The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
June 10, 1977
_-_._- - - - - - - - - - - - - - - - _. _..
-
.......
_
....
- - - - - -
Energy: Towards) Solution?
a
The House last week joined the
Senate in voting to create a new
Department of Energy, and in addition, committees in both houses
began to analyze the Administration's plans for giving the new department something to administer.
The Administration's plans involve
the momentous decision to continue price controls indefinitely on
domestic supplies of oil and natural
gas-the two fuels which provide
three-fourths of the nation's energy. Not surprisingly, domestic producers of those fuels are unhappy
about the proposed legislation.
Administration policy makers recognize the need to permit domestic prices to rise to world levels as a
means of curbing consumption of
increasingly scarce fuels. They also
recognize the need for such a step
as a means of eliminating the complex entitlements program. That
program in effect subsidizes foreign
imports by requiring refiners with
access to lower-cost domestic
crude to pay refiners using highercost imported oil an amount sufficient to equalize the effective acquisition cost of oil available from
all sources.
In the case of production from
existing wells, the new program
would equalize domestic and world
oil prices not by removing controls,
however, but by adding a tax at the
wellhead. This approach would
raise the effective cost of domestic
oil to refiners and ultimate consumers, but would prevent producers
from realizing any additional revenues from proven supplies. In the
case of production from new wells,
prices could rise to near-parity with
world prices over a three-year period, but the volumes affected would
probably be small, because new
wells would have to meet strict
geographical and depth requirements to qualify for the higher
price.
Industry spokesmen claim that the
Administration's plan fails to provide the financial incentives and
regulatory climate necessary to
stimulate increased domestic production. In addition to the complex
oil-pricing formulas, the plan'proposes the extension of price controls to intrastate natural-gas
markets-interstate
markets are already controlled-while
another
piece of legislation introduces stricter environmental controls on coal
mining. More basically, producers
claim that these steps would increase government intervention ·in
the distribution and pricing of -energy, rather than permit the more
efficient allocation of resources
through uncontrolled markets.
limiting consumption
The Administration, in contrast,
makes conservation the cornerstone of its energy program. The
plan seeks to reduce the growth of
U.S. energy consumption from the
(continued
on page 2)
If®cdl®lf@,ll
IE@,mlIk @{f
§@jffi
If
Opin ions expressed in this nevvsletter do not
necessarily reflect the views of the management of the
Federal Reserve Bank of San Francisco, nor of the Board
of Governors of the Federal Reserve System.
3Y2-percentannual growth rate of
the 1950-73period to less than 2
percent by the mid-1980's, primarily
by lowering the demand for petroleum and natural gas. (Consumption increased 5 percent last year,
but it actually declir1ed over the
recession-affected 1973-76period
as a whole.) The plan also seeks to
reduce oil imports to 7 million barrels/day by 1985, in contrast to the
current level of 9 million bid and
the projected 1985 figure of 11Y2
million bid that would be achieved
without restrictions.
Gasoline consumption is a prime
target of these proposed conservation efforts. The combination of a
tax on "gas guzzlers" and a rebate
on high-mileage cars would discourage purchases of fuelinefficient autos, and in addition,
there would be a gasoline tax increasing by 5 cents/gallon for every
year that the nation fails to meet
annual consumption targets beginning with 1979.Through these
measures,gasoline consumption
presumably would be reduced 10
percent below current levels by
1985.
Further conservation efforts would
include tax credits for homeowners and business firms that invest in insulation for their buildings,
the termination of promotional
electric-utility rates that decline
with increased volume, and the
imposition of mandatory efficiency
standards for household appliances. To encourage a switchover
2
to coal, the plan calls for a slidingscale tax on large industrial users of
oil and gas starting in 1979, and a
similar tax on utilities starting in
1983.
Limiting production?
Production incentives get less emphasis in the Administration's plan,
which calls for the indefinite continuation of price controls on domestic oil supplies. Price ceilings for
oil from previously discovered
properties would be permitted to
rise by no more than the annual
inflation rate, so that "real" prices
would remain constant. (Given recent inflation trends, this provision
would permit lessof a rise over the
next three years than under present
controls.) By 1980,further adjustments would be made, through
periodic equalization taxes, to
bring the present multi-tiered
prices into line with the average
1977 foreign oil price adjusted for
U.S. inflation. The actual 1980 relationship of U.S. crude prices to
foreign prices would depend on
whether foreign prices had risen
faster than the U.S. inflation rate.
The price of "new" oil-now redefined to include only oil discovered
after April 20, 1 977-would also be
permitted to rise over the next
three years to the 1977 world price
level (adjusted for inflation). But to
qualify for that higher price, oil
from onshore wells would have to
come from properties at least 2Y2
miles from existing wells (or from
deep-drilled wells within that radius), and oil from offshore wells
would have to come from tracts
leased after April 20, 1977.The industry claims, however, that those
restrictions would exclude the vast
bulk of the properties either drilled
or leased within recent months.
Regulations governing the pricing
of natural gas would be even more
complex, involving the concept of
oil-equivalent pricing. The plan
would eliminate the interstateintrastate distinction for ((new" gas,
making both subject to a price
limitation-determined
as the
equivalent, on a BTU basis, of the
average refiner acquisition cost of
all domestic oil. That price ceiling
would be approximately
$1 .75/thousand cubic feet at the
beginning of 1978. Under current
policy, new gas for sale to intrastate
pipelines is free from controls
and now sells for about $2.25/thousand cubic feet. Gas from existing
wells would remain at current
prices until the expiration of existing contracts, at which time gas for
sale to intrastate pipelines would be
subject to the same $1.75 ceiling as
for new gas, while interstate gas
would qualify for a price no higher
than the current ceiling price of
$1 .45/thousand cubic feet (adjusted
for inflation).
Pricing and production
This pricing approach seems to assume that oil and gas supplies
would be unresponsive to higher
prices-a somewhat doubtful assumption over the long run. For
example, Federal Energy Administration projections suggest that U.s.
crude oil production could rise
from 10.0 million bid in 1975 to 14.9
million bid in 1985 at an average
domestic price of $13 a barrel (constant 1975 dollars), in contrast to the
constant level of production which
would be maintained at the present
average price of $8 per barrel. Simi3
larly, in the case of natural gas,
production would rise from 19.5 to
22.3 trillion cubic feet over the
1975-85 period, if prices were deregulated and permitted to rise to
$2.03/thousand cubic feet (constant
1975 prices), while production
would drop to 17.9 trillion cubic
feet by 1985 if current price controls
were to continue.
Other problems would rise from
the need to stimulate the production of coal and other energy
sources, especially in view of the
fact that consumption wou Id continue to grow even under the Administration's conservationist program. The plan calls for domestic
coal production practically to double over the 1976-85period, thereby rising from 21 percent to 31
percent of an expanding national
energy market-and for nuclear
energy to increase its share from 3
percent to 8 percent of total consumption. The obstacles to this approach include the strict environmental limitations on coal production in both Eastern and Western
mining states, as well as the increased safety requirements for the
construction of light-water nuclear
reactors and the indefinite postponement of the fast-breeder reactor project. In this situation, hew
Congressional pressures might arise
to stimulate domestic energy production rather than simply curtail
consumption, perhaps through increased reliance on the price
mechanism.
Yvonne levy
• BpeA8N • o4 ePI
euozpv e E>\seiV
• 4Bln •
!!BMBH • e!UJoHp:!:) "
'me:::>OJspue.l:l ues
I
(; Sl 'ON IDW1
Eld
OBVd
'S'11
llVW SSV1:::> D:!I
lS'H
:n
BANKING DATA-TWELFTH FEDERAL SERVE STRICT
RE
DI
(Dollar amounts in millions)
Selected Assetsand Liabilities
large Commercial Banks
Amount
Outstanding
5125/77
95,960
74,323
2,174
23,802
22,986
12,998
8,388
13,249
94,626
26,606
334
66,079
5,887
31,851
26,573
9,648
Weekly Averages
of Daily Figures
Week ended
5125/77
+
+
5/18/77
-
Loans (gross, adjusted) and investments*
Loans (gross, adjusted)-total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.S. Treasury securities
Other securities
Deposits (lesscash items)-total*
Demand deposits (adjusted)
U.s. Government deposits
Time deposits-total*
Statesand political subdivisions
Savingsdeposits
Other time deposits:j:
Large negotiable CD's
Member Bank Reserve Position
ExcessReserves(+)/Deficiency H
Borrowings
Net free(+)/Net borrowed H
federal Funds-Seven large Banks
Interbank Federal fund transactions
Net purchases (+)/Net sales H
Transactions with U.S. security dealers
Net loans (+)/Net borrowings H
Change
from
+
+
+
-
+
+
-
+
+
+
+
267
19
212
79
51
61
134
114
383
337
88.
298
31
85
387
326
Change from
year ago
Dollar
Percent
Week ended
5/18/77
41
18
23
+
+
+
+
+
+
+ 8,738
+. 8,329
+ 1,004
+ 1,606
+ 2,933
+ 1,928
- 818
+ 1,227
+ 7,502
+ 2,894
- 125
+ 4,502
- 768
+ 5,730
- 99
- 1,754
+
+
+
+
-
216
+
+
55
1
54
271
117
143
+
+
+
Comparable
year-ago period
27
4
31
197
-
10.02
12.62
85.81
7.24
14.63
17.42
8.89
10.21
8.61
12.20
27.23
7.31
11.54
21.94
0.37
15.38
+
42
*Includes items not shown separately. :j:lndividuals, partnerships and corporations.
Editorial comments may be addressed to the editor (William Burke) or to -the author ••••
Information on this and other publications can be obtained by calling or writing the Public
Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120.
Phone (415) 544-2184.
