c a t h a n t h e y w e r e i n 1973.
T h e Canadians have cut back on their exports to the U n i t e d States
a n d are c o n t i n u i n g t o c u t b a c k , a n d w h e r e w e u s e d t o g e t 1 m i l l i o n
b a r r e l s a d a y f r o m C a n a d a , w e w i l l be d o w n t o a b o u t 350,000 b a r r e l s a
day w i t h i n a year or two.
So unless w e d o s o m e t h i n g t o d e a l w i t h o u r i m p o r t s i t u a t i o n , o u r
i m p o r t s w i l l increase t o a b o u t 8 m i l l i o n b a r r e l s a d a y b y 1977 f r o m t h e
6% m i l l i o n t h a t t h e y n o w are, a n d w e w i l l also b e i m p o r t i n g m o r e f r o m
r e l a t i v e l y insecure sources as c o m p a r e d t o v e r y secure sources. W e
e s t i m a t e t h a t s o m e t h i n g l i k e 4 m i l l i o n b a r r e l s a d a y o u t of t h e 8




5
m i l l i o n w i l l be c o m i n g f r o m t h e sources w h i c h m i g h t b e classified as
i n s e c u r e a n d t h a t a 6 - m o n t h c u t o f f a t t h a t p o i n t c o u l d r e s u l t i n somet h i n g l i k e a $50 b i l l i o n d e c l i n e i n G N P a n d p e r h a p s h a v e 1 m i l l i o n t o
2 m i l l i o n people u n e m p l o y e d .
T h e r e are a l o t of p e o p l e w h o d o n o t b e l i e v e t h a t r a i s i n g prices
w i l l a f f e c t e n e r g y c o n s e r v a t i o n . I t is o u r e s t i m a t e t h a t i f w e d i d n o t
have the higher prices t h a t occurred over the last year, we w o u l d
n o w be c o n s e r v i n g o v e r 1 m i l l i o n b a r r e l s a d a y m o r e t h a n w e c u r r e n t l y
use.
A n d t h e o t h e r a l t e r n a t i v e t o n o t d o i n g a n y t h i n g is t h e g r e a t e r use
o f G o v e r n m e n t c o n t r o l s , a n d t h a t is e i t h e r i m p o r t q u o t a s , a l l o c a t i o n ,
o r r a t i o n i n g . L a s t y e a r , d u r i n g t h e e m b a r g o , Congress e n a c t e d a n
E m e r g e n c y P e t r o l e u m A l l o c a t i o n A c t w h i c h b r o u g h t us a n a l l o c a t i o n
s y s t e m , w h i c h , a l t h o u g h some p e o p l e m a y f o r g e t as t h e y e a r passed,
h a d a n u m b e r of p r o b l e m s , a n d t h e w a y w e r e s o l v e d some of these
p r o b l e m s w e r e t o t a k e l a r g e a m o u n t s of gasoline o u t of i n v e n t o r i e s ,
t o m o v e l a r g e a m o u n t s of gasoline f r o m one r e g i o n t o a n o t h e r i n a v e r y
s h o r t t i m e p e r i o d . W e h a d a h i g h degree of o p t i m i s m t h a t t h e e m b a r g o
w o u l d b e o v e r , b u t these a c t i o n s c o u l d n o t c o n t i n u e f o r a n y l e n g t h of
t i m e . W e also w e r e p r e p a r e d a t t h a t p o i n t , a l t h o u g h w e d i d n o t w a n t
t o , t o go i n t o a r a t i o n i n g p r o g r a m , i f necessary, a n d I t h i n k i f t h e
embargo h a d lasted v e r y m u c h longer, we w o u l d p r o b a b l y have ended
up with a rationing program.
E a c h of these a l t e r n a t i v e s , a l l o c a t i o n a n d r a t i o n i n g , i n v o l v e
b a s i c a l l y s e l f - i m p o s e d shortages, a s e l f - i m p o s e d e m b a r g o , b u i l t - i n
inefficiencies, i n c r e a s i n g b u r e a u c r a c y , a n d r e g u l a t i o n s t h a t w o u l d , i n
e f f e c t , h a v e t h e F e d e r a l G o v e r n m e n t b a s i c a l l y m a k i n g business decisions f o r e v e r y business a n d a l m o s t e v e r y i n d i v i d u a l i n t h e c o u n t r y .
T o b e e f f e c t i v e a n d t o c o n t i n u e t h e p r o g r a m t o w a r d o u r 1985
goals w e w o u l d h e e d a l l o c a t i o n p r o g r a m s i n effect f o r t h e w h o l e t i m e ,
10 y e a r s , a n d as y o u s t a r t m o v i n g a l o n g i n t h e t i m e p e r i o d , y o u r e a c h
a p o i n t w h e r e t h e F e d e r a l G o v e r n m e n t is g o i n g b a c k t o base p e r i o d s
o f 1972 a n d i n t h e y e a r 1980 is t r y i n g t o figure o u t w h e t h e r business
s h o u l d b e m o v i n g o r g r o w i n g o r w h e t h e r p e o p l e s h o u l d be m o v i n g
around.
S e e k i n g a s o l u t i o n b y a gasoline t a x , w h i c h is a n o t h e r p r o p o s a l
t h a t w a s raised, r e a l l y , b y i t s e l f , does n o t address t h e basic p r o b l e m
w e face. I t h i t s 45 p e r c e n t of t h e b a r r e l i n s t e a d of t h e w h o l e b a r r e l
a n d w o u l d h a v e t o be t w o t o t h r e e t i m e s as h i g h as a n across-theb o a r d p e t r o l e u m p r i c e increase a n d , i n a d d i t i o n , w o u l d i n v o l v e some
regional inequities w h i c h we hope we could overcome t h r o u g h our
program.
W e d i d a n n o u n c e , as y o u k n o w , a n i n t e n t i o n t o t i l t t h e effects of t h e
i m p o r t fee t o w a r d gasoline a n d are n o w p r e p a r i n g r e g u l a t i o n s t o t h a t
e f f e c t . T h e e x p e c t e d l e v e l of e n e r g y d e m a n d , s u p p l y , a n d p e t r o l e u m
i m p o r t s i n t h e f u t u r e depends h e a v i l y o n w h e r e w o r l d o i l prices go
and the policy a n d actions t h a t we initiate.
F o r p u r p o s e s of p l a n n i n g w e h a v e a s s u m e d t h a t t h e n e a r t e r m p r i c e
of o i l , t h a t is t h e p r i c e of o i l o v e r t h e n e x t c o u p l e of y e a r s , r e m a i n s
a t a b o u t t h e c u r r e n t levels, a b o u t $ 1 1 a b a r r e l , b u t t h a t b y t h e y e a r
1980 t h e p r i c e of o i l w i l l d e c l i n e t o s o m e w h e r e i n t h e n e i g h b o r h o o d of
$7 t o $8 a b a r r e l , i n 1973 d o l l a r s .

50-290—75

2




6
W e a s s u m e d a d e c l i n e of p r i c e o v e r t h e n e x t f e w y e a r s f o r t w o
reasons. F i r s t , w e f e l t t h a t i t w a s i m p o r t a n t t o p l a n a g a i n s t w h a t
w o u l d b e a t o u g h e r s i t u a t i o n t o f a c e i n t h e f u t u r e , a n d , s e c o n d , because
the long-range supply and demand patterns i n the w o r l d , the product i v e c a p a c i t y of O P E C a n d t h e d e m a n d s of t h e c o n s u m i n g n a t i o n s ,
i n d i c a t e t h a t t h e r e is n o e c o n o m i c j u s t i f i c a t i o n f o r p r i c e s r e m a i n i n g as
h i g h as t h e y c u r r e n t l y are.
I f n o p o l i c y a c t i o n s are i m p l e m e n t e d , i f w e c o n t i n u e a l o n g t h e
ways we were following, we estimate t h a t petroleum i m p o r t s w i l l
r i s e t o 12.7 m i l l i o n b a r r e l s a d a y b y 1985. T h a t is o v e r 50 p e r c e n t
of d e m a n d , d e m a n d b e i n g a l m o s t 2 4 m i l l i o n b a r r e l s a d a y i n 1985.
T h a t c o m p a r e s t o o u r l e v e l s r i g h t n o w of a b o u t 6 m i l l i o n b a r r e l s a
d a y o r 6% m i l l i o n b a r r e l s a d a y , a n d a d e m a n d o f a b o u t 16.7 m i l l i o n
barrels a day.
T h e goals o f t h e P r e s i d e n t ' s p r o g r a m are m e t b y a c o m b i n a t i o n o f
energy conservation a n d increased s u p p l y actions t h a t reduce t h e
i m p o r t s t o 3 t o 5 m i l l i o n b a r r e l s a d a y . O n e t h i n g w e l e a r n e d as we
w e n t t h r o u g h our analysis d u r i n g the P r o j e c t Independence s t u d y
w a s t h a t a n y b o d y w h o s a i d y o u c o u l d solve t h e e n e r g y p r o b l e m
s t r i c t l y b y conservation or s t r i c t l y b y increasing domestic s u p p l y
d i d n o t r e a l l y have the facts. Y o u h a d to do b o t h . T h e r e was j u s t n o
w a y t h a t w e c o u l d reach, a g o a l of a n y l e v e l of i n v u l n e r a b i l i t y w i t h o u t
t a k i n g b o t h conservation and supply increasing actions.
T o accelerate d o m e s t i c s u p p l y t h e r e are a n u m b e r o f t h i n g s w e
c o u l d d o , b u t t o f o c u s o n t h e t w o b i g ones, t h e ones w i t h m o s t p a y o f f
i n t e r m s of r e d u c i n g o u r o i l i m p o r t s , t h e y are t o accelerate t h e d e v e l o p m e n t of o u r n a v a l p e t r o l e u m reserves a n d e s p e c i a l l y t h e n a v a l
p e t r o l e u m reserve i n A l a s k a , w h i c h w e e s t i m a t e c o u l d p r o d u c e 2
m i l l i o n b a r r e l s a d a y b y 1985, a n d t o accelerate t h e p r o d u c t i o n o n t h e
O u t e r C o n t i n e n t a l S h e l f . T h e f r o n t i e r areas of t h e O u t e r C o n t i n e n t a l
S h e l f are p r o m i s i n g . W e d o n o t k n o w e n o u g h a b o u t t h e m y e t . W e
c e r t a i n l y d o n o t k n o w e x a c t l y h o w m u c h o i l is o u t t h e r e . T h e r e are
w i d e r a n g e s of o p i n i o n i n t h e s c i e n t i f i c c o m m u n i t y as t o h o w m u c h
o i l a n d gas is i n t h e O u t e r C o n t i n e n t a l S h e l f .
M r . REES. 9 b i l l i o n b a r r e l s i n t h e S a n t a B a r b a r a C h a n n e l .
M r . PASTERNACK. T h a t is a f a i r a m o u n t of o i l .
O n t h e d e m a n d side w e p r o p o s e a n u m b e r of v e r y s t r i n g e n t r e g u l a t o r y measures, i n c l u d i n g m a n d a t o r y t h e r m a l e f f i c i e n c y s t a n d a r d s i n
a l l n e w b u i l d i n g s ; a p p l i a n c e e f f i c i e n c y goals t o i m p r o v e t h e a p p l i a n c e
e f f i c i e n c y b y 20 p e r c e n t b y 1980; a r e s i d e n t i a l t a x c r e d i t o f 15 p e r c e n t
on installing insulation for existing buildings; a low income and
e l d e r l y w i n t e r i z a t i o n p r o g r a m t o s u p p l y $55 m i l l i o n a y e a r t o p u r c h a s e
a n d i n s t a l l e n e r g y c o n s e r v i n g e q u i p m e n t i n h o m e s of p e o p l e w h o
c a n n o t a f f o r d t o b u y t h e m ; a u t o m o b i l e efficienc}^ goals t o increase t h e
e f f i c i e n c y of a u t o m o b i l e s b y 40 p e r c e n t b y t h e 1980 m o d e l y e a r ; a n d ,
of course, t h e c o n t i n u e d use of h i g h e r prices.
T h e s e a c t i o n s w i l l save o v e r 4 m i l l i o n b a r r e l s a d a y b y 1985. I n
a d d i t i o n to t h a t , we proposed a s y n t h e t i c fuels c o m m e r c i a l i z a t i o n p r o g r a m i n w h i c h t h e G o v e r n m e n t w i l l t a k e some steps t o p r o v i d e
specific i n c e n t i v e s f o r c e r t a i n t e c h n o l o g i e s t o see t h a t t h e y are c o m m e r c i a l l y p r o d u c e d . I t does n o t m e a n t h a t w e w i l l b u i l d 500 s y n t h e t i c
f u e l p l a n t s , o r coal g a s i f i c a t i o n p l a n t s , o r o i l shale p l a n t s o v e r t h e n e x t
10 y e a r s . I t does n o t m e a n a M a n h a t t a n - s t y l e p r o j e c t f o r $20 b i l l i o n a
y e a r t o b u i l d these p l a n t s , b u t i t does m e a n t h a t t h e r e w i l l b e specific




ff
4

incentives, either price guarantees, purchase guarantees, direct subsidies, loans, or o t h e r approaches t o i n s u r e t h a t these n e w technologies
n e e d e d b e y o n d 1985 a r e d e v e l o p e d .
T h e r e are s t i l l a n u m b e r of p r o b l e m s associated w i t h s y n t h e t i c
fuels—environmental impact, water availability, and other technical
q u e s t i o n s t h a t s t i l l h a v e t o b e s o l v e d . T h e y w i l l also c o s t a l o t m o r e
t h a n d o m e s t i c o i l a n d gas p r o d u c t i o n , a n d w h i l e t h e r e h a s b e e n s o m e
t a l k a b o u t price floors, i t s h o u l d be clear t h a t w e h a v e n o i n t e n t w h a t soever of p u t t i n g a price floor i n effect t o p r o t e c t t h e price of a n y of
these s y n t h e t i c fuels.
I n addition, we proposed s t a n d b y emergency measures w h i c h could
b e u s e d i n case o f e m b a r g o a n d a n e m e r g e n c y s t o r a g e p r o g r a m o f u p
to 1 b i l l i o n barrels, w h i c h could supply 3 m i l l i o n barrels a d a y i n the
e v e n t of a s u p p l y d i s r u p t i o n .
T h e r e a r e a n u m b e r o f s t a t i s t i c s i n t h e s t a t e m e n t w h i c h discuss t h e
d o l l a r o u t f l o w f o r p e t r o l e u m o v e r t h e n e x t 10 y e a r s u n d e r v a r y i n g c o n d i t i o n s , a n d I w i l l n o t go i n t o those r i g h t n o w . I j u s t w a n t e d t o m a k e a
c o u p l e o f p o i n t s a b o u t s o m e of y o u r c o m m i t t e e ' s s t u d i e s t h a t w e h a v e
g o t t e n copies of a n d r e a d . W e h a v e n o d i s a g r e e m e n t w i t h s t a t e m e n t s
s u c h as, " T h e U n i t e d S t a t e s h a s n o p r o b l e m f i n a n c i n g i t s o i l d e f i c i t s
o v e r t h e n e x t 10 y e a r s . " W e b e l i e v e t h a t t o b e t r u e .
W e believe t h a t our balance-of-payments a n d balance-of-trade
s i t u a t i o n is n o t t h a t b a d r i g h t n o w a n d w o u l d be m u c h b e t t e r , of
course, i f w e d i d n o t h a v e t o p a y $25 b i l l i o n t o $30 b i l l i o n a y e a r f o r
f o r e i g n o i l . W e also b e l i e v e v e r y s t r o n g l y t h a t , as y o u r s t u d y p o i n t s
o u t , t h e U n i t e d S t a t e s c a n find l i t t l e c o m f o r t i n g r e a t e r s e c u r i t y a n d
easing its o w n balance-of-payments s i t u a t i o n w h e n the rest of its
c o n s u m i n g n a t i o n s a n d t r a d i n g p a r t n e r s are i n s e r i o u s
financial
t r o u b l e . A n d as p a r t o f o u r e n e r g y p o l i c y , o f c o u r s e , w e are n e g o t i a t i n g
and meeting w i t h the consuming nations to arrive at various methods
to help their situation.
F i n a l l y , I w o u l d j u s t l i k e to say t h a t if prices r e m a i n h i g h over the
n e x t f e w y e a r s , t h e r e is n o q u e s t i o n t h a t o u r i m p o r t s i t u a t i o n w i l l b e
b e t t e r . W e are i n a v e r y i r o n i c s i t u a t i o n i n t h a t t h e h i g h e r t l i e w o r l d
oil price the b e t t e r our domestic i m p o r t s i t u a t i o n is a n d the worse m o s t
of t h e c o n s u m i n g n a t i o n s ' s i t u a t i o n s are a n d t h e worse, c e r t a i n l y , t h e
p r i c e e f f e c t s are d o m e s t i c a l l y .
I f we h a v e v e r y h i g h prices, we do n o t h a v e t o enact a n y m a n d a t o r y
conservation measures. W e do n o t h a v e to enact a n y m a j o r domestic
supply alternatives. W e could be at 3 to 5 b i l l i o n barrels a day if oil
p r i c e s s t a y e d $ 1 1 a b a r r e l . B u t t h e r e are o t h e r e f f e c t s o f h i g h p r i c e s
t h a t are n o t b e n e f i c i a l t o t h i s c o u n t r y , a n d i t is o u r l o n g - r a n g e i n t e n t i o n t o t r y t o do w h a t w e c a n t o b e i n g d o w n t h e price of w o r l d oil.
W e b e l i e v e v e r y s t r o n g l y t h a t t h e P r e s i d e n t ' s p r o g r a m does a c c o m p l i s h t h i s , a n d w e h a v e set o u t g o a l s a n d m e t h o d s t o a c h i e v e t h e m .
A n d w i t h t h a t , I w i l l be h a p p y to answer any questions.
[ M r . Pasternack's prepared statement follows:]
PREPARED

STATEMENT

OF B R U C E

A.

PASTERNACK

I appreciate the opportunity to appear before you today to discuss the Administration's proposals for dealing w i t h the Nation's energy problems. I am the
Deputy Assistant Administrator f o r Policy and Analysis. I am substituting f o r
M r . Eric Zausner, the A c t i n g Deputy Administrator, i n his absence.




8
I ' m sure t h a t we all agree t h a t the present energy situation requires broad,
/decisive and p r o m p t government action t o prevent continued erosion of our
economic v i t a l i t y and national security. W e need a coordinated n a t i o n a l energy
policy w h i c h restores our energy independence.
Our economic system is strong and resilient, and we have great resources. The
i m p a c t of recent changes i n the w o r l d oil m a r k e t on other countries m u c h more
dependent on oil imports has been correspondingly greater. The U n i t e d States
can be p r o f o u n d l y affected b y severe economic crisis abroad. W e m u s t show our
leadership among the industrialized nations a n d demonstrate our willingness t o
take h a r d a n d expensive steps i n energy conservation and development of new
energy resources. The President's p r o g r a m is an outstanding example t o other
countries of America's determination t o reverse the trends towards dependency.
Reducing our v u l n e r a b i l i t y t o supply i n t e r r u p t i o n and price m a n i p u l a t i o n m u s t
be given the highest p r i o r i t y .
The President has prescribed t o u g h action t o cure our energy ills. H e has outlined three, time-phased goals.
1. A cut i n our oil i m p o r t s of 1 m i l l i o n barrels per day b y the end of this year
a n d of 2 m i l l i o n barrels per day b y the end of 1977.
2. B y 1985, i n v u l n e r a b i l i t y t o i m p o r t disruptions, or i m p o r t s of no more t h a n
3 - 5 m i l l i o n barrels per d a y — a n d the capability of i m m e d i a t e l y replacing t h a t
a m o u n t f r o m storage and standby measures i n the event of a supply disruption.
3. Accelerated development of energy technology and resources so t h a t the
U n i t e d States can meet a significant share of the energy needs of t h e free w o r l d b y
the end of this century.
ACTIONS TO M E E T T H E S H O R T - T E R M

GOAL

I n the first crucial years, few supply actions can have m u c h i m m e d i a t e effect.
P r o d u c t i o n f r o m the E l k H i l l s , California, N a v a l Petroleum Reserve, m u s t be
developed and increased. The conversion of o i l b u r n i n g facilities t o coal m u s t be
increased. Legislation f o r b o t h of these proposals has been s u b m i t t e d b y the
President. B u t these supply actions w i l l n o t be enough i n t h e next t w o t o three
years. Therefore, we must promote energy conservation and v o l u n t a r y conservat i o n measures have not been adequate so far.
The first step i n the stronger conservation p r o g r a m has been a $1 fee on i m p o r t e d
petroleum products t o ease the i m p a c t on regions heavily dependent on i m p o r t e d
petroleum products, such as N e w E n g l a n d and the Northeast States, t h e President's p r o g r a m provides for a lower fee rate on products other t h a n crude oil.
These increased i m p o r t fees are t e m p o r a r y u n t i l C o n g r ^ s enacts Comprehensive
t a x legislation which includes an excise t a x of $2 per barrel on all crude oil and
petroleum products.
The revenues raised w i l l be returned t o the economy t h r o u g h t a x rebates i f the
President's f u l l economic and energy p r o g r a m is enacted. The relative cost of
p e t r o l e u m products wiU be increased w i t h o u t c u t t i n g disposible income. F u r t h e r more, the restoration of a f u l l m a r k e t w i l l remove price advantages c u r r e n t l y
enjoyed b y areas n o t dependent on i m p o r t e d oil.
A proposed excise t a x of 37^ per thousand cubic feet on all n a t u r a l gas, the
equivalent t o the $2 oil excise tax, has been proposed. Deregulation of n a t u r a l
gas should serve to reverse the t r e n d of d w i n d l i n g n a t u r a l gas reserves, u n e m p l o y m e n t due t o curtailments, and t o prevent i n d u s t r i a l switching f r o m oil t o already
scarce n a t u r a l gas because of its lower price.
The price of old domestic crude oil is expected to be decontrolled. Congressional
enactment of the w i n d f a l l profits t a x is also required t o prevent excess profits
accruing t o the i n d u s t r y .
A p r o g r a m of income t a x reductions and rebate measures t o r e t u r n t o t h e
economy the roughly $30 b i l l i o n increased cost of these provisions has been
proposed. M o s t of this money is t o be restored directly t o consumers, w i t h special
measures t o provide funds for the poor.
The use of i m p o r t fees, excise taxes and decontrol of oil prices t o foster largescale energy conservation has attracted m u c h a t t e n t i o n and criticism.
I w o u l d like, therefore, t o outline some alternatives. First, there is the altern a t i v e of doing nothing. N o action only postpones the t o u g h decisions we have t o
make. W i t h o u t conservation, our t a b for i m p o r t e d oil, w h i c h was $3 b i l l i o n i n
1970, and $24 billion last year (1974), w o u l d reach over $30 b i l l i o n i n 1977.
Today, even more of our i m p o r t s are coming f r o m A f r i c a a n d the M i d d l e East
t h a n were i n 1973. Over half of our petroleum i m p o r t s come f r o m sources outside
of the Western Hemisphere. Unless we do something, the dependence on A f r i c a n




9
and M i d d l e Eastern sources w i l l continue t o grow. W i t h o u t p r o m p t action our
i m p o r t s w i l l approach 8 M M B / D i n 1977. The 2 M M B / D reduction w i l l j u s t h o l d
us level.
E v e r y m o n t h we hesitate w i l l make i t t h a t m u c h harder t o achieve our 1985
goals. We must reflect on the f u t u r e cost t o the n a t i o n i f we do n o t act
expeditiously.
There are those who believe t h a t raising prices of energy at home w i l l not help
us cut back on consumption. However, present consumption w o u l d have been a t
least 1 m i l l i o n barrels a day more i f prices had n o t risen so sharply last year. A l t h o u g h t h e cartel has cut back on production there is still a surplus of oil on the
w o r l d m a r k e t despite the pre-embargo concern about the c a p a b i l i t y t o satisfy
the growing w o r l d demand. There is concrete evidence all around us t h a t price
is indeed effective i n reducing demand.
The other alternative t o inaction is t h e greater use of Government controls—
whether i m p o r t quotas, allocation systems or rationing. We looked at m a n y of
these last year during the embargo. We chose some and rejected others. A n d our
reasoning was good for a short-term crisis. We now face a longer t e r m one. E a c h
of these alternatives w o u l d involve some f o r m of self-imposed shortages as well as
b u i l t - i n inefficiencies, burgeoning bureaucracies and regulatory proliferation and
disruptions i n the lives of all American citizens. T o be effective, controls m u s t be
i n place for a long-term of up t o ten years. I doubt t h a t the American people
w o u l d be w i l l i n g t o p u t up w i t h such alternatives.
Seeking a solution t h r o u g h gasoline t a x increases alone does n o t address the
basic problem of reducing demand. Instead, an increase i n all products f r o m a
barrel of oil seems a more effective and more equitable solution.
T o the m a x i m u m extent possible, we should allow the free m a r k e t to w o r k .
T h i s is w h a t the energy conservation taxes and fees w o u l d do, while the rebates
w o u l d assure no significant loss of consumer purchasing power*
FORECASTS

OF S U P P L Y A N D

DEMAND

T h e expected level of energy demand, supply and petroleum i m p o r t s depends
heavily on f u t u r e movements i n the w o r l d price of oil and the policy actions w h i c h
we initiate. The s u r v i v a l of the oil cartel is n o t guaranteed b u t their actions w i l l
have a great i m p a c t on our imports, oil dollar outflow and the associated vulnera b i l i t y . For purposes of planning, the A d m i n i s t r a t i o n has assumed t h a t the near
t e r m price of oil remains at current levels of approximately $11 per barrel b u t
drops t o $7 per barrel before 1980. This has the effect of decreasing domestic
supply, increasing demand a n d increasing the potential i m p o r t levels when compared t o a continual rise i n the n o m i n a l price of oil.
I f no new policy actions are implemented, our estimates indicate t h a t at $7
per barrel, petroleum i m p o r t s could rise b y more t h a n 600 M B / D each year t o
12.7 M M B / D i n 1985 t o satisfy the associated petroleum demand of 23.9 M M B / D .
T h i s compares w i t h 6 M M B / D of i m p o r t s and 16.7 M M B / D of consumption i n
1975. T h i s is the planning assumption used i n the development of the President's
program.
The goals of the President's p r o g r a m are m e t b y a combination of energy
conservation and increased supply activities t h a t reduce 1985 i m p o r t s of the 3 - 5
M M B / D range. The central supply features of this m i d - t e r m p r o g r a m call for the
accelerated development of the N a v a l Petroleum Reserves and the Outer Cont i n e n t a l Shelf to produce a combined t o t a l of 3.8 M M B / D i n expanded domestic
production. On the demand side, 900 M B / D due t o i m p r o v e d t h e r m a l b u i l d i n g
standards, appliance efficiency standards, and t h e r m a l r e t r o f i t of residential
buildings supplement the 1 M M B / D savings f r o m automobile efficiency standards
are the 2.1 M M B / D i n reduced demand produced b y higher prices and taxes.
These effects plus the impacts of coal conversion and synthetic fuel development
should reduce i m p o r t s t o 4.2 M M B / D i n 1985. This i m p o r t v u l n e r a b i l i t y can be
m e t w i t h standby emergency measures plus an emergency storage program of 1
b i l l i o n barrels w h i c h could supply 3 M M B / D for one year.
The oil dollar outflows of such a program w o u l d be $10.7 b i l l i o n annually under
our price assumptions as compared to $32.5 billion if no action is taken.
These figures indicate the importance of our proposed policy actions. Assumptions about f u t u r e prices or cartel behavior increase the difficulty ,of designing a
comprehensive p r o g r a m for dealing w i t h p o t e n t i a l i m p o r t vulnerability. I f the
cartel collapses and w o r l d prices drop to pre-embargo levels, i m p o r t demand could
rise over 21 M M B / D b y 1985 if no f u r t h e r policy action is taken. The dollar
outflow w o u l d be ove $30 b i l l i o n i n 1973 dollars. On the other hand, if 1985




10
prices stay near present levels i n real terms and no policy action is taken, the h i g h
prices alone should reduce i m p o r t demand to 3 - 4 M M B / D and dollar outflows
w i l l be $12-$16 billion.
These-fluctuations i n the oil deficit are large, particularly if we take no action,
b u t the oil dollar outflow figures do not address the more comprehensive and more
complicated measure of the net balance of payments. The estimation of the oil
deficit is a simple matter b y comparison and I have no detailed estimates of our
expected balance of payments.
However, I do not disagree w i t h the recent study prepared for this committee:
(Balance-of-Payments Adjustment to Higher Oil Prices: Managing the Petrodollar
Problem, December 1974),
. . the U n i t e d States has no problem financing its o i l
deficits",-'In-fact,-the balance of payments problem w i l l be m u c h more serious for
our trading partners.
As your study indicates, " T h e U n i t e d States would, i n those circumstances,
find l i t t l e comfort i n its relatively greater energy security and ease of balance-ofpayments financing". We must consider the broader implications of the oil cartel
as well as its effect on our own i m p o r t vulnerability. Our policy actions w i l l combine w i t h the programs i n other countries to p u t pressure on the w o r l d price of
oil and reduce dependence on politically unstable sources of energy. This w i l l i n
itself produce some variation i n the eventual outcome of prices and i m p o r t quantities. For any outcome, the stakes are high.
We believe t h a t our planning assumptions are prudent and t h a t a difficult b u t
comprehensive program must be implemented. I f prices remain high, our i m p o r t
positions w i l l be further improved. I n any event, our program assures effective
elimination of embargo vulnerability and improves the climate for our t r a d i n g
partners as well, even given our expectations of lower prices. Our task is t o determine the least cost method of achieving this goal w i t h o u t reliance on programs
which cannot be implemented or have a l i m i t e d chance of success.
I believe the President's program does accomplish this and I w o u l d be glad t o
answer any questions you m i g h t have. T h a n k you.
M r . REES. T h a n k y o u v e r y m u c h .
F o r m e m b e r s of t h e s u b c o m m i t t e e w h o c a m e i n a l i t t l e l a t e , t h i s is
B r u c e A . P a s t e r n a c k , a n d h e is t h e A c t i n g D e p u t y A s s i s t a n t A d m i n i s t r a t o r for P o l i c y of t h e F e d e r a l E n e r g y A d m i n i s t r a t i o n .
I w o u l d just like to ask t w o questions.
One, o n some studies w e d i d w e felt t h a t the 67-percent increase i n
the price of p e t r o l e u m , w h i c h is b a s i c a l l y t h e P r e s i d e n t ' s p r o g r a m ,
w i t h a d o u b l i n g o f t h e p r i c e o f n a t u r a l gas w o u l d b e v e r y h a r m f u l a t
t h e t i m e w h e n t h e c o u n t r y is i n a v e r y serious recession. W e
figure
t h a t the cost of the p r o g r a m t o the consumer w o u l d be a r o u n d $50
b i l l i o n , a n d t h a t is t h e d i r e c t c o s t — t h e i n d i r e c t c o s t i s r a t h e r h a r d t o
c o m p u t e . T h i s is t h e w o r s t t i m e t o c o m e t h r o u g h w i t h t h a t t y p e o f
program.
Also, w e felt t h a t there were different price elasticities i n t h e v a r i o u s
components of w h a t p e t r o l e u m p r o d u c e s — y o u m i g h t h a v e a r e l a t i v e l y
h i g h elasticity i n gasoline b u t v e r y l o w i n h o m e f u e l or j e t fuel. I f
increases were g o i n g t o be m a n d a t e d , t h e y s h o u l d be m a d e o n t h e
s p e c i f i c p r o d u c t i n s u c h a w a y t h a t i t w o u l d cause t h e l e a s t a m o u n t
of h a r m t o t h e consumer.
W o u l d y o u like to comment on that?
M r . PASTERNACK. W e l l , a c o u p l e o f t h i n g s o n w r h a t y o u s a i d — a s
y o u k n o w , w e disagree w i t h t h e e s t i m a t e of $50 b i l l i o n i n t e r m s of t h e
effects of t h e p r o g r a m , a n d h a v e t r i e d t o c o m p a r e , i n f a i r l y g r e a t detail, our analysis w i t h the analysis of t h e Congressional Research
Service a n d the Senate I n t e r i o r C o m m i t t e e a n d others w h o h a v e been
i n t h e $40 b i l l i o n t o $50 b i l l i o n range, a n d I w i l l be h a p p y t o m a k e
available t h e details of those analyses f o r the record.
B u t , b a s i c a l l y , o u r a n a l y s i s o f $ 3 0 b i l l i o n is n o t j u s t t h e d i r e c t
e f f e c t s ; t h a t is, t h e d i r e c t a n d i n d i r e c t e f f e c t s . A n d o n e m i s t a k e t h a t




11
is s o m e t i m e s m a d e i n s a y i n g t h a t i t is o n l y t h e d i r e c t effect is t h a t
w h e n y o u l o o k a t , f o r e x a m p l e , n a t u r a l gas, a n d t h e p r i c e increases f o r
n a t u r a l gas t h a t w o u l d o c c u r u n d e r t h i s p r o g r a m , m o s t of t h e i n creases w o u l d be f e l t b y i n d u s t r y , a n d m o s t of those increases w o u l d
b e passed a l o n g t o t h e c o n s u m e r . T h o s e are i n d i r e c t effects, as o p p o s e d
t o t h e d i r e c t effects o n t h e c o n s u m e r .
T h e r e are c e r t a i n r i p p l e effects t h a t w o u l d o c c u r a y e a r o r t w o f r o m
n o w as t h e r e s u l t o f , m a y b e , h i g h e r wages, h i g h e r prices of c e r t a i n
r a w m a t e r i a l s , w h i c h w e h a v e also i n c l u d e d i n o u r e s t i m a t e . A l l these
d e t a i l s are i n t h e c o m p a r i s o n s . A s f a r as t h e t i m i n g a n d t h e specifics,
as t o w h a t p r o d u c t s , h e p l a c e d t h e e m p h a s i s o n — o n e t h i n g I l e a r n e d —
a n d I a m n o t a n e c o n o m i s t — b u t one t h i n g I l e a r n e d o v e r t h e l a s t
y e a r a n d h a v e h a d d r u m m e d i n t o m e b y a l l of o u r e c o n o m i s t s is t h a t
e l a s t i c i t y is a v e r y f u n n } ^ w o r d .
T h e r e is n o s u c h t h i n g as a n e l a s t i c i t y of o i l o r a n e l a s t i c i t y of
g a s o l i n e . T h e r e are e l a s t i c i t i e s w i t h r e s p e c t t o d e m a n d t h a t h a v e t o
take i n t o account the a b i l i t y to switch to other products, the ability
for conversions a n d t i m i n g i n short t e r m elasticities or l o n g t e r m
e l a s t i c i t i e s . I n f a c t , gasoline does n o t h a v e t h e h i g h e s t e l a s t i c i t y of
d e m a n d . T h e r e are o t h e r p r o d u c t s . A n d o v e r a c e r t a i n p e r i o d of t i m e ,
r e s i d u a l o i l , f o r e x a m p l e , w o u l d h a v e a h i g h e r e l a s t i c i t y t h a n gasoline.
T h e r e w o u l d be m o r e o p p o r t u n i t y t o c o n v e r t , a n d t h e r e w o u l d be m o r e
o p p o r t u n i t y t o save.
W e b e l i e v e t h a t t h e r e is a n i m p o r t a n t n e e d t o conserve a l l p a r t s
o f t h e b a r r e l . A n d w h i l e w e p u t f o r w a r d a p r o g r a m w h i c h does n o t do
so across t h e b o a r d , w e recognize t h e concerns of m a n y p e o p l e as t o
t h e e m p h a s i s w e h a v e p l a c e d o n o t h e r p a r t s of t h e b a r r e l t h a n gasoline,
a n d t h a t is one o f t h e reasons t h e P r e s i d e n t a n n o u n c e d h i s i n t e n t i o n
t o t i l t t h e p r o g r a m a n d t h e effects of t h e p r o g r a m t o w a r d gasoline.
I n fact, the w a y we have proposed i t now, i t w o u l d p u t roughly
t w o - t h i r d s of t h e increase o n gasoline a n d o n e - t h i r d o n o t h e r p r o d u c t s .
T h e t i m i n g of i m p l e m e n t i n g t h e p r o g r a m , t h e f o r c e of t h e p r o g r a m
a t t h i s t i m e is c e r t a i n l y one t h a t w e h a v e b e e n d i s c u s s i n g w i t h a l l of
t h e c o m m i t t e e s i n t h e H o u s e a n d Senate, a n d one w h i c h w e are s t i l l
negotiating.
M r . REES. I n t h i s q u e s t i o n p e r i o d , e v e r y o n e c a n ask one q u e s t i o n ,
and let's do i t informally. I a m n o t m u c h i n love w i t h the seniority
system.
M r . STANTON. M r . P a s t e r n a c k , as M r . Rees h a s said, t h i s s u b c o m m i t t e e is p r i m a r i l y i n t e r e s t e d i n t h e i n t e r n a t i o n a l aspects of o i l ,
i n c l u d i n g t h e p r i c e of t h e o i l a n d i t s r e l a t i o n s h i p i n t h e i n t e r n a t i o n a l
m o n e t a r y f u n d . T h a t is w h e r e o u r basic i n t e r e s t lies.
M y q u e s t i o n is one of c u r i o s i t y . F o r e x a m p l e , w e r e a d a b o u t t h e o i l
f l o o r p r i c e scheme a n d w e h a v e o t h e r d e a l i n g s w i t h t h e A r a b c o u n t r i e s
and the French. I n the i n t e r n a t i o n a l m o n e t a r y considerations y o u
h a v e t h e T r e a s u r y D e p a r t m e n t i n v o l v e d a n d of course w e h a v e t h e
F E A , of w h i c h y o u are a p a r t .
T h e question is: Of w h a t importance w o u l d y o u p u t your F E A i n
r e g a r d s t o o u r r e l a t i o n s h i p w i t h t h e i n t e r n a t i o n a l aspects of t h i s
p r o b l e m ? D o y o u t h i n k o u r m a j o r i t y i n p u t s h o u l d be f r o m t h e T r e a s u r y D e p a r t m e n t , the State D e p a r t m e n t , the F E A , or a c o m b i n a t i o n .
M r . PASTERNACK. A s y o u k n o w , t h e m e c h a n i s m w e h a v e b e e n u s i n g
t o d e a l w i t h t h i s w h o l e e n e r g y p r o b l e m has b e e n t h r o u g h t h e c o o r d i n a t i o n of t h e E n e r g y Resources C o u n c i l w h i c h t h e P r e s i d e n t




12
e s t a b l i s h e d u n d e r R o g e r s M o r t o n w i t h F r a n k Z a r b as t h e E x e c u t i v e
D i r e c t o r . T h a t , i n d e e d , i s w h e r e m o s t o f t h e basic p o l i c y d e c i s i o n s
a r e b e i n g m a d e , a n d m o s t of t h e b a s i c p o l i c y r e c o m m e n d a t i o n s a r e
b e i n g m a d e t o t h e President f r o m t h e E n e r g y Resources C o u n c i l .
So i n t h a t r e s p e c t , F r a n k Z a r b a n d R o g e r s M o r t o n , r e p r e s e n t i n g
t h e i r agencies, are h e a v i l y i n v o l v e d i n t h e i n t e r n a t i o n a l q u e s t i o n s .
Certainly the lead w i t h i n the Federal Government for negotiations
w i t h the producing nations and the consuming nations, has been a n d
continues t o be p r i m a r i l y i n t h e State D e p a r t m e n t u n d e r Secretary
Kissinger and Assistant Secretary Enders. T h e y have been doing m o s t
of t h e n e g o t i a t i o n s o n b o t h t h e p r i c e f l o o r c o n c e p t , t h e s a f e t y n e t ,
a n d the negotiations w i t h the p r o d u c i n g nations on w o r l d oil prices
and security supply. T h e Treasury D e p a r t m e n t plays a m a j o r role
i n the international recycling question and i n the financial markets
of t h e w o r l d .
T h a t is p r o b a b l y a r o u n d a b o u t a n s w e r t o y o u r q u e s t i o n b u t I t h i n k
a l l agencies are i n v o l v e d ; h o w e v e r , S t a t e a n d T r e a s u r y h a v e t h e
m a j o r i t y of t h e l e a d o n t h e financial side.
M r . TSONGAS. M a y I ask t w o q u e s t i o n s ?
M r . REES. Y e s , sir.

M r . TSONGAS. O n e is t h a t w e h a d a m e e t i n g of t h e N e w E n g l a n d
caucus yesterday a n d there was great concern a b o u t conservation of
petroleum. W e l l , i n N e w E n g l a n d at this point, I do n o t k n o w w h a t the
case is i n o t h e r places, b u t t h e m a j o r o i l c o m p a n i e s are f o r c i n g t h e r e t a i l
gasoline dealers t o s t a y o p e n o n S u n d a y s t o l o w e r t h e p r i c e of g a s o l i n e
a n d l o w e r i n g t h e p r i c e c o m i n g f r o m t h e gasoline dealers' p r o f i t s , a n d
also e x t e n d i n g t h e i r h o u r s , t h e o b v i o u s i n t e n t b e i n g t o i n c r e a s e
c o n s u m p t i o n of gasoline, I w o u l d assume, because t h e r e are excess
supplies.
N o w i f y o u are t a l k i n g a b o u t c o n s e r v a t i o n , o i l c o m p a n i e s are
e n g a g e d i n w h a t is a t b e s t a n u n w i s e p o l i c y . I t m a y e v e n b e u n p a t r i o t i c
g i v e n t h e w a y t h i n g s are g o i n g . W h y is t h e r e n o a t t e m p t b y t h e F E A
t o p o l i c e t h i s , t o s t o p i t , a n d t o , i n essence, b e as t o u g h w i t h t h e o i l
c o m p a n i e s as t h e P r e s i d e n t is a p p a r e n t l y able t o be w i t h t h e c o n s u m e r ?
M r . PASTERNACK. W e l l , w e h a v e s t a r t e d t o d e a l w i t h t h i s , b u t i t
h a s b e e n a f a i r l y r e c e n t d e v e l o p m e n t a n d w e are s t i l l n o t sure h o w
widespread.
M r s . FENWICK. I t is i n N e w J e r s e y , t o o . Y o u g e t a k e w p i e d o l l i f
y o u b u y 10 gallons.
M r . TSONGAS. A y e a r a n d a h a l f ago I b e c a m e a l a w y e r f o r t h e
Gas Dealer's Association i n m y d i s t r i c t a n d at t h a t p o i n t a year a n d
a h a l f ago t h e y w e r e m u s c l i n g t h e gas dealers f o r a l l k i n d s of i n c e n t i v e s
t o s t a y o p e n a n d devise a l l k i n d s of g i m m i c k s a n d so f o r t h . T h a t is
t a k i n g place a t t h e grassroots l e v e l a n d t h e o n l y a c t i v i t y t h a t w e see
b y t h e F E A is p o l i c i n g t h e gas s t a t i o n s a n d n o t i n a n y sense p o l i c i n g
the oil companies.
T h e r e are t w o p r o b l e m s . O n e is t h e w h o l e q u e s t i o n of c r e d i b i l i t y ,
w h i c h affects y o u r p r e s e n t a t i o n . A n d second, t h e q u e s t i o n of e q u i t y .
I t is p e r c e i v e d t h a t t h e G o v e r n m e n t is m o v i n g r a p i d l y w i t h r e s p e c t
to the consumer a n d w i t h respect to the s m a l l businessman, a n d y e t
those w h o h a v e m a d e a g r e a t d e a l of m o n e y f r o m t h e p o l i c y s o m e h o w
o r a n o t h e r are u n f e t t e r e d . A n d once y o u h a v e sense of i n e q u i t y , i t is
i m p o s s i b l e t o get t h e Congress, I w o u l d t h i n k , t o go a l o n g w i t h these
policies.




13
M r . PASTERNACK. I c a n n o t agree w i t h y o u m o r e , a n d l e t m e t r y t o
e x p l a i n as b e s t I k n o w e x a c t l y w h a t w e are d o i n g o n t h i s .
F i r s t , t h e r e are c e r t a i n l i m i t a t i o n s t o o u r s t a t u t o r y r e s p o n s i b i l i t y
t o get i n t o c o n t r a c t s , a n d there are e x i s t i n g c o n t r a c t s b e t w e e n i n d u s t r y
a n d t h e service stations. W h e r e w e can exert pressure o n t h e i n d u s t r y ,
w e are n o w p r o c e e d i n g t o do t h a t . F r a n k Z a r b has m e t p e r s o n a l l y
w i t h t h e r e t a i l service s t a t i o n dealers w i t h i n t h e l a s t 2 weeks a n d he is
m e e t i n g w i t h s o m e o f t h e o i l c o m p a n i e s i n v o l v e d i n these, a n d h i s
i n t e n t i o n i s t o d o w h a t e v e r h e c a n t o b r i n g w h a t e v e r p r e s s u r e i s necess a r y t o s t o p these unnecessary actions.
M r . C O N L A N . D o e s h e h a v e a n y s t a t u t o r y a u t h o r i t y o r is i t j u s t
jawboning?
M r . PASTERNACK. T O a l a r g e e x t e n t , i t is j a w b o n i n g a n d p u t t i n g
pressure on.
M r . REES. W e l l , h e c a n a l l o c a t e . H e h a s t h a t p o w e r .
M r . PASTERNACK. A l l o c a t i o n , b a s i c a l l y does n o t h u r t t h e r e t a i l o i l
d e a l e r s t h a t m u c h . I t r e a l l y does n o t . A l l t h e a l l o c a t i o n t e n d s t o d o i s ;
one, i t cuts b a c k o n s u p p l y a n d ends u p h u r t i n g y o u r consumer m o r e
t h a n a n y t h i n g else, a n d y o u w a n t t o b e c a r e f u l t h a t w e d o n o t t a k e a
c i r c u i t o u s r o u t e a n d e n d u p w i t h s o m e t h i n g t h a t is n o t b e n e f i c i a l .
M r . TSONGAS. Y O U are g o i n g t o b e g e t t i n g a l e t t e r f r o m m e a n d
h o p e f u l l y some of m y colleagues o n t h i s n e x t w e e k .
M r . PASTERNACK. W e a r e p r e p a r e d t o r e s p o n d v e r y q u i c k l y .
M r . TSONGAS. T h e s e c o n d q u e s t i o n i s : Y o u e x p r e s s e d a s u r p r i s i n g
nonconcern about the balance-of-payments problem; could y o u explain
that?
M r . PASTERNACK. B a s i c a l l y , w h a t I w a s s a y i n g i s w e a r e c o n c e r n e d
a b o u t t h e p r i c e w e are p a y i n g f o r f o r e i g n o i l a n d t h e a m o u n t o f m o n e y
g o i n g o u t of t h i s c o u n t r y f o r f o r e i g n o i l . A n d i n f a c t , w h e n y o u t a l k
a b o u t $25 b i l l i o n or $30 b i l l i o n a y e a r g o i n g o u t of t h i s c o u n t r y a n d
g o i n g t o t h e M i d d l e E a s t a n d t h e p r o d u c i n g n a t i o n s , t h a t is s o m e t h i n g
t h a t concerns us v e r y m u c h a n d i t concerns us t h a t i t is m o n e y t h a t
could be going i n t o our T r e a s u r y a n d could be m u l t i p l y i n g here i n this
c o u n t r y as o p p o s e d t o p r o d u c i n g n a t i o n s .
Nevertheless, despite t h e $24 b i l l i o n w e s p e n t l a s t y e a r f o r f o r e i g n
oil, I believe, if I r e m e m b e r the numbers, o u r balance-of-payments
d e f i c i t o r b a l a n c e o f t r a d e d e f i c i t w a s s o m e t h i n g l i k e $ 6 b i l l i o n o r $7
billion, a n d t h a t indeed was a r e l a t i v e l y h e a l t h y sign.
M r . BROWN. B u t i f t h e g e n t l e m a n w o u l d y i e l d , I t h i n k a l o t o f t h a t
d e f i c i t o f f s e t w a s a r e s u l t o f t h e sale o f f a r m c o m m o d i t i e s w h i c h y o u
m a y n o t h a v e again.
M r . HANNAFORD. T h a t i s e x a c t l y t h e q u e s t i o n o f w h i c h I a m c o n cerned. W h e n y o u said y o u were n o t concerned a b o u t t h e l o n g - r u n
b a l a n c e o f p a y m e n t s , i t seems t o m e t h a t t h a t r e a l l y i s o u r o n l y c o n cern. I f w e r e a l l y i n t h e l o n g r u n h a v e a b a l a n c e of p a y m e n t s , w e w o u l d
n o t really be t h a t w o r r i e d about using foreign energy. A s a m a t t e r
o f f a c t , t h e b e s t t h i n g w e m i g h t d o i s use f o r e i g n e n e r g y as l o n g as
w e h a v e o n t h i s g l o b e a r e l a t i v e l y s h o r t t e r m o f f o s s i l f u e l s t o use.
W h i l e w^e a r e d e v e l o p i n g o u r a l t e r n a t i v e e n e r g y s o u r c e s , w e w o u l d
b e b e t t e r o f f t o use t h e f o r e i g n e n e r g y so l o n g as w e c a n m a i n t a i n a
balance of p a y m e n t s .
I s t h a t n o t a reasonable analysis?
50-290—75
s




M r . GoNiiAN. B u t d i d h e n o t s a y t h e r e w e r e t w o f a c t o r s , one, t h e
e c o n o m i c s i n t h e b a l a n c e of p a y m e n t s , a n d t w o , t h e s e c u r i t y f a c t o r s ,
as t o w h a t y o u are d e p e n d e n t u p o n ? C a n y o u m o v e i n w i t h o u t a n
e c o n o m i c disaster?
M r . PASTERNACK. T h e p r o b l e m is as m u c h one o f s e c u r i t y a n d t h e
a b i l i t y to control our foreign policy and our domestic policy a n d our
d o m e s t i c e c o n o m y , as i t is one of b a l a n c e of p a y m e n t s .
I n o t h e r w o r d s , i f w e c a n n o t c o n t r o l t h e p r i c e of o i l i n o i l a n d e n e r g y
of s u c h basic q u a n t i t i e s t o o u r existence, t h e n w e are n o t i n c o n t r o l
o f o u r f o r e i g n p o l i c y a n d w e are s u b j e c t t o v e r y w i d e d i s r u p t i o n t h r o u g h
changes i n p r i c e s i n a v e r y s h o r t p e r i o d of t i m e .
I f t h e p r i c e of o i l d r o p p e d t o d a y f r o m $11 a b a r r e l t o $3 a b a r r e l ,
a n d t h e n 2 years f r o m n o w w e n t u p to $11 a b a r r e l again, this w o u l d
t h r o w t r e m e n d o u s c o n t o r t i o n s i n t o o u r d o m e s t i c e c o n o m y . T h a t is
w h e r e o u r p r i m a r y c o n c e r n is.
M r . HANNAFORD. I t seems t o m e i f w e r e a l l y are n o t w o r r i e d a b o u t
t h e b a l a n c e of p a y m e n t s i n t h e l o n g r u n , t h a t w h a t w e r e a l l y n e e d t o
d o w o u l d b e t o h a v e some d e v i c e r e a d y t o p u t i n place a t a n y t i m e t o
r a t i o n or v e r y r i g i d l y regulate fuel. Therefore, all we w o u l d h a v e to
d o w o u l d b e t o d e m o n s t r a t e t o t h e O P E C c o u n t r i e s t h a t w e are
t o u g h e n o u g h i n t h e s h o r t r u n t o p u t i n t o effect a r i g i d a u s t e r i t y
program. W i t h this system t h e y w o u l d have to deal w i t h us b o t h i n
t e r m s of o u r defense a n d i n t e r m s of t h e i r a b i l i t y t o b r e a k u p t h e
price.
M r . PASTERNACK. T h a t w a s t r u e l a s t y e a r w h e n w e w e r e i m p o r t i n g
5 m i l l i o n , 6 m i l l i o n barrels a day. I t was true w h e n we could survive
a c u t o f f of 1 m i l l i o n o r 2 m i l l i o n b a r r e l s a clay. T h e p r o b l e m t h a t w e
face n o w , o r w e are s t a r t i n g t o face n o w a n d w e w i l l b e f a c i n g m o r e i n
2 y e a r s a n d e v e n m o r e 5 t o 10 y e a r s f r o m n o w , is t h a t i n s t e a d of b e i n g
a t 5 m i l l i o n t o 6 m i l l i o n b a r r e l s a d a y , w e w i l l b e a t 12 m i l l i o n o r 13
m i l l i o n barrels a day. A n d while we can absorb m a y b e 1 - m i l l i o n or
2 - m i l l i o n - b a r r e l - a - d a y c u t o f f f o r 10 o r 15 p e r c e n t of o u r use, i f w e
w e r e a t 13 m i l l i o n b a r r e l s a d a y of i m p o r t s a n d w e r e c u t o f f , s a y , 8 t o 10
m i l l i o n b a r r e l s a d a y , t h e n n o a l l o c a t i o n p r o g r a m a n d n o r a t i o n i n g pro^g r a m c o u l d r e a l l y g e t us o u t of t h a t s i t u a t i o n .
W e used to say last year t h a t the embargo came j u s t at t h e r i g h t
t i m e . I f i t h a d come 2 years before, i t w o u l d n o t h a v e m a t t e r e d because w e w e r e n o t i m p o r t i n g t h a t m u c h a n d w e w o u l d n o t h a v e e v e n
f e l t i t . A n d i f i t h a d c o m e 2 y e a r s l a t e r , w e w o u l d be i m p o r t i n g t o o
m u c h a n d w e w o u l d n o t b e able t o s u r v i v e t h e p r o b l e m .
M r . CONLAN. I t h i n k y o u h a v e s u m m a r i z e d i t r e a l w e l l . Y o u h a v e
t o use c o n s e r v a t i o n p r a c t i c e s a n d y o u h a v e g o t t o g e t m o r e p r o d u c t i o n .
I h a v e h e a r d a l l k i n d s of stories a b o u t w h y i t is t a k i n g us so l o n g t o
g e t o f f s h o r e p r o d u c t i o n s g o i n g a n d a b o u t t h e agencies a n d I n t e r i o r a n d
y o u a n d across t h e l i n e .
W h o m a k e s t h e d e c i s i o n as t o w h e t h e r y o u are g o i n g t o d r i l l o r n o t ?
M r . PASTERNACK. W e l l , i t depends o n t h e area. T h e I n t e r i o r D e p a r t m e n t has t h e f u l l c o n t r o l of t h e O u t e r C o n t i n e n t a l Shelf p r o g r a m .
T h e y s u b m i t areas f o r lease. T h e y r u n t h e d e v e l o p m e n t p r o g r a m . T h e y
have the f u l l control.
N o w t h e p r o b l e m i n some areas, a n d i t v a r i e s b y area, is t h a t a t t h i s
t i m e , as m o s t of y o u k n o w , t h e A t l a n t i c C o a s t S t a t e s h a v e b e e n c o n t e s t i n g t h e r i g h t of t h e F e d e r a l G o v e r n m e n t t o lease o f f s h o r e t h e
A t l a n t i c coast.




15
M r . CONLAN. T h e r e i s n o f u r t h e r e n v i r o n m e n t a l s t u d i e s t h a t n e e d
t o be done? Y o u c o u l d decide t o m o r r o w ?
M r . PASTERNACK. N O . E v e r y lease sale r e q u i r e s a n e n v i r o n m e n t a l
i m p a c t statement, a n d the I n t e r i o r D e p a r t m e n t has done a d r a f t
e n v i r o n m e n t a l i m p a c t s t a t e m e n t f o r t h e w h o l e p r o g r a m , or a so-called
p r o g r a m m a t i c s t a t e m e n t w h i c h t a l k s a b o u t t h e w h o l e A t l a n t i c coast
i n b r o a d t e r m s . B u t f o r e v e r y lease sale t h e r e h a s t o b e a specific e n v i r o n m e n t a l i m p a c t s t a t e m e n t d e a l i n g w i t h t h e specific t r a c t s t h a t are
g o i n g u p f o r sale, w h a t t h e i m p a c t s w o u l d b e as a r e s u l t o f t h a t d e velopment.
M r . C O N L A N . H o w l o n g does i t t a k e t o g e t one of t h o s e d o n e ?
M r . PASTERNACK. G e n e r a l l y , i t t a k e s
M r . CONLAN. N i n e t y days?
M r . PASTERNACK. N O ; l o n g e r t h a n t h a t . G e n e r a l l y , i t t a k e s 6 t o 9
m o n t h s . I t u s e d t o t a k e a l i t t l e o v e r a y e a r b u t p e o p l e are g e t t i n g m o r e
professional about i t now.
M r s . F E N W I C K . T h e i m p a c t s t u d y f o r t h e c o a s t o f f of N e w Jerse} r
w a s s u p p o s e d t o b e J u l y a n d i t is g o i n g t o b e S e p t e m b e r n o w a n d t h a t
has been about a year.
M r . PASTERNACK. I t t a k e s 9 m o n t h s o r so t o c o m p l e t e a s t a t e m e n t ,
the p r o b l e m being t h a t y o u have to get i n t o an extraordinary a m o u n t
of d e t a i l a b o u t t h e e n v i r o n m e n t as i t n o w is i n t h a t area. A n d so y o u
h a v e t o d o o r i g i n a l w o r k a n d m e a s u r e t h e b i o l o g y a n d e v e r y t h i n g else.
M r . CONLAN. IS t h i s a q u e s t i o n t h a t t h e r e is a l i m i t e d n u m b e r of
e x p e r t s , o r w o u l d t h e r e n o t b e s o m e w a y t o speed t h a t u p ?
M r . PASTERNACK. W e l l , y o u c o u l d n o t d o i t t o o f a s t because y o u
c a n n o t d o i t b e f o r e y o u are r e a d y t o d e v e l o p t h e lease because t h e
c o n d i t i o n s c h a n g e f r o m y e a r t o y e a r . So i t t a k e s s o m e t i m e t o j u s t
go o u t a n d m e a s u r e t h e c u r r e n t c o n d i t i o n s a n d t o d o t h e i m p a c t
studies.
I d o n o t t h i n k i f 3^ou d o u b l e d o r t r i p l e d t h e s t a f f a t I n t e r i o r t h a t is
w o r k i n g o n i m p a c t statements, y o u w o u l d n o t i c e m u c h difference.
M r . CONLAN. A l l a u t h o r i t y f o r t h i s is i n I n t e r i o r . A l l t h e h e a d c r a c k i n g is d o n e i n I n t e r i o r ?
M r . PASTERNACK. T h e I n t e r i o r D e p a r t m e n t r u n s t h e p r o g r a m a n d
they prepare environmental i m p a c t statements.
M r . CONLAN. L e t m e a s k t w o o t h e r q u i c k q u e s t i o n s . S t o c k p i l i n g —
w h e r e are w e o n s t o c k p i l i n g , a n d w h e r e d o y o u see a n y i n d e p e n d e n c e
t h r o u g h stockpiling? F i v e , t e n years d o w n the line?
M r . PASTERNACK. T h e r e are n o w , as y o u k n o w , i n v e n t o r i e s a n d
every c o m p a n y has inventories, a n d we h a v e a couple h u n d r e d
m i l l i o n b a r r e l s o f g a s o l i n e i n i n v e n t o r y . T h e s e t h i n g s are f e d i n t o t h e
pipelines.
M r . CONLAN. W h a t a r e t h e y n o w , 9 0 - d a y ? T h i r t y - d a y ?
M r . PASTERNACK. I b e l i e v e t h e i n v e n t o r i e s o f g a s o l i n e are a b o u t
2 4 0 m i l l i o n b a r r e l s , a n d w e vise a b o u t 7 m i l l i o n b a r r e l s a d a y . So t h a t
is r o u g h l y 30 o r 4 0 d a y s of s t o r a g e , a l t h o u g h m o s t of t h i s is i n p i p e l i n e s a n d u n a v a i l a b l e i n emergencies. W i t h i n t h a t r a n g e is a b o u t
w h e r e w e a r e o n m o s t p r o d u c t s . W h a t w e are t a l k i n g a b o u t is a
1-billion-barrel-a-day storage p r o g r a m w o u l d be a whole n e w system
i n w h i c h w e w o u l d s t o r e c r u d e o i l p r i m a r i l y , since t h e r e are d i f f i c u l t i e s
i n storing products a n d w h i c h w o u l d be developed p r o b a b l y i n large
p a r t a l o n g t h e g u l f c o a s t i n t h e s a l t d o m e s . T h e r e are p r o b l e m s w i t h
steel t a n k s i n t e r m s of steel a v a i l a b i l i t } ^ a n d costs.




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W h e r e w e are a t t h e p r e s e n t t i m e is w e h a v e s u b m i t t e d l e g i s l a t i o n
for w h i c h there have been hearings this week i n b o t h the Senate a n d
t h e H o u s e , t o a c t u a l l y g e t t h e a u t h o r i t y t o d e v e l o p these p r o g r a m s ,
a n d t o get the a u t h o r i t y to purchase the facilities.
M r , CONLAN. W i l l t h i s a l l be G o v e r n m e n t o w n e d ?
M r . PASTERNACK. W e l l , t h a t is one of t h e q u e s t i o n s t h a t is s t i l l u p
i n t h e a i r . T h e r e are a n u m b e r of q u e s t i o n s t h a t h a v e t o b e a n s w e r e d .
W h e r e are t h e y ? W h a t d o y o u store? H o w m u c h ? W h a t r e f i n e r y
. c a p a c i t y d o y o u h a v e t o c o m p l e m e n t i t i f y o u h a v e t o use i t ? W h e n
d o y o u use i t ? W h o o w n s i t ? W h o finances i t ?
M r . CONLAN. A n d so f o r t h e n e x t 4 o r 5 y e a r s , as f a r as s t o c k p i l i n g
is c o n c e r n e d , w e w i l l h a v e n o n e a n d w e are r e a l l y t a l k i n g a b o u t a
30- t o 4 0 - d a y reserve.
M r . PASTERNACK. N O , n o t q u i t e . W e w o u l d e x p e c t t h a t w i t h i n 1
3 r ear, l e t ' s say, a f t e r t h e e n a c t m e n t of t h i s l e g i s l a t i o n , w e w o u l d b e g i n
to prepare the facilities and t h a t w i t h i n a few years we c o u l d have,
s a y , 100 m i l l i o n b a r r e l s i n storage.
M r . CONLAN. I t has g o t t o go d o u b l e t h a t .
M r . REES. M r . C o n l a n , c o u l d I b r e a k i n ?
W e s t u d i e d t h i s . I t is o n page 162 of t h i s r e p o r t . W e w^ent i n t o a
c o m p l e t e analysis. T h e figure w e t o o k is t h a t o u r s t o r a g e c a p a c i t y
s h o u l d c o v e r o u r i m p o r t s f r o m insecure sources, b a s i c a l l y t h e A r a b
c o u n t r i e s , o v e r a 6 - m o n t h p e r i o d , a n d t h a t s h o u l d be t h e t o t a l a m o u n t
of storage. T h e r e is one w a y of s t o r i n g t h a t is v e r y i n e x p e n s i v e , a n d
t h a t is E l k H i l l s o r N a v a l R e s e r v e N o . 4 u p i n A l a s k a .
I f y o u d r i l l a field, i m p r o v e t h e field, a n d t h e n s h u t i t d o w n , t h a t is
t h e c h e a p e s t f o r m of s t o r a g e , as l o n g as y o u are n o t c a p i t a l i z i n g t h e
cost of t h e o i l i n t h e g r o u n d .
So I t h i n k t h a t i t w o u l d be wise f o r storage, since i t t a k e s a b o u t 3
m o n t h s t o b u i l d a field or t o get p r o d u c t i o n g o i n g , i f y o u h a d a c o m b i n a t i o n of a b o v e g r o u n d storage b a c k e d u p b v s a l t d o m e s a n d t h e n
backed u p b y f u t u r e E l k H i l l s p r o d u c t i o n . W e could do this o n the
OCS drilling.
F o r e x a m p l e , w e c o u l d c h e c k e r b o a r d t h e area, l e a v e a n area t h a t is
t h e p r o p e r t y of t h e p e o p l e of t h e U n i t e d States, i m p r o v e t h e field a n d
t h e n cap i t . T h a t c o u l d be p r e s t o r a g e .
M r . CONLAN. O n e f u r t h e r q u e s t i o n h e r e . I t h i n k t h a t is v e r y i n t e r e s t i n g a n d i f y o u t i e d t h a t i n t o t h i s w h o l e area of excess p r o f i t s t a x
y o u m i g h t as w e l l g i v e t h e m some k i n d of w r i t e o f f t o p l o w t h a t s t u f f
b a c k i n . A n d t h i s is w h e r e t h e h a n g u p is.
So j u s t p u t t i n g i t i n t h e G o v e r n m e n t t i l l t o use as G o v e r n m e n t o v e r h e a d is f o o l i s h . I f t h e e n e r g y c o m p a n y w e r e f o r c e d t o p l o w t h a t b a c k
i n t o those t y p e of reserves a n d d e v e l o p m e n t s , t h e y are g o i n g t o
g e t n o cash o u t of i t a l o n g those lines. I t h i n k w e w o u l d b e f a r w i s e r .
I s t i l l h a v e n o t h a d a g o o d e x p l a n a t i o n as t o w h a t is w r o n g w i t h a
quota.
W h y c a n y o u n o t say w e are c u t t i n g 1 m i l l i o n b a r r e l s a d a y a n d w e
are g o i n g t o a p p l y i t e v e n l y t o a l l c o u n t r i e s t h a t e x p o r t t o u s — " S o r r y
a b o u t t h a t , f e l l o w s . W e are b u y i n g 5 p e r c e n t less. T h e r e is n o c u r r e n c y a v a i l a b l e f o r i t or o t h e r w i s e . "
M r . PASTERNACK. T h e p r o b l e m is n o t one of t e l l i n g t h e p r o d u c e r s
t h a t y o u w i l l i m p o r t 1 m i l l i o n b a r r e l s a d a y less. T h e p r o b l e m is w h a t
effect i t has domestically.




A*
M r . CONLAN. W a i t a second. Y o u h a v e j u s t come i n u n d e r t h e w h o l e
p r o g r a m here a n d say, " W e w i l l increase t h e cost t h r o u g h a t a x t o
force the c o n s u m p t i o n d o w n . "
N o w t o m e t h a t is six of one a n d o n e - h a l f d o z e n of t h e o t h e r .
M r . PASTERNACK. W e l l , n o t necessarily. Y o u h a v e t w o o p t i o n s
w h e n y o u h a v e a q u o t a . T h e f i r s t o p t i o n is t o l e t t h e p r i c e rise t o t a k e
care of t h e s h o r t a g e . T h a t is t h e same as t h e t a r i f f , n o difference. I n
effect, t h a t is b a s i c a l l y w h a t w e are p r o p o s i n g .
M r . CONLAN. SO i n effect t h e n t h e answer t o t h e q u o t a t i l i n g is t h a t
I w a s s u p p o s e d t o v o t e f o r a t a x increase t o p u t i t i n t h e g o v e r n m e n t a l
t i l l r a t h e r t h a n l e a v i n g t h e m o n e y i n t h e p r i v a t e sector because t h e y
n e e d e d t h e r e v e n u e s t o offset t h e t a x r e d u c t i o n scheme t h a t t h e y c a m e
u p w i t h t h a t failed over i n the House.
M r . BROWN. I t is also f i n a n c e d b y d e r e g u l a t i o n . Y o u get m o n e y
back i n for exploration and f u r t h e r domestic production.
M r . CONLAN. I do n o t see h o w t h a t fits i n .
M r . TSONGAS. W e l l , y o u r e d u c e y o u r c o n s u m p t i o n b y c r e a t i n g a
depression, w h i c h t h e n l o w e r s t h e n e e d t o consume.
M r . CONLAN. W e l l , t h a t y o u h a v e t o do i f y o u w a n t t o m a k e y o u r self m o r e i m p e r v i o u s t o e x t e r n a l assault.
Now 7 i f y o u are n o t i n t e r e s t e d i n t h e r e s u l t s of e x t e r n a l assault, t h e n
you c a n d r i n k r i g h t u p here t o t h e s k y .
M r . TSONGAS. B u t I t h i n k y o u r q u e s t i o n is w e l l t a k e n , b u t I s t i l l
do n o t u n d e r s t a n d t h e answer, w h y t h e i m p o r t q u o t a s y s t e m w i t h t h e
a l l o c a t i o n g i v e n t o t h e S t a t e s does n o t m a k e m o r e sense t h a n a t a r i f f
t h a t is v e r y d i s l o c a t i v e t o t h e e c o n o m y .
M r . PASTERNACK. L e t m e f i n i s h t h a t . I s t a r t e d t o say t h e r e were
t w o t h i n g s y o u c o u l d d o i f y o u h a d a q u o t a . T h e first was to l e t t h e
prices rise t o t a k e care of t h e s h o r t a g e a n d t h a t was i n d e e d v e r y
similar to a tariff.
T h e second t h i n g
M r . CONLAN. T o h o l d t h e m o n e y i n t h e G o v e r n m e n t t i l l r a t h e r
t h a n t h e p r i v a t e sector.
M r . PASTERNACK. T h a t is r i g h t . T h e second t h i n g y o u c a n d o is t o
h o l d t h e prices, h o l d t h e p r i c e of t h e o i l a n d a l l o c a t e t h e s h o r t a g e .
Y o u c a n n o t a r b i t r a r i l y c u t off a m i l l i o n b a r r e l s a d a } ' w i t h o u t h a v i n g
an allocation program.
M r . CONLAN. W h y ?
M r . PASTERNACK. Because w h a t h a p p e n s is y o u create severe
r e g i o n a l p r o b l e m s . W h a t y o u w i l l d o is y o u w i l l h i t t h e areas t h a t
i m p o r t most. Y o u w i l l h i t the Northeast and the M i d d l e A t l a n t i c
S t a t e s , w h i c h are a l m o s t t o t a l l y d e p e n d e n t o n i m p o r t s .
So t h e r e has t o be some f o r m of a l l o c a t i o n t o t a k e care of t h e r e g i o n a l
p r o b l e m of t h e s h o r t a g e . N o w w h e n y o u get i n t o a n a l l o c a t i o n s y s t e m
t o deal w i t h a m i l l i o n - b a r r e l - a - d a y c u t o f f , y o u t h e n e n d u p w i t h m a k i n g
a n u m b e r of decisions.
M r . CONLAN. W a i t a second. Y o u are s a y i n g y o u subsidize t h e p r i c e
of t h e o i l i n t h e N o r t h e a s t r a t h e r t h a n t h e M i d w e s t . T h a t sounds l i k e
legalized stuff.
M r . PASTERNACK. I n d e e d . I f y o u j u s t c u t off 1 m i l l i o n b a r r e l s a
day
M r . LAFALOE". YOU h a v e t o h a v e a m a n d a t o r y a l l o c a t i o n s y s t e m
c o u p l e d w i t h a n i m p o r t q u o t a S3Tstem.




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M r . CONLAN. W h y c a n t h e p r i c e s y s t e m n o t r e g u l a t e t h a t ?
M r . PASTERNACK. W e l l , i f t h e p r i c e s y s t e m r e g u l a t e s i t
M r . CONLAN. W e l l , i f I a m f a r t h e r a w a y i n A r i z o n a f r o m s o m e o f
y o u r m a n u f a c t u r i n g goods, I h a v e t o p a y t r a n s p o r t a t i o n goods. Y o u
d o n o t t h i n k of m e i n t h e W e s t . Y o u say, " S c r e w y o u . T o u g h . "
N o w y o u are s a y i n g i f t h e o i l c o m e s d o m e s t i c a l l y a n d y o u h a v e t o
p a y a l i t t l e b i t m o r e f o r t r a n s p o r t a t i o n costs, t h e n y o u w a n t t h e
G o v e r n m e n t to ask f o r relief?
M r . LAFALCE. I f we d i d n o t have an allocation system, w h a t y o u
a r e t a l k i n g a b o u t is 3 0 - p e r c e n t u n e m p l o y m e n t i n t h e N o r t h e a s t a t t h e
m i n i m u m . Y o u m u s t h a v e a m a n d a t o r y a l l o c a t i o n s y s t e m , i f y o u are
going t o have i m p o r t quotas. I w o u l d like to get their opinion o n the
c o m b i n a t i o n of t h e t w o , a n d w h y n o t t h a t c o m b i n a t i o n r a t h e r t h a n
t h e P r e s i d e n t ' s p r o p o s a l of t h e i n c r e a s e d t a r i f f ?
M r . PASTERNACK. S u r e . T h e r e are a n u m b e r of r e a s o n s w h y w e f e e l
t h a t is a v e r y b a d idea.
N o w l e t m e t r y t o e n u m e r a t e a f e w of t h e m . F i r s t , w h e n y o u a r b i t r a r i l y c u t off a n d y o u allocate, y o u t h e n r u n i n t o some of t h e same
p r o b l e m s w e h a d l a s t y e a r , w h i c h are w h o d o y o u a l l o c a t e t o ?
M r . L A F A L C E . L e t ' s n o t use t h e w o r d " a r b i t r a r y " i n c o n n e c t i o n
w i t h a q u o t a unless w e also use t h e w o r d " a r b i t r a r y " i n c o n n e c t i o n
w i t h a tariff, or let's eliminate i t altogether.
M r . PASTERNACK. O K , y o u e s t a b l i s h a q u o t a , a f a i r a n d j u s t q u o t a ,
and y o u establish a fair and just allocation system and y o u allocate
e q u a l l y t o a l l p a r t s of t h e c o u n t r y a n d a l l s e g m e n t s o f t h e e c o n o m y .
T h a t is, y o u d o n o t h a v e a n y s p e c i a l p r o b l e m s o r a n y s p e c i a l e x e m p t i o n s f o r f a r m e r s , f o r h o s p i t a l s , f o r c e r t a i n businesses t h a t h a v e t o
h a v e c e r t a i n a m o u n t s of p e t r o l e u m . I n f a c t , t h a t is n o t w h a t h a p p e n s .
Y o u g e n e r a l l y e n d u p m a k i n g s o m e concessions, y o u m a k e s o m e
exceptions.
Y o u t h e n say, " A l l r i g h t , I o w a gets m o r e t h a n N e w Jersey. I o w a
g e t s 9 8 p e r c e n t of i t s s h a r e a n d N e w J e r s e y gets 85 p e r c e n t . " T h a t is
i n d e e d w h a t h a p p e n e d l a s t 3 r ear, i n e f f e c t , b a c k i n t h e g o o d o l d d a y s
o f t h e e m b a r g o , as s o m e p e o p l e r e f e r t o i t . W e h a d o n e S t a t e c o m i n g
i n as t h e o t h e r S t a t e w a s l e a v i n g s a y i n g t h a t w e h a d u n f a i r l y g i v e n
t h e m less t h a n t h e o t h e r s .
O K , t h a t is the f i r s t t h i n g t h a t h a p p e n s .
T h e s e c o n d t h i n g t h a t h a p p e n s is t h a t y o u t a k e a w a y a n y i n c e n tive
M r . TSONGAS. B e f o r e y o u g e t o n t o t h e s e c o n d , t h e first is s i m p l y
some people are u n h a p p y . Y o u get v i s i t o r s f r o m v a r i o u s States. B u t
t h a t is n o t a s t r o n g a r g u m e n t a g a i n s t t h e p r o g r a m .
M r . PASTERNACK. N O , b u t w h a t i t s a y s is, i n f a c t , t h e areas i n t h e
E a s t e r n States, f o r example, w i l l get a smaller share of t h e a v a i l a b l e
pie t h a n t h e y w o u l d if y o u d i d n o t have a n y exceptions.
T h e s e c o n d t h i n g t h a t h a p p e n s is y o u r e m o v e t h e i n c e n t i v e f o r
c o m p e t i t i o n c o m p l e t e l y because w h a t y o u d o is y o u s a y t h e r e is n o w
a s h o r t a g e . T h e r e is a s h o r t a g e o f a m i l l i o n b a r r e l s a d a y , l e t ' s s a y .
S u p p o s e h a l f o f i t o r a l l o f i t is i n g a s o l i n e . W e l l , t h e r e i s n o i n c e n t i v e
a t t h a t p o i n t because t h e r e i s — —

M r . LAFALCE. incentive for what?
. M r . PASTERNACK. Incentive for competition in terms of price. So
despite the fact that people say price controls will continue in an allocation program, what indeed happens is that dealers, service station




19
dealers, i n p a r t i c u l a r , are able t o g e t t h e f u l l m a r g i n t h e y are e n t i t l e d
t o i n s t e a d o f h a v i n g t o c o m p e t e as t h e y are n o w c o m p e t i n g , a n d t h a t is
w h y y o u are seeing c e r t a i n r e d u c t i o n s i n gasoline prices. I n f a c t , i f y o u
t a l k e d t o m o s t r e t a i l service s t a t i o n dealers, t h e y w i l l g e n e r a l l y f a v o r
a n a l l o c a t i o n s y s t e m a n d t h e r e are o t h e r reasons b u t t h a t is one of t h e
reasons.
M r . REES. YOU are t a l k i n g a b o u t a c o u p l e of cents a g a l l o n , are y o u
not?
M r . PASTERNACK. L a s t y e a r , i n a v e r y s h o r t p e r i o d of t i m e , o n l y a
f e w m o n t h s , w e e n d e d u p h a v i n g t o increase t h e m a r g i n of service
s t a t i o n s b y a b o u t 3 cents a g a l l o n , a n d t h a t w a s o n l y a c o u p l e of
m o n t h s . T h a t is because w h i l e t h e y w e r e o p e n less, t h e y h a d less
services t h a n some o t h e r areas. T h e y w e r e f o r c e d t o observe some of
t h e same f i x e d costs t h a t t h e y h a d o t h e r w i s e a n d t h e y w e r e selling
less, a n d so t h e i r v o l u m e w a s g o i n g d o w n a n d t h e y w e r e i n serious
financial
trouble.
M r . TSONGAS. T h r e e cents takes t h e m n o w t o 10 cents. So a g a l l o n of
g a s o l i n e t h e n costs 55 c e n t s ; 10 cents of t h a t is g o i n g t o t h e gas dealer,
45 cents is g o i n g someplace else. A n d w e are t a l k i n g a b o u t c o m p e t i t i o n .
I k n o w p a r t of i t is F e d e r a l a n d S t a t e t a x b u t h o w m u c h of t h a t is t o
t h e o i l c o m p a n i e s ? W h y is c o m p e t i t i o n a l w a y s seen i n t e r m s of t h e ret a i l dealer?
M r . PASTERNACK. B e c a u s e , i n effect, t h e y are t h e ones t h a t suffer
t h e c u t b a c k because t h e y are t h e ones t h a t sell less as t h e i r v o l u m e
goes d o w n .
M r . TSONGAS. W h y are w e c o n c e r n e d a b o u t c o m p e t i t i o n b e t w e e n
gas dealers i n t e r m s of p r i c e ? W h a t d i f f e r e n c e does t h a t m a k e ? L e t ' s
s a y t h e y do n o t c o m p e t e , t h e y a l l s t a y a t t h e same p r i c e .
W h a t is so w r o n g w i t h t h a t ?
M r . PASTERNACK. T h e r e is n o t h i n g w r o n g w i t h i t as l o n g as y o u
r e a l i z e t h a t a l l o c a t i o n s d o n o t m e a n a free r i d e i n t e r m s of p r i c e because of t h e forces t h a t w i l l be i n effect. Y o u j u s t w a n t t o h a v e t h e
s h o r t a g e , 3^ou w a n t t o h a v e t h e fixed a r r a y of costs a n d o t h e r costs a n d
y o u w i l l n o t have a n y need to compete o n price.
So y o u w i l l see f u l l m a r g i n b e i n g a c h i e v e d as o p p o s e d t o n o w w h e r e
y o u are seeing less t h a n t h e f u l l m a r g i n a c h i e v e d .
M r . L A F A L C E . T h e f u l l m a r g i n y o u are s u g g e s t i n g m i g h t m e a n 3
cents m o r e p e r g a l l o n .
M r . PASTERNACK. O r m o r e because t h a t w a s o n l y a p e r i o d of 3
m o n t h s o r 4 m o n t h s . B u t t h e t h i r d p o i n t , t h a t is a n i m p o r t a n t one
M r . TSONGAS. B e f o r e y o u g e t off t h a t i f y o u are c o n c e r n e d a b o u t 3
cents d i f f e r e n c e because gas dealers d o n o t c o m p e t e a n d y o u i m p o s e a n
o i l t a r i f f t o offset t h a t p r o b l e m — w e l l , go ahead.
M r . BROWN. W e l l , one t h i n g , i t w o u l d h a v e b e e n h e l p f u l i f b o t h o f
y o u g e n t l e m e n c o u l d h a v e b e e n here d u r i n g t h e t i m e t h a t t h e y w e r e
a l l o c a t i n g because y o u w o u l d h a d p a r t of t h e p r o b l e m a t least. I ' d
h a t e t o h a v e t o l i s t e n a g a i n t o t h e n u m b e r of a l l o c a t i o n c o m p l a i n t s a n d
t h e p e o p l e n e e d i n g s p e c i a l t r e a t m e n t s because of r e d u c e d sales, t r a n s i t i o n w i t h i n a c o m m u n i t y w h i c h c h a n g e d t h e b u y i n g h a b i t s of t h e
p u b l i c , e t cetera.
M r . L A F A L C E . B u t y o u see, w i t h t h a t r i c h experience w e are g o i n g
to do m u c h better.
M r . TSONGAS. B u t i t seems t o m e a t t h a t t i m e t h e p e o p l e s a w t h e
e m b a r g o as a s h o r t t e r m p r o b l e m a n d d i d n o t m a k e a n y r e a d j u s t m e n t s




m t h e i r lifestyle, or carpooling or a n y m a j o r r e a d j u s t m e n t s beca..
t h e y figured as s o o n as t h e e m b a r g o w a s o v e r , w e are g o i n g t o g o b a c k
t o t h e easy, c o n v e n i e n t g a s o l i n e s o u r c e .
A n d t h e a d m i n i s t r a t i o n h a s n o t d o n e a ver}^ g o o d j o b o f m a k i n g t h e
A m e r i c a n p u b l i c r e a l i z e t h i s is a l o n g t e r m p r o b l e m a n d yon h a v e
change y o u r lifestyle.
T h a t is t h e d i f f e r e n c e b e t w e e n w i i a t h a p p e n e d i n 1973
hopefully, w h a t would happen today.
M r . BROWN. B u t i f y o u g o v o l u m e t r i c a l l y , w o u l d i t n o t c o n t e m p l a t e
a s h o r t e r p e r i o d of t i m e ? M a r k e t w i s e c o n t e m p l a t e s 5 years or b e t t e r I n e f f e c t , a g r a d u a l r e e s t a b l i s h m e n t . W h e r e a s , i f 3^ou d o i t v o l u m e t r i c a l l y b y q u o t a s , e t c e t e r a , y o u s u g g e s t is is onl}^ f o r t h e s h o r t t e r m f o r
n o one w a n t s the q u o t a system a n d r a t i o n i n g f o r 5 - 1 0 years
M r . HYDE. T h e r e was one m o r e p o i n t he h a d t o m a k e .
M r PASTERNACK. T h e l o n g e r W^E t a l k , t h e m o r e I w i l l t h i n k (
T h e r e are s e v e r a l o t h e r p o i n t s . M a y b e I w i l l j u s t h i t t h e m q u i c k l y
W e h a v e d o n e s o m e e s t i m a t e s as t o w h a t v a r i o u s l e v e l s o f a l l o c a t i o n s o r v a r i o u s c u t o f f s w o u l d m e a n i n t e r m s of e i t h e r p r i c e i n c r e a s e s o r
w a i t i n g t i m e increases. I n f a c t , t h e q u e u i n g a t gas s t a t i o n s w o u l d g o w e e s t i m a t e i f y o u h a d , say, 700,000 barrels a d a y of a l l o c a t i o n o l
g a s o l i n e , t h a t i f y o u d i d n o t h a v e a p r i c e i n c r e a s e 3^ou w o u l d h a v e a r
average w a i t of 45 m i n u t e s t o a n h o u r a t t h e service s t a t i o n .
N o w t h e n e x t p o i n t y o u g e t i n t o is t h i s , e v e n i f y o u a c c e p t a l l t h e s e
t h i n g s — w e l l , h o w l o n g d o 3^ou a c c e p t t h e m f o r ? D o y o u a c c e p t t h e m
for a year, and t h e n w h a t happens 2 years f r o m now?
So w h a t h a p p e n s 2 y e a r s f r o m n o w is y o u n o w w o u l d h a v e b e e n
i m p o r t i n g 8 m i l l i o n barrels a day Y o u could n o t live w i t h the same
7 0 0 , 0 0 0 b a r r e l s a d a y c u t o f f because t h a t is n o t e n o u g h . H e n c e , w h a t
3 r ou d o is y o u h a v e t o go a l i t t l e b i t h i g h e r a n d w h a t y o u d o i s y o u e n d
u p c u t t i n g . Y o u end u p decreasing allocation fractions to m a y b e P
1% m i l l i o n o r 2 m i l l i o n b a r r e l s a d a y .
W h e n y o u get i n t o 1% m i l l i o n or 2 m i l l i o n barrels a day, y o u have
g o t t h e same k i n d of p r o b l e m s m a g n i f i e d , a n d t h e n w h a t y o u are
d o i n g is, i n e f f e c t , n o t c r e a t i n g a n y i n c e n t i v e a t a l l f o r a n y i n c r e a s e s
i n d o m e s t i c s u p p l y , because y o u h a v e n o t c h a n g e d t h e d o m e s t i c
s u p p l y p a t t e r n , a n d i n s t e a d w h a t y o u a r e d o i n g is y o u a r e c o n t i n u a l l y
h i t t i n g h a r d e r a n d h a r d e r as y o u g o t h r o u g h t i m e .
M r , L A F A L C E . I do n o t u n d e r s t a n d h o w w e are g o i n g f r o m i m p o r t e d
o i l vis-a-vis i m p o r t q u o t a s a n d t h e n w e are t a l k i n g a b o u t t h e domestic;
oil program.
M r , PASTERNACK. T h e y a r e i n t e r r e l a t e d .
M r . LAFALCE-. I k i i o W t h e y a r e i n t e r r e l a t e d . B u t i f w e w e r e t o
establish i m p o r t quotas arid a m a n d a t o r y allocation system, h o w
w o u l d i t s effect vtpon p r o d u c t i o n of d o m e s t i c oil differ f r o m t h e effect
of increased tariffs o n i m p o r t e d oil u p o n the production* of d o m e s t i c
oil?
M r . P A S T E R N A C K . 1 Well, w i t h j u s t s t r i c t l y i n c r e a s e d t a r i f f s , n
w o u l d n o t h a v ^ m u ^ h bf k difference. B u t i n d t \ t p r o g r a m , w h a t w e are
t a l k i n g a b o u t M frbt j u s t t h e t a r i f f s , t h e t e m p o r a r y 1 t a r i f f s , b u t
decontrol.
J
M r . LAFA^C^. Y o u ebtild talk about decontrol and i m p o r t
t o o . S o I d o n o t t h i n k t h a t is a f a i r a r g u m e n t a t a l l ,
M r . PASTERNACK. O K , I w i l l a c c e p t t h a t .




21
M r . HOGAN. Q u o t a s w i t h d e c o n t r o l , a l l o w i n g t h e p r i c e t o r e a d j u s t
are s i m i l a r t o t a r i f f s , T h e d i f f i c u l t y b e g i n s w h e n t a l k i n g a b o u t q u o t a s
w i t h p r i c e c o n t r o l s a n d a l l o c a t i o n s . T h e n t h e m a r k e t s y s t e m is n o t
a d j u s t i n g f o r t h e v a r i o u s c o n s u m e r s of p e t r o l e u m , a n d 3^ou n e e d a
y e r y complicated allocation system. I f we k n e w h o w to allocate
p e r f e c t l y w i t h o u t c h a n g i n g t h e prices a t t h e same t i m e , i t w o u l d n o t
m a k e a d i f f e r e n c e , w e c o u l d use q u o t a s a n d h a v e a l l o c a t i o n s , a n d w e
c o u l d decide w h o w o u l d receive w h a t a n d w h o w o u l d c o n s u m e w h a t
a n d h o w i t w o u l d change over time. W e w o u l d determine w h i c h
businesses are d e c l i n i n g a n d w o u l d receive less a n d w h i c h are e x p a n d i n g to receive more.
T h e t r o u b l e is, w e d o n o t k n o w h o w . W e do n o t k n o w h o w t o r u n
a n a l l o c a t i o n p r o g r a m of l a r g e m a g n i t u d e o v e r a l o n g p e r i o d of t i m e
w h e n t h e e c o n o m y is c h a n g i n g .
T h e p u r p o s e of taxes a n d prices is t o a l l o w M r . LAFALCE. W e l l , r a t h e r t h a n allow going to this 1 m i l l i o n
f i g u r e — a n a r b i t r a r y 1 m i l l i o n f i g u r e — c o u l d w e n o t phase i t i n ?
I s there a n y i m p e r a t i v e need for 1 m i l l i o n this year? C o u l d we n o t
phase i t i n w i t h a n a l l o c a t i o n s y s t e m , f o r e x a m p l e , so t h a t w e w o u l d
h a v e t h i s p e r i o d of t i m e t o see t h e effects c o u p l e d , of course, w i t h . t h e
experience w e h a v e a l r e a d y h a d ?
M r . HOGAN. T h e t r o u b l e is, e v e n t u a l l y t h e a l l o c a t i o n m u s t be a
v e r y l a r g e n u m b e r . Y o u c o u l d phase i t i n , b u t i f y o u are g o i n g t o g e t
to the l o n g t e r m goal, y o u have to handle a v e r y large n u m b e r .
M r . LAFALCE. I do n o t have any p r o b l e m w i t h t h a t .
M r . REES. L e t m e ask o n y o u r t i m i n g n o w . I t is e s t i m a t e d t h a t y o u r
p r o g r a m w i l l r u n the i n f l a t i o n a r y rate u p another 2 to 4 percent.
M r . PASTERNACK. T w o p e r c e n t , as a o n e - t i m e s h o t t h i s y e a r .
M r . REES. W e l l , some of o u r e c o n o m i s t s are s a y i n g 4. So l e t us s p l i t
i t a n d s a y 3.
N o w , t h a t is a t a t i m e w h e n prices are g o i n g d o w n . I f 3^011 c h e c k
y o u r r a w m a t e r i a l prices i n t h e W a l l S t r e e t J o u r n a l , t h e y are g o i n g
d o w n ; t h e r a t e of i n f l a t i o n is g o i n g d o w n , o b v i o u s l y , because i t is a
recession a n d t h e r e is less b u y i n g p o w e r a n d less d e m a n d .
N o w , t o k i c k t h a t u p a g a i n w i t h a n increase of 67 p e r c e n t i n y o u r
f u e l prices a t a t i m e d u r i n g t h i s t e r r i b l e recession, i t seems t o m e t o be
v e r y c o u n t e r p r o d u c t i v e w h e n y o u are l o o k i n g a t t h e e c o n o m i c s i t u a t i o n f o r t h e n e x t 12 m o n t h s . N o w , 12 m o n t h s f r o m n o w t h e e c o n o m y
m i g h t be able t o t a k e t h i s t y p e of k i c k e r , b u t w e h e a r d C h a r l i e S c h u l t z e
a n d t h e n J o h n S a w h i l l t h e o t h e r d a y , a n d t h e y m o r e or less h a d t h i s
v i e w t h a t a t t h i s t i m e i t is v e r y d i f f i c u l t f o r t h e e c o n o m y t o t a k e t h i s
k i n d of increase i n a v e r y basic c o m m o d i t y .
M r . PASTERNACK. W e l l , of course, t h a t is a k e y q u e s t i o n t h a t has
t o b e r e s o l v e d . I t is one t h a t w e j u d g e d , t h a t w e f e l t t h a t o u r p r o g r a m
c o u l d absorb a n d t h a t w i t h t a x rebates a n d t a x cuts a n d e v e r y t h i n g
else t h a t w e c o u l d offset t h e i n c r e a s e d i n f l a t i o n r a t e b y m a i n t a i n i n g
consumer b u y i n g power over the next year.
N o w , t h a t is s o m e t h i n g t h a t , o b v i o u s l y , a l o t of p e o p l e do n o t agree
w i t h a n d , c e r t a i n l y , one t h i n g t h a t w e are t a l k i n g a b o u t i n
negotiating
M r . HANNAFORD. A r t h u r B u r n s expressed t h a t v i e w also.
M r . REES. W e l l , I t h i n k a p r o b l e m t h a t a l o t of us h a v e , a n d J o h n
expressed i t , is t h a t t h e p r o g r a m seems t o be a d o - o r - d i e p r o g r a m of
a l l t h e c h i p s , o n t h e process of r a i s i n g t h e p r i c e of p e t r o l e u m a n d
n a t u r a l gas a t l e a s t 67 p e r c e n t .




22
B u t w e m i g h t go i n t o m o r e of a m i c r o a p p r o a c h a n d say; all r i g h t ,
n o w l e t u s p u t a n excise t a x o n a l l n e w c a r s n o t g e t t i n g a t l e a s t 2 0
miles to a gallon. L e t us p u t a t a x o n peaking power i n terms of
electrical d e v e l o p m e n t . L e t us t o t h r o u g h 60 o r 7 0 separate m o v e s
which, added together, w o u l d give y o u t h a t approximately 1-billionbarrel cut.
W h a t a b o u t S u n d a v closings, o r w h a t a b o u t h a v i n g o n l y a f e w gas
stations open o n Sundays for Emergency purpose; w h a t a b o u t l i m i t i n g
t h e h o u r s t h a t a s t a t i o n m i g h t b e o p e n ? Y o u c a n see a b o u t 6 0 o r 7 0
different things t h a t can be done t o achieve this. W h a t y o u are t r y i n g
to do w i t h the pricing mechanism.
M r . PASTERNACK. T h e r e i s n o q u e s t i o n t h e r e i s a w i d e r a n g e o f
a l t e r n a t i v e s available. W e s t a r t e d o u t , w h e n w e g o t i n t o t h i s process
i n t h e s t a t e of t h e U n i o n message, w i t h m a y b e 100 d i f f e r e n t a l t e r n a tives, r a n g i n g f r o m S u n d a y gasoline p r o g r a m s to 1 - d a y - a - w e e k
d r i v i n g bans, t o r a t i o n i n g , to allocations, quotas, gasoline taxes,
t a x e s across t h e b o a r d , r e b a t e s , a n d excise t a x e s o n n e w c a r s . W e f e e l
t h a t t h e p r o g r a m t h a t t h e P r e s i d e n t has p r o p o s e d is b o t h a s i m p l e
p r o g r a m i n t e r m s of i t s o p e r a t i o n a n d one w h i c h c a n b e a c c o m p l i s h e d
a n d c a n a c h i e v e t h e g o a l s w e set o u t .
N o w , t h a t is n o t t o say t h a t is t h e o n l y a p p r o a c h a n d t h a t there
a r e n o t t r a d e o f f s as t o w h e r e y o u p u t y o u r v a l u e s i n t e r m s o f e c o n o m y ,
i n t e r m s of r e g i o n a l i m p a c t s , i n t e r m s of t i m i n g , i n t e r m s of energy
independence a n d dependence, a n d those are a l l t h i n g s t h a t w e
discussed.
M r s . FENWICK. C o u l d I say something?
I w o u l d l i k e t o associate m y s e l f w i t h y o u r r e m a r k s , because a l l
t h i s seems so u n r e a l t o t h e g e n e r a l p u b l i c ; a n d i f i t is g o i n g t o i n v o l v e
t h e general p u b l i c i n a s m a s h i n g p r i c e increase r i g h t across t h e b o a r d ,
n o t j u s t i n t h e i r f u e l o i l or t h e i r gasoline. A s one m a n u f a c t u r e r said,
" M y u t i l i t y b i l l h a s a l r e a d y g o n e u p f r o m $3 m i l l i o n t o $ 6 m i l l i o n a
y e a r , " w h i c h means t h a t his p r o d u c t s w i l l be m o r e expensive.
H o w do y o u m a k e this real to the A m e r i c a n public, w h e n y o u get a
k e w p i e d o l l f o r b u y i n g 10 g a l l o n s o r m o r e ? T h e r e i s s o m e t h i n g t h a t
does n o t m a k e sense. E i t h e r t h e r e i s a n e m e r g e n c y — a s h o r t a g e — o r
there isn't. W h a t s t a t u t o r y powers do y o u need to control the oil
companies? W h a t k i n d of s t a t u t o r y powers d o y o u need i n order t o be
able t o say t o t h e o i l companies, n o t t h e dealers, " Y o u are g o i n g t o
h a v e t o m a k e sense o n t h i s ? " T h e e x p e r t s s a y , " T h i s i s a r e a l p r o b l e m , "
b u t i t does n o t s e e m r e a l .
T h e o i l c o m p a n i e s a r e a b l e t o f o r c e t h e d e a l e r s t o p r o m o t e sales,
w h i c h is e n t i r e l y c o n t r a r y t o t h e p u b l i c i n t e r e s t a n d t h e r e t r u l y i s a
shortage. N a t u r a l l y , the p u b l i c receives o n l y t h e i m p r e s s i o n t h a t
t h e y get d r i v i n g d o w n the h i g h w a y .
N o w , w h a t do y o u need to c o n t r o l the oil companies? W h a t k i n d of
statute do y o u want?
M r . PASTERNACK. I h a v e t o b e h o n e s t . T h a t i s s o m e t h i n g I a m n o t
personally qualified to answer.
M r . TSONGAS. L e t m e g e t b a c k t o y o u t h i s w e e k , b e c a u s e w e a r e
working on that.
M r . REES. W e l l , t h i s is a q u o r u m call.
M r s . FENWICK. W h a t do y o u t h i n k w e o u g h t t o do a b o u t E l k H i l l s ?
M r . PASTERNACK. P r o d u c e i t .




23
M r . REES. L e t m e say t h e bells are f o r a q u o r u m call. N o w ,
w o u l d y o u l i k e t o c o m e b a c k a n d c o n t i n u e t h i s , say, u n t i l a r o u n d
4, o r a d j o u r n , o r w h a t ?
[ D i s c u s s i o n off t h e r e c o r d . ]
M r . REES. T h e r e are several p r o b l e m areas t h a t I a m i n t e r e s t e d i n .
T h e r e is t i t l e I X of t h e E n e r g y I n d e p e n d e n c e A c t . T h e r e is a K i s s i n g e r
p r o p o s a l t o set u p a t a r i f f s y s t e m so t h a t a l o w e r i n g of O P E C prices
t h a t w o u l d n o t p u t o u r h i g h cost e n e r g y sources o u t of business.
I h a v e t a l k e d w i t h e x e c u t i v e s i n t h e o i l i n d u s t r y , s u c h as a p r o d u c e r
w h o is b a s i c a l l y d e p e n d e n t o n d o m e s t i c sources a n d v e r y m u c h i n t o
t h e d e v e l o p m e n t of A l a s k a . Because of t h e h i g h c a p i t a l cost of d e v e l o p i n g c o a l g a s i f i c a t i o n p l a n t s , o r shale p l a n t s , s y n t h e t i c f u e l p l a n t s , w h a t
w o u l d y o u t h i n k about a j o i n t venture w i t h the G o v e r n m e n t to pick
u p some of these f r o n t - e n c l costs? Y o u h a v e t o p u t u p $100 m i l l i o n
f o r y o u r b i d . T h a t goes i n t h e g e n e r a l t r e a s u r y a n d does n o t come b a c k
i n t o e n e r g y p r o d u c t i o n . H e s a i d i t is a d a r n g o o d idea.
N o w , since I t a l k e d t o t h e g e n t l e m a n , t h i s c o m p a n y has g o t t e n o u t
of b o t h t h e t a r s a n d p r o j e c t , a n d t h e y h a v e a b a n d o n e d t h e i r shale
p r o j e c t . A n d b a s i c a l l y i t is because of t h e c a p i t a l i n t e n s i v e n e s s of t h i s
t y p e of d e v e l o p m e n t . T h e y are s p e n d i n g a l l of t h e i r m o n e y o n t h e
A l a s k a p i p e l i n e , a n d t h i s is a c o m p a n y t h a t is d e v o t e d s t r i c t l y t o
e n e r g y . T h e y are n o t b u y i n g o u t s i d e c o m p a n i e s .
N o w , s h o u l d t h e r e n o t be some m e t h o d of a j o i n t v e n t u r e ? W e h a v e
l o t s of e x a m p l e s i n t h i s c o u n t r y a n d o t h e r c o u n t r i e s w h e r e j o i n t v e n t u r e s h a v e w r orked o u t v e r y w e l l . O t h e r w i s e , t h e f r o n t - e n d c a p i t a l costs
t i e d i n w i t h t h e f r o n t - e n d b o n u s b i d w o u l d j.ust p u t t h e m o u t of
business.
M r . PASTERNACK. T h e r e are r e a l t y t w o p r o b l e m s , a n d t h e y are
c o m p l e t e l y d i f f e r e n t . O n e is t h e q u e s t i o n of w h a t do w^e do w i t h o u r
t r a d i t i o n a l a n d c o n v e n t i o n a l d o m e s t i c sources of e n e r g y , oil, n u c l e a r ,
coal? A n d t h e second one is, w h a t do w e do w i t h some of t h e n e w e r
t e c h n o l o g i e s , t h e c o a l g a s i f i c a t i o n , l i q u i f a c t i o n , o i l shale, a n d others?
T h e y are t w o d i f f e r e n t p r o b l e m s , because t h e p r i c e or t h e cost of p r o d u c i n g f r o m these t e c h n o l o g i e s v a r i e s t r e m e n d o u s l y . W h e r e a s y o u
c a n p r o d u c e m o s t o i l f o r $5, $6, $7 a b a r r e l , m a y b e t e r t i a r y r e c o v e r y
and advanced recovery
M r . REES. W h y do y o u n o t s t a r t a t $2?
M r . PASTERNACK. T h e r e are n o t m a n y of those l e f t . I t costs $12,
$13, $14, m a y b e $20 a b a r r e l t o p r o d u c e some of those. W h e n we
s t a r t e d t h i n k i n g a b o u t w h a t do w e do i f t h e p r i c e of o i l comes d o w n
b e l o w i t s c u r r e n t levels, w h a t do w e do i f i t is $ 7 ; w h a t do w e do i f i t
is $ 4 ; w h e r e do w e g e t concerned?
T h e Federal G o v e r n m e n t felt t h a t i t was n o t our p r o b l e m a n d conc e r n f o r t h e p r o p e r s o l u t i o n t o p u t i n a p r i c e f l o o r , or p r i c e s u p p o r t , t o
s u p p o r t s o m e t h i n g t h a t w o u l d be $15 a b a r r e l or $14 a b a r r e l , because
t h e n y o u are s u b s i d i z i n g n o t o n l y t h a t one, b u t y o u are subsidizing;
e v e r y b o d y t h a t gets i n a t $5, $6, a n d $7 a b a r r e l .
So t h e f i r s t t h i n g w e r u l e d o u t w a s a n y p r i c e f l o o r a t t h a t k i n d of
l e v e l , a n d , i n f a c t , w h a t w e h a v e p r o p o s e d i n a s y n t h e t i c fuels p r o g r a m
is a set of j o i n t v e n t u r e s , subsidies, l o a n guarantees, p u r c h a s e g u a r a n tees, p r i c e g u a r a n t e e s , w h a t e v e r , t o b r i n g o n g a s i f i c a t i o n , l i q u i f i c a t i o n ,
a n d o i l shale, a n d w e are r i g h t n o w a c t u a l l y s t a r t i n g t h a t .
I t w i l l p r o b l a b l y b e u n d e r t h e auspices of E R D A or F E A .




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M r . REES. SO i f I w a n t e d t o go i n t o t h e shale business, a n d I s a i d w e
are going t o need a half b i l l i o n dollars, if I spend a half b i l l i o n dollars,
I w a n t s o m e t h i n g l i k e 1 2 - p e r c e n t p r o f i t o n m y i n v e s t m e n t , a n d I also
w a n t a target price guaranteed b y the G o v e r n m e n t . N o w , this could
be g u a r a n t e e d b y purchase contracts, a n d therefore y o u w o u l d n o t
a f f e c t t h e p r i c e s of o t h e r c h e a p e r e n e r g y .
M r . PASTERNACK. T h a t is e x a c t l y t h e a p p r o a c h t h a t I t h i n k — I a m
n o t s u r e t h a t i t is g u a r a n t e e d t h r o u g h a c o n t r a c t o r s u b s i d i e s o r w h a t
i t is. A n d t h a t is one of t h e t h i n g s w e are w o r k i n g o n . B u t t h a t is e x a c t l y
t h e w T ay w e p l a n t o go w i t h t h e n e w t e c h n o l o g i e s .
N o w , o n t h e p r i c e floor c o n c e p t , w h a t w e a s k e d f o r i n t i t l e I X w a s t h e
a u t h o r i t y a n d , i n e f f e c t , t h e w a y t h e t h i n g is w o r d e d i t says t h a t t h e
P r e s i d e n t w o u l d be a u t h o r i z e d a n d r e q u i r e d t o establish either a price
floor, q u o t a , o r t a r i f f , o r s o m e t h i n g t o p r o t e c t t h e l e v e l o f d o m e s t i c o i l
p r i c e s i f t h e p r i c e of o i l d r o p s t o s o m e t h i n g t h a t t h r e a t e n s o u r v u l n e r a b i l i t y a n d i n d e p e n d e n c e . N o w , t h a t a g a i n is v e r y g e n e r a l t e r m s . N o w ,
w h a t w e m e a n t t h e r e w a s , i f t h e p r i c e o f o i l d r o p p e d t o $3 o r $4 a
b a r r e l , t h e n t w o t h i n g s c a n h a p p e n . O n e , d e m a n d is g o i n g t o go u p
a g a i n , a n d i t i s g o i n g t o go u p v e r y q u i c k l y , a n d o u r p r o j e c t i o n s w e r e
$4 a b a r r e l . A n d w e w o u l d b e i m p o r t i n g 20 m i l l i o n b a r r e l s a d a y .
S e c o n d , t h e sources, l i k e t h e O C S a n d A l a s k a , w h i l e t h e y d o n o t
c o s t $10 a b a r r e l , t h e y d o cost $5, $6, $7 a b a r r e l , a n d t h o s e w o u l d
become v e r y q u i c k l y uneconomic. W e f e l t t h a t there was a need for
t h e U . S . G o v e r n m e n t t o s a y t h a t t h e e r a of c h e a p e n e r g y is o v e r a n d
t h a t w e are n e v e r a g a i n g o i n g t o see $3 a b a r r e l o i l p r i c e s i n t h i s
c o u n t r y . A n d f r o m t h e s t a n d p o i n t of o u r o w n p r o t e c t i o n a n d t h e s t a n d p o i n t of e n e r g y c o n s e r v a t i o n a n d t h e p r o t e c t i o n o f t h e c o n v e n t i o n a l
sources of e n e r g y , w e are g o i n g t o h a v e t o l i v e w i t h t h e f a c t t h a t m a y b e
$5, $6, o r $7 is t h e r i g h t l e v e l . A n d w e also f e l t t h a t w e w e r e n o t r e a d y
t o say w h a t t h e l e v e l w a s .
I t is a f a i r l y c o m p l i c a t e d q u e s t i o n , y o u k n o w , w h a t s o u r c e , w h a t
r e g i o n , a n d so t h e w a y w e p h r a s e d o u r l e g i s l a t i o n w a s t h a t w e w o u l d
assess a t a n y g i v e n p e r i o d w h a t o u r d e m a n d s i t u a t i o n w a s , w h a t o u r
s u p p f y s i t u a t i o n w a s , a n d w h a t t h e o i l p r i c e s are, a n d figure o u t w h e r e
we t h o u g h t we were becoming too vulnerable, and at t h a t p o i n t the
P r e s i d e n t w o u l d h a v e t h e a u t h o r i t y t o p u t i n e i t h e r o n e o f these
m e c h a n i s m s . A n d t h a t is b a s i c a l l y t h e w a y t h e S t a t e D e p a r t m e n t i s
proceeding i n t h e i n t e r n a t i o n a l n e g o t i a t i o n s w i t h o t h e r countries, is
t o agree i n c o n c e p t w i t h t h i s k i n d of a p p r o a c h .
M r . REES. G o o d . I w a s w o r r i e d t h a t i t w o u l d b e t h e t y p e o f t a r i f f
t h a t w o u l d p u t us p e r m a n e n t l y i n a h i g h c o s t e n e r g y p o s i t i o n a n d w e
w o u l d n o t be c o m p e t i t i v e w i t h other countries w h o were i m p o r t i n g
p e t r o l e u m b u t n o t assessing t h e t a r i f f .
M r . PASTERNACK. T h a t is n o t t h e i n t e n t , a n d t h e S t a t e D e p a r t m e n t
is l e a d i n g n e g o t i a t i o n s a n d is p r o c e e d i n g a l o n g t h e p a t h o f g e t t i n g a n
i n t e r n a t i o n a l a g r e e m e n t . I f t h e U n i t e d S t a t e s a l o n e does i t , w e l l , t h a t
w o u l d b e fine f o r o u r o w n e n e r g y p u r p o s e s , b u t , c e r t a i n l y , i n o u r
t r a d i n g situation i t w o u l d n o t be v e r y fair.
M r . REES. T h e r e w a s s o m e d i s c u s s i o n o n t h e O C S . W e d i d a r e p o r t —
I t h i n k we sent i t to y o u r s h o p — o n the d e v e l o p m e n t of t h e O u t e r
C o n t i n e n t a l S h e l f , a n d m y i m p r e s s i o n w a s t h a t w e s h o u l d n o t lease
a n y t h i n g t h i s y e a r because t h e I n t e r i o r r e a l l y does n o t k n o w w h e r e i t
is g o i n g a n d n e v e r has. I t does n o t h a v e a p o l i c y o t h e r t h a n j u s t l e a s i n g




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t r a c t s o u t . N e a r l y h a l f of w h a t t h e y h a v e is i n s h u t - i n c a p a c i t y . E v e n
i f t h e y d i d n o t lease a n y t h i n g o u t , t h e y h a v e g o t e n o u g h a l r e a d y
u n d e r lease t o p r o b a b l y k e e p t h e o i l i n d u s t r y b u s y f o r a n o t h e r 5 y e a r s ,
p l u s t h e f a c t t h e r e are v e r y severe s h o r t a g e s i n d r i l l i n g p i p e , p l a t f o r m s .
I n m y o w n area, i n C a l i f o r n i a , w e h a v e , I t h i n k , 12 refineries i n
o u r h a r b o r area, b u t t h e y are a l l b u s y a n d a l l t h e s t o r a g e is f u l l , a n d
w e are u s i n g m o s t l y l o w s u l p h u r I n d o n e s i a n . So t h a t w^ould n o t b e
a r e p l a c e m e n t of e i t h e r A l a s k a n o r t h e O u t e r C o n t i n e n t a l S h e l f ,
a n d e v e n i f t h e y d o n o t go a h e a d w i t h t h e l e a s i n g p r o g r a m , t h a t
9 b i l l i o n barrels I was t a l k i n g about i n the Santa B a r b a r a Channel
is a l r e a d y leased o u t . T h e y are j u s t w a i t i n g f o r t h e e n v i r o n m e n t a l
impact study.
W i t h a m i l l i o n and a half barrels coming d o w n f r o m Alaska there
is g o i n g t o b e a h u g e s h o r t a g e of p e t r o l e u m o n t h e w e s t coast i n a b o u t
2 y e a r s — I m e a n a surplus. A n d n o w w h a t do we do w i t h it?
M r . PASTERNACK. T h a t is a v e r y r e a l p r o b l e m . A l l t h r e e of us h e r e
w o r k e d i n v a r y i n g capacities o n the P r o j e c t Independence s t u d y . T h e
k e y t h i n g w e f o u n d w a s t h a t i n 2 t o 3 years, o r l o n g e r , i f y o u h a d
Santa B a r b a r a Channel producing and y o u had the Alaska pipeline
c o m i n g i n a n d p r o d u c i n g i t s 2 m i l l i o n b a r r e l s a d a y o r so, a n d i f y o u
e v e r w a n t e d t o lease a n y m o r e i n A l a s k a , t h e n i f y o u d i d n o t h a v e a n y
i n f r a s t r u c t u r e , y o u w o u l d g e t t h e o i l a w a y f r o m t h e w e s t coast. T h e
w e s t coast w o u l d be s w i m m i n g i n o i l w h i l e t h e M i d w e s t a n d t h e E a s t
were suffering.
T h a t leads us t o a c o u p l e of c o n c l u s i o n s . F i r s t , t h a t y o u h a v e g o t t o
d o s o m e t h i n g t o g e t o i l f r o m A l a s k a o r t h e w e s t coast t o t h e M i d w e s t
a n d t o the gulf, or m o v e i t u p f r o m the gulf. M a y b e a C a n a d i a n
pipeline, or m a y b e a tanker route around either S o u t h A m e r i c a or
C e n t r a l A m e r i c a . B y t h e w a y , t h a t c o u l d be cheaper t h a n a C a n a d i a n
pipeline.
S e c o n d , t h e o t h e r p r o b l e m , of course, is t h a t t h e r e is a f a i r a m o u n t
of o i l , w e t h i n k , o n t h e east coast, i n t h e A t l a n t i c . T h e r e is a f a i r
a m o u n t of oil, w e t h i n k , i n t h e G u l f of A l a s k a , b u t w e d o n o t k n o w
y e t . W e d o n o t k n o w because n o b o d y has gone o u t t h e r e a n d d r i l l e d
o r e x p l o r e d o r f o u n d a n y . A n d w e t h i n k i t is of p r e t t y h i g h i m p o r t a n c e
f o r t h i s c o u n t r y t o find o u t w h a t is o u t t h e r e a n d t o b e able t o d e t e r m i n e w h e t h e r o r n o t t o c o u n t o n i t i n t h e f u t u r e . A n d t h a t is w h y w e
w o u l d l i k e t o see t h a t e x p l o r a t i o n a n d p r o d u c t i o n s t a r t i n g o u t t h e r e .
M r . REES. T h e y d o n o t n e e d a n y m o r e leasing, a t least f o r a n o t h e r
y e a r , a y e a r a n d a h a l f , because t h e y h a v e e n o u g h o u t t h e r e t h a t t h e y
h a v e n o t even p u t d o w n their strap wells. W h a t a b o u t the possibility
of k e e p i n g p a r t of i t as a s t r a t e g i c reserve? I t a l k e d t o I n t e r i o r . T h e y
say t h a t y o u first p u t i n a s t r a p w e l l j u s t t o see w h a t y o u h a v e , b u t
once t h a t is p r o v e n , t h e y p l u g t h a t . A n d t h e n w h e n t h e y go i n f o r
p r o d u c t i o n , t h e y go i n w i t h a n o r m a l r i g , a n d h e s a i d i t o n l y t o o k
a b o u t 30 d a y s , once y o u r r i g w a s i n place, t o d r i l l a field. T h a t is t h e
first h o l e .
N o w , t h a t is n o t v e r y m u c h t i m e . So w h y c o u l d y o u n o t j u s t h a v e
s t r a t e g i c reserves i n a c h e c k e r b o a r d area, w h e t h e r i t be i n t h e E a s t ,
w h e t h e r i t be i n the West?
M r . PASTERNACK. W h e r e do y o u g e t t h e p l a t f o r m s ?
M r . REES. W e l l , I guess y o u w o u l d h a v e t o h a v e some t y p e of
dedicated p l a t f o r m s for t h a t purpose.




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M r . PASTERNACK. I f I r e m e m b e r — a n d I d o n o t r e m e m b e r t h e
s t a t i s t i c s o n i t — w h e n y o u l o o k a t w h a t i t w o u l d t a k e i n t e r m s of
dedicated platforms and pipeline and tankers, and if y o u h a d the oil
o u t i n t h e m i d - A t l a n t i c someplace, a n d y o u h a d a s h u t - i n w e l l , a n d
y o u produced it, y o u w o u l d then have to find a w a y to b r i n g i t to
shore, a n d a place t o b r i n g i t t o shore. Y o u c e r t a i n l y d o n o t w a n t t o
b u i l d a pipeline.
M r . REES. I f t h e r e w a s a n o i l crisis, i t w o u l d p r o b a b l y m e a n t h e r e
w o u l d b e a s u r p l u s of t a n k e r s , a n d t h e r e w o u l d b e a s u r p l u s of s t o r a g e ,
a n d t h e r e w o u l d be a s u r p l u s of r e f i n i n g c a p a c i t y .
M r . PASTERNACK. T h e r e c o u l d be, b u t , I t h i n k , as y o u g o t h r o u g h
t h e n u m b e r s a n d t h e analyses as t o t h e cost of t h o s e i n d i v i d u a l areas
a l l u p a n d d o w n t h e coast, o r w h e r e v e r t h e y are, t h a t i t t u r n s o u t t h a t
t h e s a l t d o m e storage, w h i c h m a y cost a t o t a l , i n c l u d i n g m a i n t e n a n c e ,
o f $ 1 a b a r r e l , a n d m a y b e o n e - t h i r d t h e cost of t h e s h u t - i n c a p a c i t y . I
t h i n k t h a t is w h e r e t h e e c o n o m i c s w o r k o u t .
M r . REES. I t h i n k o n t h e s h u t - i n c a p a c i t y t h e y c a p i t a l i z e t h e p r i c e
o f t h e o i l i n t h e g r o u n d , a n d t h a t becomes p a r t of t h e cost. T h a t is
wh}^ t h e cost of s h u t - i n a l w a y s seems so v e r y h i g h .
M r . HOGAN. I d o n o t h a v e t h e figures, b u t I h a v e h e a r d t h e same
s t a t e m e n t , a n d w e d o h a v e some w o r k t h a t h a s b e e n d o n e o n t h i s .
I t says t h a t t h e s h u t - i n c a p a c i t y , c o m p a r e d t o s a l t d o m e s , is a m o r e
e x p e n s i v e f o r m of s t o r a g e , b u t I t h i n k t h e r e a s o n is because of t h e
flow r a t e p r o b l e m . T h e t y p i c a l pressure a n d flow r a t e s t h a t y o u c a n
g e t o u t of s h u t - i n c a p a c i t y f o r a n i n d i v i d u a l w e l l are m u c h l o w e r t h a n
t h e t y p e y o u c a n g e t o u t of s a l t d o m e s , a n d y o u n e e d m o r e w e l l s t o
g e t t h e same k i n d of response i f y o u w a n t 3 m i l l i o n b a r r e l s a d a y t o
c o m e o u t , o r a m i l l i o n b a r r e l s a d a y , o r w h a t e v e r i t is, y o u c a n d o t h a t
w i t h a s m a l l g r o u p i n g of wells i n one s a l t d o m e w h e r e t h e y h a v e
s u f f i c i e n t pressure a n d c a p a b i l i t y t o w i t h d r a w i t r a p i d l y . W h e r e a s
w i t h t h e s h u t - i n c a p a c i t y y o u n e e d a l a r g e n u m b e r o f w e l l s because o f
the geological structure. I t h i n k t h a t is t h e m o t i v a t i o n f o r s a y i n g i t is
c h e a p e r t o store i t i n t h e s a l t domes. W h e r e a s I t h i n k t h e e s t i m a t e is
a b o u t 60 cents p e r b a r r e l .
M r . PASTERNACK. W e w o u l d b e g l a d , b y t h e w a y , t o s u p p l y w h a t ever i n f o r m a t i o n we h a v e got on t h a t t o y o u .
M r . REES. Y e s , w e d i d g e t i n t o t h i s . M i l t R u s s e l l d i d some w o r k
on i t w h i c h was v e r y interesting.
M r . PASTERNACK. W e d o n o t p r e t e n d t o k n o w a l l t h e a n s w e r s ,
a n d t h a t is one r e a s o n w h y I t h i n k w e n e e d a l i t t l e t i m e t o s t u d y i t .
M r . REES. O n y o u r n a t u r a l gas p r i c i n g , I h a v e d o n e s e v e r a l s t u d i e s
u s i n g t h a t 6 - t o - l r a t i o i n t e r m s of a p r i c e of a b a r r e l of o i l r e l a t e d t o
h o w m a n y M C F , a n d t r i e d t o c h e c k t h e i n t r a s t a t e cost. I
figured
p r o b a b l y t h e d e r e g u l a t e d n a t u r a l gas w o u l d be a t l e a s t $ 1 a n M C F .
M r . PASTERNACK. O n n e w n a t u r a l gas w h i c h is n o t u n d e r c o n t r a c t s ?
M r . REES.

Yes.

M r . PASTERNACK. Y e s , w e t h i n k i t w o u l d b e a t l e a s t $ 1 M C F .
W h a t is i m p o r t a n t is t h a t m o s t n a t u r a l gas is u n d e r l o n g t e r m c o n t r a c t s , a n d w h i l e y o u w o u l d see a n i m m e d i a t e increase i n s o m e of these
s p o t p r i c e s a n d j n n e w c o n t r a c t s , w h a t y o u w o u l d n o t see is a v e r y
s h a r p increase o n t h e average p r i c e of n a t u r a l gas. I t w o u l d go u p
r a t h e r s l o w l y . W e e s t i m a t e d i f y o u d e r e g u l a t e d n a t u r a l gas t h i s y e a r ,
i t w o u l d a m o u n t t o a 6 - c e n t increase i n t h e p r i c e of n a t u r a l gas.




27
M r . REES. T h e l a t e s t prices I h a v e seen h a v e b e e n a b o u t 48 cents
a n M C F on the Federal Power Commission,
M r . PASTERNACK. F i f t y - o n e cents.
M r . REES. SO y o u are g o i n g t o d o u b l e t h a t p r i c e b y d e r e g u l a t i n g .
A n d t h e n , o n t o p of t h a t , y o u are g o i n g t o p u t a 3 8 - c e n t - a n - M C F t a x .
I s t h a t n o t k i n d of a l o o p h o l e ?
M r . PASTERNACK. W e l l , t h e n e w r e g u l a t i o n s w o u l d a c c o u n t f o r
ma}^be 5 o r 6 cents across a l l n a t u r a l gas. I t o n l y h i t s t h e f i r s t w h o l e
f r a c t i o n . T h e 37 cents, t h e r e is n o q u e s t i o n . T h a t is a s i g n i f i c a n t b i t e
o n n a t u r a l gas, b u t t h e p r o b l e m is t h a t n a t u r a l gas r i g h t n o w is i n s u c h
s h o r t s u p p l y t h a t we h a d a 14-percent c u r t a i l m e n t this year. I t was
a b o u t 8 o r 9 p e r c e n t l a s t y e a r , a n d i t is g o i n g t o go u p h i g h e r n e x t
y e a r . T h i s has caused us v e r y s i g n i f i c a n t p r o b l e m s .
W e d i d n o t see t h i s 3 7 - c e n t excise t a x as a n y w a y t o increase s u p p l y .
W e s a w i t as a w a y t o c u t d e m a n d a n d t o r e d u c e t h e c u r t a i l m e n t s ,
a n d we e s t i m a t e t h a t t h a t w o u l d i n d e e d r e d u c e t h e c u r t a i l m e n t
problem.
M r . REES. W e l l , h o w m u c h of t h a t s h o r t a g e is because o f u n d e r p r o d u c t i o n a n d a n t i c i p a t i o n of d e r e g u l a t i o n , a n d h o w m u c h of i t is
because t h e field is a c t u a l l y b e i n g c o m p l e t e d ?
M r . PASTERNACK. I d o n o t t h i n k v e r y m u c h of i t is because of
p r o d u c t i o n a n d t h e w a y w e s t r u c t u r e d i t a n d t h e Congress, i n a n y
l e g i s l a t i o n I h a v e seen, has s t r u c t u r e d i t . T h e n a t u r a l gas r e g u l a t i o n
is t o say t h a t i t w o u l d b e r e t r o a c t i v e so t h a t t h e r e is n o r e a s o n t o h o l d
back production.
M r . REES. I t w o u l d b e r e t r o a c t i v e t o w h a t ?
M r . PASTERNACK. W e l l , t h e r e h a v e b e e n v a r i o u s dates p r o p o s e d i n
t h e v a r i o u s b i l l s . O u r s , I believe, has i t r e t r o a c t i v e t o J a n u a r y 1 of
t h i s y e a r , w i t h some g o i n g b a c k t o 1973.
M r . HOGAN. T h e o t h e r t h i n g is t h a t t h e i n d u s t r y t y p i c a l l y t r i e s t o
m a i n t a i n a f a i r l y c o n s t a n t p r o d u c t i o n r a t e f r o m k n o w n reserves, a n d
t h a t is a f u n c t i o n of w h a t t h e i r d r i l l i n g p a t t e r n s h a v e been. I n p r e v i o u s
y e a r s t h e d r i l l i n g p a t t e r n s f o r n a t u r a l gas h a v e b e e n d e c l i n i n g s t e a d i l y
c o n s i s t e n t w i t h d e c l i n e i n p r o d u c t i o n a n d t h e h i s t o r i c a l r a t i o s of p r o d u c t i o n t o reserves. I t n o w a p p e a r s t h a t t h e p r o d u c t i o n is, i n f a c t ,
d e c l i n i n g c o n s i s t e n t w i t h t h a t d r o p i n reserves.
So I t h i n k t h e b e h a v i o r t h a t w e are seeing n o w is n o t i n c o n s i s t e n t
w i t h the p a t t e r n s i n the past, a n d i t can be explained.
M r . REES. W h a t is t h e p r o j e c t e d c o a l g a s i f i c a t i o n r a t e ? I t is p r o b a b l y o v e r $1.50 n o w , is i t n o t ?
M r . PASTERNACK. Y e s , easily. I t is p r o b a b l y , i f I r e c a l l , i t is t h e
e q u i v a l e n t of a b o u t $12 t o $14 a b a r r e l , a n d i t c o u l d m a k e i t o v e r $2
p e r M C F o r $3 o r $4 a n M C F .
M r . REES. T h e n y o u r L N G w o u l d be w h a t , $1.50 c o n t r a c t w i t h
Algeria?
M r . BORRE. T h a t i s u p i n t h e a i r . F i r s t of all, i n t h e n e g o t i a t i o n s f o r
t h e L N G prices t h e A l g e r i a n s h a v e e x p l i c i t l y a s k e d f o r a f l o o r g u a r antee. N o w , t h e y are t a l k i n g s o m e t h i n g i n t h e r a n g e of $1.20 t o $1.40
p e r m i l l i o n B T U , b u t t w o m a j o r issues t h a t r e m a i n o p e n are one,
w h e t h e r t h e n e g o t i a t i o n w i l l pass u n d e r F P C r e v i e w , n a m e l y w o u l d
t h e F P C , accept t h e p r i c e f l o o r c o n c e p t w h i c h t h e A l g e r i a n s h a v e
asked f o r , r o u g h l y $ 1 p e r m i l l i o n B t u . A n d second, t h e A l g e r i a n s h a v e
asked f o r a p r i c e e s c a l a t i o n clause t o be i n c l u d e d w i t h t h a t a p p r o a c h ,




28
b u t they have not defined that. So i t is very h a r d to project out w h a t
the landed price would be.
M r . REES. I was talking to the Iranians about their so-called basket
of goods, and i t just depends w h a t y o u p u t i n t h a t basket.
W h a t w o u l d y o u t r y to do about the upcoming oil g l u t on the
Pacific coast? We have passed a coastal i n i t i a t i v e measure i n California. So i t is going to be very difficult to develop more refineries.
There are refineries, and nonpolluting refineries to begin w i t h , because
we have the toughest stationary source legislation on air pollution i n
the country. S t i l l people are not emotionally i n favor of refineries.
M r . P A S T E R N A C K . I t h i n k — b y the way, the California laws are
very interesting on the coastal zoning and protection and management.
M r . REES. Well, i t is a f u n n y thing, the State Lands Commission
just refused a request, I think, b y S O C A L to b u i l d a pipeline f r o m
their Outer Continental Shelf well to their storage, which is on shore,
and the State has jurisdiction over the 3 miles.
M r . P A S T E R N A C K . I t h i n k the obvious answer is t h a t the glut, if i t
occurs, would come—it w i l l come p r i m a r i l y f r o m the Alaska pipeline.
A n d all t h a t says is t h a t the oil coming f r o m Valdez w i l l probably have
to go somewhere else. A n d i t w i l l probably have to go to either the
Northwest and then be transported v i a some k i n d of pipeline to the
East or to the Midwest, or i t w i l l have to go, as I said, i n tankers,
either through the central American route or around South America.
Those things can all be done for about $1 or $2 a barrel. T h a t m a y be
the way y o u have to go.
M r . REES. W h a t about exports to Japan?
M r . P A S T E R N A C K . Was t h a t n o t forbidden i n the Trans-Alaska
pipeline legislation? I t h i n k there was a specific clause i n t h a t t h a t
does n o t allow the U.S. Government or any company to export the
oil.
M r . BORRE. Except for a switching arrangement. I f we were
guaranteed equivalent volumes, then there would be a switching
possibility, b u t we would n o t lose a drop of oil.
M r . PASTERNACK. There was a time, I remember, a few years ago
when we talked about shipping Trans-Alaskan pipeline oil to Japan,
and they would give us their M i d d l e Eastern oil.
M r . REES. Yes; they are getting environmentally conscious too.
M r . HOGAN. Also, i t does n o t solve our vulnerability problem.
M r . P A S T E R N A C K . The Japanese have a very serious problem i n
t h a t they are almost 99 percent dependent on foreign sources, and
they have no alternatives.
M r . REES. Yes; I was amazed t h a t their economy, i t was able
to take the impact.
Well, thank y o u very much. I very much appreciate this briefing.
We are going into a l o t of different factors again, mostly on the
international pricing adjustments and the balance-of-payments deficit.
B u t this is a great help, and if we can have any of the new projections
i n terms of domestic supply, I am very much interested i n alternate
sources and the time schedule for when they start h i t t i n g , like these
flow charts t h a t have been done b y several groups.
M r . P A S T E R N A C K . We w i l l be glad to supply those to you.
M r . REES. The subcommittee w i l l stand adjourned subject to the
call of the Chair.




29
[ I n response t o t h e r e q u e s t of C h a i r m a n Rees, t h e f o l l o w i n g I n f o r m a t i o n was submitted for the record b y M r .
H o n . THOMAS M .

Pasternack:]

REES,

C h a i r m a n , Subcommittee
on I n t e r n a t i o n a l T r a d e , I n v e s t m e n t s a n d M o n e t a r y P o l i c y ,
Committee
on B a n k i n g , C u r r e n c y a n d H o u s i n g , W a s h i n g t o n , D . C .
DEAR M R . CHAIRMAN: I have enclosed responses t o be s u b m i t t e d f o r the r e c o r d
as requested d u r i n g m y t e s t i m o n y of M a r c h 12, 1975. T h e three items i n c l u d e :
(1) a comparison of our estimate of the President's p r o g r a m cost of $30 b i l l i o n
dollars as contrasted t o those prepared b y various elements of t h e Congress;
(2) a n analysis of p o t e n t i a l savings due t o a u t o efficiency s t a n d a r d s ; (3) o u r
analysis of t h e difficulties of using allocations a n d i m p o r t quotas f o r l o n g - t e r m
reductions o f energy demands.
W i t h r e g a r d t o t h e first i t e m , I w i s h t o call t o y o u r a t t e n t i o n the detailed
analysis of t h e cost comparisons. A l t h o u g h we continue t o believe t h a t our estimates are realistic projections of the t o t a l cost of the President's p r o g r a m , i t is
useful t o recognize where t h e differences i n the analyses r e m a i n . I n p a r t i c u l a r , all
t h e analyses are i n agreement a b o u t t h e e s t i m a t e d cost of the o i l components of
t h e President's p r o g r a m .
T h i s figure is r o u g h l y $25 b i l l i o n dollars d u r i n g the first f u l l year of i m p l e m e n t a t i o n . A l l disagreement o n t h e estimated cost, therefore, rests i n t h e n a t u r a l gas a n d
coal segments of the p r o g r a m . Thus, i t follows t h a t the higher cost figure should
n o t be used as an a r g u m e n t f o r opposing t h e o i l portions a n d rebate of the President's p r o g r a m . R a t h e r , t h e difference i n the estimates of cost s h o u l d be used f o r
careful e x a m i n a t i o n of t h e n a t u r a l gas a n d coal components of the p r o g r a m a n d
the development of policies t h a t are needed t o deal w i t h a n y changes t h a t occur
f o r these fuels.
I appreciated the o p p o r t u n i t y t o discuss t h e energy p r o b l e m a n d t h e various
alternatives available t o cope w i t h i t . I f I m a y be of f u r t h e r assistance, please call
o n me.
Sincerely,
BRUCE

A.

PASTERNACK,

Acting Deputy Assistant Administrator,
Policy Integration and Evaluation.
Enclosures.
THE

LOGIC

OF

EFFICIENCY

STANDARDS AND T H E I R
CONSUMPTION

INFLUENCE

ON

GASOLINE

T h i s paper examines t h e f u e l savings t h a t can be o b t a i n e d b y changes i n t h e
average efficiency or miles per gallon of t h e stock of automobiles. A u t o m o b i l e
gasoline c o n s u m p t i o n equals t h e t o t a l n u m b e r of miles t r a v e l l e d b y a l l vehicles on
t h e r o a d d i v i d e d b y t h e average efficiency of these vehicles. Therefore, a n y p o l i c y
w h i c h increases t h e average efficiency of t h e stock of cars w o u l d decrease gasoline
c o n s u m p t i o n . H o w e v e r , t h e same p o l i c y b y increasing average miles per gallon
lowers t h e cost per m i l e of d r i v i n g w h i c h increases t h e t o t a l n u m b e r of miles d r i v e n .
F o r example, if some p o l i c y increased t h e average efficiency of t h e stock of cars b y
three miles per gallon w i t h o u t affecting t h e n u m b e r of miles d r i v e n , t h e a p p r o x i m a t e f u e l savings w o u l d be 860,000 barrels of gasoline a day. H o w e v e r , i t is k n o w n
t h a t t h e t o t a l n u m b e r of miles d r i v e n also increases so t h a t t h e a c t u a l savings
w o u l d o n l y a m o u n t t o a p p r o x i m a t e l y 830,000 barrels of gasoline per day.
M a n y policies are designed t o increase t h e average efficiency of t h e stock of cars
b y m a n d a t i n g t h e efficiency standards f o r new cars. E v e n if these policies d r a s t i c a l l y affect t h e efficiency of n e w cars, t h e y w i l l be slow i n a f f e c t i n g t h e efficiency of
t h e stock of cars. C u r r e n t l y there are a b o u t 100 m i l l i o n cars o n t h e road, a p p r o x i m a t e l y 10 percent of these cars are r e t i r e d d u r i n g a n y g i v e n year a n d a b o u t 10
m i l l i o n or 10 percent of t h e stock is replaced e v e r y year t h r o u g h new-car sales.
Therefore, a p o l i c y w h i c h affects t h e efficiency of new cars w o u l d have a smaller
effect on t h e efficiency of t h e stock of cars i n t h e first year since t h e stock of used
cars is large r e l a t i v e t o t h e n u m b e r of n e w cars sold (even t h o u g h n e w cars are
d r i v e n m o r e t h a n are o l d cars). H o w e v e r , as t i m e progresses, efficiency standards
h a v e a greater i m p a c t since t h e stock w i l l be replaced w i t h newer, m o r e efficient
automobiles.
F o r purposes of i l l u s t r a t i o n , we n o w examine the average efficiency of the stock
of cars r e s u l t i n g f r o m f o u r different scenarios:




30
1. B a s e C a s e — N o p o l i c y is i m p l e m e n t e d ; t h e w o r l d price of o i l is assumed t o
be $ l l / b b l . f r o m 1975 t o 1977 a n d $7/bbl. t h e r e a f t e r .
2. P r e s i d e n t ' s P r o g r a m — A t a r i f f a n d excise t a x of $2/bbl. o n i m p o r t e d a n d
domestic o i l a n d a linear increase i n new-car efficiency t o 20 m p g i n 1980 a n d
thereafter.
3. E f f i c i e n c y S t a n d a r d I — A linear increase i n new-car efficiency t o 24 m p g i n
1980 a n d thereafter.
4. E f f i c i e n c y S t a n d a r d I I — A linear increase i n new-car efficiency t o 28 m p g i n
1980 a n d t h e r e a f t e r . T h i s s t a n d a r d is f a r m o r e severe t h a n t h e m a x i m u m c o n sidered b y t h e D e p a r t m e n t of T r a n s p o r t a t i o n a n d t h e E n v i r o n m e n t a l P r o t e c t i o n
A g e n c y i n t h e i r R e p o r t t o Congress, P o t e n t i a l f o r M o t o r Vehicle F u e l E c o n o m y
Improvement.1
T a b l e I shows t h a t efficiency standards increase t h e efficiency of t h e s t o c k of
cars, b u t t h a t t h i s increase evolves over t i m e as older, fuel-inefficient cars are
replaced b y newer, more efficient automobiles. T a b l e I I examines t h e f u e l savings
r e s u l t i n g f r o m t h e policies i n each of t h e f o u r scenarios. I t indicates t h a t if t h e y
can be i m p l e m e n t e d , policies t h a t increase t h e efficiency of n e w cars c a n lead t o
large gasoline savings, b u t t h a t the i m p a c t of these policies is f a r greater i n l a t e r
years t h a n i n earlier years.
These efficiency standards c a n n o t be o b t a i n e d s i m p l y b y t e c h n i c a l i m p r o v e m e n t s i n a l l classes of cars b u t requires a n a l t e r a t i o n of t h e m a r k e t m i x of d i f f e r e n t
w e i g h t cars. F o r example, w h i l e i t w o u l d be v e r y d i f f i c u l t t o produce a 4,000 l b .
car t h a t c o u l d achieve 24 m p g , t h a t car c o u l d be sold if a n u m b e r of smaller cars
a c h i e v i n g b e t t e r t h a n 24 m p g were also sold. I n such a case, t h e sales-weighted
efficiency of a l l cars sold c o u l d be 24 m p g .
T o summarize, fuel savings f r o m efficiency standards i n t h e range of 0.9 M M B D
can be achieved b y 1985 if standards can, i n fact, be i m p l e m e n t e d . A cost of t h i s
t y p e of p o l i c y is t h e need t o influence t h e m a r k e t shares of large a n d s m a l l cars.
H o w e v e r , t h e i m p a c t s are less t h a n appear o n t h e surface because people d r i v e
m o r e w h e n costs are less a n d because of t h e d o m i n a n c e of t h e o l d s t o c k of
automobiles.
TABLE 1 — AVERAGE EFFICIENCY OF THE STOCK OF CARS
[Miles per gallon of the stock]

1977

Base c a s e . . . .
President's program..
Efficiency standard 1 . . .
Efficiency standard II

TABLE

1980

1985

14.14
14.72
14.88
15.27

Scenario

14.83
16.44
17.58
18.77

15.37
18.45
21.04
23. 54

I I --FUEL SAVINGS RESULTING FROM EFFICIENCY STANDARDS
[Reduction from base case in MMBDJ

Scenario

1977

COMPARISON

OF

F E A
OF

FIGURES
THE

W I T H

INTERIOR

PRESIDENT'S

ENERGY

1985

-0.3
-.19
-.28

President's program
Efficiency standard 1
Efficiency standard I L . _

1980

-0.51
-.68
92

-0.91
-1.4
-1.8

COMMITTEE

STAFF

ANALYSIS

PROGRAM

BACKGROUND

O n F r i d a y , J a n u a r y 17, a n I n t e r i o r C o m m i t t e e staff s t u d y p r e p a r e d f o r Senator
H e n r y M . Jackson was issued as a c r i t i q u e of President F o r d ' s energy p r o g r a m .
T h i s c r i t i q u e e s t i m a t e d t h a t t h e m i n i m u m d i r e c t cost t o consumers of t h e Presid e n t ' s p r o g r a m was over $43 b i l l i o n a n d t h a t p r o d u c e r p r o f i t s w o u l d be a t least
$14 b i l l i o n . T h e s t u d y ' s assumptions a n d analysis have been c a r e f u l l y r e v i e w e d
a n d i t appears t h a t t h e r e is a s u b s t a n t i a l o v e r e s t i m a t e of t h e cost figures a n d t h a t
there are l i t t l e or no increases i n producer p r o f i t s . T h i s p a p e r a t t e m p t s t o s h o w
where assumptions a n d conclusions d i f f e r f r o m those of F E A analysis.
1
Scenario "D" from that report assumes a 23-mpg efficiency of new cars i n 1980 and a
26-mpg efficiency i n 1985.




31
COMPARISON

OF

RESULTS

The staff s t u d y indicates t h a t the t a x revenues f r o m the President's program
w i l l be $29 billion, substantially the same as the A d m i n i s t r a t i o n estimate of
approximately $30 billion. However, costs of the programs, as estimated b y the
C o m m i t t e e staff are $43 billion. Table 1 compares the t o t a l costs of the program
as estimated b y the A d m i n i s t r a t i o n w i t h the I n t e r i o r Committee staff estimates.
The p o r t i o n of these a d d i t i o n a l costs t h a t w i l l be p a i d b y the consumer is $19.2
billion. A detailed discussion of the u n d e r l y i n g assumptions and support for these
figures is presented below.
TABLE 1—COMPARISON OF ALTERNATIVE COST ESTIMATES 1
[In billions of dollars]

Interior
Committee
staff study

FEA cost
analysis

4.8
6.4
12.6

3.9
7.22
13. 01

23.8

24. 20

4.5
3.8
8.9

1.09
4. 38
2. 33

17.2

Action

7. 80

Oil:
Petroleum import fee
Excise tax on domestic crude oil.
Decontrol of old oil
Total
Natural gas:
New interstate gas
Old interstate gas
Intrastate gas
Total
Coal: Price increase
1

2.3

0

Calculations for both studies are contrasted in the section discussing the assumptions of the analyses.

The Treasury D e p a r t m e n t estimates t h a t $5 b i l l i o n of this cost increase applies
to state and local governments. The F E A analysis of the macroeconomic effects
indicates t h a t approximately $7.8 b i l l i o n w i l l flow i n t o capital goods investment
or w i l l be absorbed b y reduced markups under forecasted m a r k e t conditions.
Therefore, the net first year costs at an annual rate are $19.2 b i l l i o n for consumers.
F i n a l l y , the staff study's higher estimates of consumer costs were compounded
when converted t o average costs per household. The study assumes 53 m i l l i o n
families of f o u r when, i n fact, there are about 70 m i l l i o n households i n this country.
Therefore, estimates per f a m i l y are too h i g h and ignore the i m p o r t a n t fact t h a t
the costs w i l l v a r y substantially b y income class and be as low as $85 per year
for the lowest income group (0-$2,000 class). Table 2 illustrates this range of
costs and contrasts these increased costs w i t h estimates of expected tax relief.
TABLE 2.—ILLUSTRATIONS OF PERMANENT TAX RELIEF AND INCREASED ENERGY COSTS AT VARIOUS LEVELS OF
HOUSEHOLD INCOME

Permanent tax relief plus $80
special payments for adjusted
gross incomes equal to
household incomes shown
Total
increased
energy costs

Household income

$2,000
$3,000
$5,000
$8,000
$10,000
$12,000
$15,000
$18,000
$25,000
$30,000

1

-

Single person

Family of 4
persons

$85
110
150
188
228
253
296
318
393
420

-$80
-120
-250
-297
-254
-190
-190
-190
-190
-148

—$160
-160
-178
-337
-349
-316
-221
-210
-192
-151

Source: Office of the Secretary of the Treasury, Office of Tax Analysis, Jan. 30, 1975.




32
DIFFERING

ASSUMPTIONS

T h e r e are m a j o r differences i n some of t h e assumptions used i n each analysis.
These are h i g h l i g h t e d i n t h i s section along w i t h t h e detailed cost calculations.
Oil
T h e m i x between i m p o r t e d oil a n d domestic o i l is d i f f e r e n t because F E A
estimates assume t h a t d e m a n d reductions a n d i m p o r t savings occur. I n a d d i t i o n ,
F E A ' s i n c l u s i o n of N a t u r a l Gas L i q u i d s is i d e n t i f i e d separately f r o m aggregate
crude oil. H o w e v e r , t h e t o t a l figures are q u i t e s i m i l a r .
T h e figures of t h e C o m m i t t e e Staff S t u d y are repeated as:
Consumer cost
(billions
per year)

1. I m p o r t e d o i l : T a r i f f : 6.5 M M B D X 3 6 5 X $ 2
2. Presently c o n t r o l l e d o i l :
( a ) D e c o n t r o l : 5.7 M M B D X 3 6 5 X $ 8 . 1 5
(b) Excise T a x : 5.7 M M B D X 3 6 5 X $ 2
3. Presently u n c o n t r o l l e d o i l : Excise t a x : 3.0 M M B D X 3 6 5 X $2

$4.8
12. 6
4. 2
2. 2

T o t a l oil

23. 8

T h e F E A Analysis is c o n t r a s t e d as:
Consumer cost
(billions
per year)

1. I m p o r t fee: Uses estimate of 5.433 M M B D i m p o r t s after i m p l e m e n t a t i o n of President's p r o g r a m — $ 2 X 5 . 4 3 3 M M B D X 365
2. Excixe t a x o n domestic o i l :
P r o d u c t i o n of 8.7 M M B D — $ 2 X 8 . 7 M M B D X 365
E q u i v a l e n t t a x of $1.43 per b a r r e l of n a t u r a l gas l i q u i d s ( N G L )
w i t h 1.66 M M B D — $ 1 . 4 3 X 1.66 M M B D X 365
3. D e c o n t r o l of o l d o i l :
Assumes 60 percent o l d oil exclusive of E l k H i l l s (0.1 M M B D
a n n u a l average), hence 5.16 M M B D of o l d o i l r i s i n g f r o m
c o n t r o l l e d price of $5.25 t o u n c o n t r o l l e d price of $11—$5.75
X 5.16 M M B D X 365
Assumes N G L price rises e q u i v a l e n t a m o u n t of crude oil. C r u d e
increase $4.56 less $1.43 due t o N G L t a x — $ 3 . 1 3 X 1.66 M M B D
X365
A d j u s t m e n t of +$290,000,000 t o account f o r r o u n d i n g a n d
r e f i n e r y gain a n d t o balance calculated increase of p r o d u c t
prices of $4.10 a n d average c o n s u m p t i o n of 16.17 M M B D —
($4.10X16.17 M M B D X 3 6 5 = $24,200,000,000) ___

$3. 966
6. 35
. 866

10.83
1. 896

. 29
24. 198

N a t u r a l gas
T h e staff s t u d y assumes t h a t there w i l l be large w i n d f a l l p r o f i t s t o n a t u r a l gas
producers (almost $10 b i l l i o n ) . I n f a c t , t h i s a r g u m e n t overstates t h e n a t u r a l gas
i m p a c t s f o r t h e f o l l o w i n g reasons:
A p p r o x i m a t e l y one t r i l l i o n cubic feet of contracts f o r i n t e r s t a t e gas w o u l d expire
a n d be available f o r new contracts i n 1975, even w i t h decontrol. T h i s is less t h a n
h a l f of t h e staff s t u d y estimates. W i t h o u t deregulation v e r y l i t t l e n e w gas is g o i n g
t o i n t e r s t a t e sales.
T h e C o m m i t t e e staff estimates t h a t i n t r a s t a t e n a t u r a l gas prices w i l l rise t o
$2.21 per M C F a n d t h a t 6 0 % of a l l i n t r a s t a t e gas contracts c o u l d be r e n e g o t i a t e d
t p t h a t price. T h i s is inconsistent w i t h c u r r e n t m a r k e t conditions. C u r r e n t spot
prices f o r i n t r a s t a t e n a t u r a l gas are a b o u t $1.50 per M C F , w h i c h is less t h a n t h e
B T U e q u i v a l e n t of oil a t $11.40 ( I n t e r i o r staff figure) w h i c h w o u l d be $1.97. W i t h a
$.37 excise t a x , t h e new i n t r a s t a t e price w o u l d be e s t i m a t e d a t $1.87 or m o r e , b u t
n o t a t $2.21. Present i n t r a s t a t e prices average a b o u t $.50 per M C F a l t h o u g h n e w
sales are a t $1.50 per M C F . T h i s indicates t h a t o n l y t h e e q u i v a l e n t of 2 0 % of
i n t r a s t a t e average prices reflect t h e c u r r e n t price of $1.50.
D e r e g u l a t i o n w o u l d p r e s u m a b l y b r i n g u p t o .8 t c f of a d d i t i o n a l gas i n t o t h e
i n t e r s t a t e m a r k e t i n 1975. I f t h i s occurs i t w o u l d t e n d t o replace a n e q u i v a l e n t
a m o u n t of i m p o r t e d o i l w h i c h w o u l d have cost consumers as m u c h or m o r e as t h e
new gas prices. T h e President's p r o g r a m w o u l d t e n d t o s h i f t t h i s a m o u n t f r o m o i l
i m p o r t s t o gas, b u t w o u l d o n l y increase consumer costs b y t h e a m o u n t of t h e excise
tax.




33
T h e figures of t h e C o m m i t t e e Staff S t u d y are:
Consumer cost
(billions
per year)

1. N e w i n t e r s t a t e gas: D e c o n t r o l : 2.3 t c f X ($2.21 —$0.45) X 1.11____
2. O l d i n t e r s t a t e gas: Excise t a x : 9.2 t c f X $ 0 . 3 7 X 1.11
3. I n t r a s t a t e gas: Price increase: 0 . 6 X 11.OX ($2.21 — $ 1 . 0 0 ) X 1.11
T o t a l n a t u r a l gas

$4.5
3. 8
8.9
17. 2

T h e F E A Analysis is c o n t r a s t e d as:
1. N e w i n t e r s t a t e gas: E s t i m a t e d a t 0.91 t c f w i t h e q u i l i b r i u m price of
$1.11 c o m p a r e d t o average of $0.28 o n o l d gas. Excise t a x of $0.37.
$1.20X.91 tcf
$1,092
2. O l d i n t e r s t a t e gas: I n t e r s t a t e e s t i m a t e d as t w o - t h i r d s of t o t a l gas cons u m p t i o n of 19.1 t c f . $ 0 . 3 7 X ( 1 9 . I X - 6 6 —.91)
4. 376
3. I n t r a s t a t e gas: Excise t a x o n o n e - t h i r d of t o t a l c o n s u m p t i o n . $0.37
X (19.1 X . 3 3 )
2. 332
T o t a l n a t u r a l gas
7. 800
Coal
T h e I n t e r i o r C o m m i t t e e analysis assumes t h a t half of t h e t o t a l coal p r o d u c e d
w i l l rise i n price b y a n e q u i v a l e n t of $2 per barrel. W e e s t i m a t e t h a t 8 0 % of a l l
coal is u n d e r l o n g - t e r m contracts, w r here prices t e n d t o reflect l o n g r u n coal p r o d u c t i o n costs, w h i c h do n o t t e n d t o rise i n real t e r m s . F u r t h e r , o u r c u r r e n t e s t i m a t e
indicates t h a t coal prices are l i m i t e d b y t h e i n a b i l i t y of gas a n d o i l consumers t o
c o n v e r t t o coal. As a r e s u l t even t h e r e m a i n i n g 2 0 % of coal sold i n spot m a r k e t s is
l i k e t y t o sell o n l y a t prices necessary t o cover o v e r t i m e p a y a n d o t h e r costs of
g e t t i n g o u t t h e 1975 r a t e of p r o d u c t i o n ( a b o u t 35 M T m o r e t h a n 1974 because of
p r o d u c t i o n lost d u r i n g t h e s t r i k e ) . H i g h e r prices f o r o i l w o u l d a d d v e r y l i t t l e t o
t h e a m o u n t of conversion t o coal. Conversions t o coal are e s t i m a t e d a t 23 m i l l i o n
t o n s i n 1975 a n d 47 i n 1976.
T h e figures of t h e C o m m i t t e e Staff S t u d y are:
Consumer cost
(billions
per year)

Price increase: 0 . 5 X 540 m m t X 4 : 2 7 X $2

$2. 3

T h e F E A Analysis is c o n t r a s t e d as:
F E A assumes no direct increase i n coal due t o t h e President's p r o g r a m

0'

C O M P A R I S O N OF F E A F I G U R E S W I T H T H E L I B R A R Y OF C O N G R E S S C O N G R E S S I O N A L R E S E A R C H S E R V I C E A N A L Y S I S OF T H E P R E S I D E N T ' S E N E R G Y P R O G R A M
BACKGROUND

O n J a n u a r y 23, 1975, t h e Congressional Research Service ( C R S ) of the L i b r a r y
of Congress, issued a c r i t i q u e of President's F o r d energy p r o g r a m . T h i s c r i t i q u e
e s t i m a t e d t h a t t h e direct costs t o consumers of the President's p r o g r a m were i n
t h e range of $40-$50 b i l l i o n a n d t h a t the i n f l a t i o n a r y i m p a c t w o u l d be a 2.7 t o 3.3
percentage p o i n t increase i n the i n f l a t i o n rate. T h i s s t u d y ' s assumptions a n d
analysis have been c a r e f u l l y reviewed, and i t appears t h a t there is a s u b s t a n t i a l
overestimate of t h e cost figures a n d t h a t the change i n t h e Consumer Price I n d e x
( C P I ) w i l l be less t h a n t h a t s t a t e d i n the C R S analysis. T h i s paper d o c u m e n t s
where t h e Congressional Research Service's assumptions a n d conclusions differ
f r o m those of the F E A analysis.
C O M P A R I S O N OF R E S U L T S

T o t a l cost
T h e Congressional Research Service estimates t h a t t h e cost of the President's
p r o g r a m c o u l d be as h i g h as $50.3 b i l l i o n i n 1975. T a b l e 1 presents t h e t o t a l cost
of t h e p r o g r a m according t o t h e A d m i n i s t r a t i o n a n d t o the Congressional Research
Service. T h e p o r t i o n of t h e t o t a l cost t h a t w i l l be p a i d b y consumers is $19.2
b i l l i o n . A detailed discussion of the u n d e r l y i n g assumptions a n d s u p p o r t f o r these
figures is presented below.




34
T h e T r e a s u r y D e p a r t m e n t estimates t h a t $5 b i l l i o n of t h i s cost increase applies
t o state a n d local governments. T h e F E A analysis of t h e macroeconomic effects
demonstrates t h a t a p p r o x i m a t e l y $7.8 b i l l i o n w i l l flow i n t o c a p i t a l goods i n v e s t m e n t s or w i l l be absorbed b y reduced m a r k u p s u n d e r forecasted m a r k e t conditions.
Therefore, t h e net first year costs at a n a n n u a l rate are $19.2 b i l l i o n f o r consumers.
TABLE 1.—COMPARISON OF ALTERNATIVE COST E S T I M A T E S 1
Congressional
research
service study

FEA cost
analysis

$12.6
11.0

$11.19
13.01

23.6

24.20

8.36
5.40

Action

7.1
.7

Oil:
Petroleum fees and excise taxes
Decontrol of old oil

Natural gas:
Excise tax
Deregulation on new gas

13.76
Coal: Price increase.
Changes in utility accounting:
Inclusion of construction work in progress ( C W I P ) in rate base
Inclusion of pollution control equipment in rate b a s e . . .

5.2
6.8 . . .
'1.0

Total
1

L8
0

7.8

0

Calculations for both studies are contrasted in the section discussing the assumptions of the analyses.

I m p a c t on the Consumer
Price Index
T h e Congressional Research Service s t u d y f u r t h e r states t h a t g i v e n a cost of
$50.3 b i l l i o n i n 1975 a n d g i v e n an a n t i c i p a t e d 1975 G N P of $1,500 b i l l i o n , t h e
President's p r o g r a m could raise prices b y 3 percentage p o i n t s . A stage-of-processi n g m o d e l was used b y F E A t o forecast t h e effect t h a t energy price changes h a v e
u p o n t h e Consumer Price I n d e x a n d components of the C P I . T h e m o d e l requires
t w o i n p u t s : (1) forecasts of wholesale energy prices a n d (2) forecasts of t h e general
wholesale a n d r e t a i l price indices p r i o r t o energy price changes. Price i n f o r m a t i o n
is c o m b i n e d w i t h h i s t o r i c a l i n f o r m a t i o n o n t h e relationship between t h e stages-ofprocessing t o forecast t h e effects t h a t energy price changes w i l l h a v e o n t h e prices
of crude wholesale goods, i n t e r m e d i a t e wholesale goods, finished wholesale
p r o d u c t s , a n d f i n a l l y , r e t a i l consumer goods a n d services.
U s i n g t h i s m e t h o d o l o g y , i t is e s t i m a t e d t h a t t h e C P I w i l l increase 2 percentage
p o i n t s d u r i n g t h e first f u l l year of the p r o g r a m . G i v e n t h e n o r m a l , u n e n c u m b e r e d
economy, t h e C P I w o u l d rise b y a p p r o x i m a t e l y 2.5 percentage p o i n t s d u r i n g
t h e first f u l l year of t h e p r o g r a m i n a d d i t i o n t o t h e n o r m a l l y expected rise. These
e s t i m a t e d increases t e n d t o overestimate t h e affect of t h e p r o g r a m f o r t w o
reasons:
(1) T h e energy price increases t h a t were used as i n p u t s t o t h e m o d e l assume a
f u l l p a s s - t h r o u g h of t h e taxes a n d i m p o r t fees. I t is u n l i k e l y t h a t t h i s w i l l occur
because of t h e t a x rebates t o i n d u s t r y a n d because t h e economy is generally w e a k .
T h u s , excess s u p p l y w o u l d result if i n d u s t r y a t t e m p t s t o p a s s - t h r o u g h a l l of t h e
costs.
TABLE 2.—ILLUSTRATIONS OF PERMANENT T A X RELIEF AND INCREASED ENERGY COSTS AT VARIOUS LEVELS
OF HOUSEHOLD INCOME

Household income

Total
increased
energy
costs

$2,000..
$3,000
$5,000
$8,000.
$10,000
$12,000
$15,000
$18,000
$25,000.
$30,000
Source: Office of the Secretary of the Treasury, Office of Tax Analysis, Jan. 30,1975.




$85
110
150
188
228
253
296
318
393
420

Permanent tax relief plus $80
special payments for adjusted
gross incomes equal to household incomes shown
— —
Single
Family of 4
person
persons
$80
-120
-250
-297
-254
-190
-190
-190
-190
-148

-$160
-160
-178
-337
-349
-316
-221
-210
-192
-151

35
(2) The stage-of-processing model is based u p o n historical m a r k u p relationships and these m a y not h o l d because of the currently poor m a r k e t demand
conditions. T h a t is, demand is currently at such a low level t h a t companies m a y
n o t be w i l l i n g to pass on increased costs for fear of further reducing their markets.
Consumer cost impacts
The consumer costs t h a t w i l l actually be incurred b y households has been
estimated b y the A d m i n i s t r a t i o n to be $19.2 billion for the first year at an annual
rate. Table 2 illustrates the range of costs b y income class and contrasts these
increased costs w i t h estimates of expected tax relief. N o t o t a l estimate of the
i m p a c t on consumers is presented on the C R S study.
DIFFERING

ASSUMPTIONS

BETWEEN

ADMINISTRATION

ANALYSIS

AND

CRS

STUDY

There are major differences i n some of the assumptions used i n each analysis.
These are highlighted i n this section along w i t h the detail.
Oil
The m i x between i m p o r t e d oil and domestic oil is different because our estimates assume t h a t demand reductions and i m p o r t savings occur. I n addition,
F E A ' s inclusion of N a t u r a l Gas Liquids is identified separately f r o m aggregate
crude oil. However, the t o t a l figures are quite similar.
The figures of the Congressional Research Service are repeated as:
Cost
(billions
per year)

1. Excise t a x : 17.3 M M B D X 365 X $ 2 _ _ _ _
2. Presently controlled oil: Decontrol: 5.22 M M B D X 3 6 5 X $ 5 . 7 5
T o t a l oil

$12. 6
11. 0
23. 6

The F E A analysis is contrasted as:
Cost
(billions
per year)

1. I m p o r t fee: Uses estimate of 5.433 M M B D imports after implement a t i o n of President's program—$2 X 5.433 M M B D X 365 _
2. Excise t a x on domestic o i l :
Production of 8.7 M M B D — $ 2 X 8 . 7 M M B D X 3 6 5
E q u i v a l e n t t a x of $1.43 per barrel of n a t u r a l gas liquids ( N G L )
w i t h 1.66 M M B D — $ 1 . 4 3 X 1 . 6 6 M M B D X 3 6 5
3. Decontrol of old oil:
Assumes 60 percent old oil exclusive of E l k H i l l s (0.1 M M B D
annual average), hence 5.16 M M B D of old oil r i s i n g f r o m
controlled price of $5.25 to uncontrolled price of $11—$5.75
X 5 . 1 6 M M B D X 365
Assumes N G L price rises equivalent a m o u n t of crude oil. Crude
increase $4.56 less $1.43 due t o N G L t a x — $ 3 . 1 3 X 1.66
MMBDX365
A d j u s t m e n t of plus $290,000,000 to account for r o u n d i n g and
refinery gain and t o balance calculated increase of product
prices of $4.10 and average consumption of 16.17 M M B D —
($4.10X16.17 M M B D X 3 6 5 = $24,200,000,000)
Total

$3. 966
6. 35
. 866

10.83
1. 896

. 29
24. 198

Natural gas
The Congressional Research Service s t u d y assumes t h a t 1975 n a t u r a l gas production is 22.5 t r i l l i o n cubic feet (tcf) and t h a t the amount of new gas subject to
deregulation i n 1975 w i l l be equivalent t o a $5.4 billion i n i t i a l cost for the first
year. I n fact, this argument overstates the n a t u r a l gas impacts for the f o l l o w i n g
reasons:
A p p r o x i m a t e l y 1 t r i l l i o n cubic feet of contracts for interstate gas w o u l d expire
and be available for new contracts i n 1975, even w i t h decontrol. This is substant i a l l y less t h a n t h a t reflected b y the C R S study i n its $5.4 b i l l i o n cost for the first
year. W i t h o u t deregulation, very l i t t l e new gas is going to interstate sales.
The excise t a x w i l l be levied on net marketed production and not on t o t a l gas
production. Hence, only 19.1 tcf w i l l be affected b y the excise t a x of 37cf. This w i l l
result i n a m u c h lower t o t a l cost a t t r i b u t e d to the excise tax.




3G
Deregulation could presumably b r i n g u p t o .8 tcf of additional gas i n t o the i n t e r state m a r k e t i n 1975. I f this occurs, i t w o u l d tend t o replace an equivalent a m o u n t
of i m p o r t e d oil w h i c h w o u l d have cost as much, or more, as the new gas prices.
T h e President's program w o u l d tend to shift this amount f r o m i m p o r t s t o gas, b u t
w r ould only increase consumer costs b y the a m o u n t of the excise t a x .
The figures of the Congressional Research Service are:
Cost
(billions
per year)

1. Excise t a x : 22.5 t c f X 0 . 3 7
2. Deregulation of new gas
Total

$8. 3
5. 4
13.7

T h e F E A analysis is contrasted as:
1. N e w interstate gas: E s t i m a t e at 0.91 t c f w i t h e q u i l i b r i u m price of $1. 1
compared t o average of $0.28 on old gas. Excise t a x of $0.37
— $ 1 . 2 0 X 0 . 9 1 tcf
$1. 092
2. O l d interstate gas: I n t e r s t a t e estimated as t w o - t h i r d s of t o t a l gas
consumption of 19.1 tcf—$0.37 (19.1X0.667 - 0 . 9 1 )
4. 376
3. I n t r a s t a t e gas: Excise t a x on one-third of t o t a l consumption—$0.37
X19.1X0.33)
2. 322
T o t a l n a t u r a l gas

7. 800

Coal
T h e Congressional Research Service analysis assumes t h a t coal produced i n
1975 w i l l rise i n price b y an equivalent of $2 per barrel or a p p r o x i m a t e l y $8/ton.
We estimate t h a t 80 percent of all coal is under l o n g - t e r m contracts, where prices
t e n d t o reflect long-run coal p r o d u c t i o n costs, w h i c h do n o t t e n d t o rise i n real
terms. F u r t h e r , our current estimate indicates t h a t coal prices are l i m i t e d b y t h e
i n a b i l i t y of gas and oil consumers to convert t o coal. As a result even t h e rem a i n i n g 20 percent of coal sold i n spot markets is l i k e l y t o sell o n l y a t prices
necessary t o cover overtime p a y and other costs of g e t t i n g o u t t h e 1975 rate of
p r o d u c t i o n (about 35 m m t more t h a n 1974 because of p r o d u c t i o n lost d u r i n g
the strike). Higher prices for oil w o u l d add v e r y l i t t l e t o t h e a m o u n t of conversion
t o coal. Conversions t o coal are estimated at 23 m i l l i o n tons i n 1975 a n d 47 i n 1976.
T h e figures of the Congressional Research Service s t u d y are:
Cost
(billions
per year)

Price increase: $8 X 650 m m t

$5. 2

T h e F E A analysis is contrasted as:
F E A assumes no direct increases i n coal due t o the President's p r o g r a m (see
discussion of assumptions)
- —

0

Changes in utility
accounting
The above costs of the President's p r o g r a m as estimated b y F E A consisted of
the cost of imposing taxes a n d fees on petroleum and n a t u r a l gas and the cost of
decontrolling the price of old oil. The costs associated w i t h changes i n u t i l i t y
accounting procedures were n o t included for several reasons:
(1) The need for additional funds t o finance electric u t i l i t y expansion w i l l
require some f o r m of rate change. This need for a rate change is independent of
the President's energy program. Hence, the costs of any proposals, such as changes
i n the accounting procedures, should n o t be included i n the costs of a p r o g r a m
designed t o achieve energy independence.
(2) The changes i n accounting procedures presented b y C R S allow for t h e
a d d i t i o n of one billion dollars w o r t h of p o l l u t i o n control equipment i n a d d i t i o n
t o the expansion of p l a n t and equipment. This clearly is n o t p a r t of the cost of
achieving energy independence and m a y n o t even be the appropriate a m o u n t of
p o l l u t i o n control f r o m a cost-effectiveness s t t n d p o i n t .
(3) The accounting changes are p a r t of the long-term energy p r o g r a m and w i l l
have no effect on short-run energy supplies.
I n a d d i t i o n t o inappropriately including the u t i l i t y accounting changes, t h e
C R S has incorrectly estimated the i m p a c t of these changes. The Congressional




37
Research Service estimates t h a t the additional 1975 costs w i l l be $6.8 billion b y
including construction work i n progress i n the rate base. This is based on an
FPC/Office of Economic study, An Analysis of the Electric Utility
Industry's
Financial Requirements, 1975-79. This cost is incorrect i n t h a t the costs of including
construction work i n progress i n the rate base as estimated using the F P C study
are $3.4 billion.
[Whereupon, at 3:50 p.m., the s u b c o m m i t t e e a d j o u r n e d to reconvene
a t t h e call of the C h a i r . ]




o


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