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SYNTHETIC FUEL PRODUCTION HEARING BEFORE T H E SUBCOMMITTEE ON ECONOMIC STABILIZATION OF T H E COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS UNITED STATES SENATE N I N E T Y - S I X T H CONGRESS F I R S T SESSION T O S T U D Y V A R I O U S PROPOSALS D E S I G N E D TO R E D U C E OR E L I M I N A T E O U R D E P E N D E N C E ON F O R E I G N SOURCES O F E N E R G Y T H R O U G H T H E D E V E L O P M E N T OF S Y N T H E T I C F U E L S J U N E 20, 1979 P r i n t e d f o r the use of the Committee on Banking, Housing, and U r b a n A f f a i r s U.S. G O V E R N M E N T P R I N T I N G 48-169 0 WASHINGTON : 1979 OFFICE COMMITTEE ON BANKING, HOUSING, A N D URBAN AFFAIRS WILLIAM PROXMIRE, Wisconsin, Chairman HARRISON A. WILLIAMS, JR., New Jersey ALAN CRANSTON, California ADLAI E. STEVENSON, Illinois ROBERT MORGAN, North Carolina DONALD W. RIEGLE, JR., Michigan PAUL S. SARBANES, Maryland DONALD W. STEWART, Alabama PAUL E. TSONGAS, Massachusetts JAKE GARN, Utah JOHN TOWER, Texas JOHN HEINZ, Pennsylvania WILLIAM L. ARMSTRONG, Colorado NANCY LANDON KASSEBAUM, Kansas RICHARD G. LUGAR, Indiana KENNETH A . MCLEAN, Staff Director M . DANNY WALL, Minority Staff Director ANTHONY T . CLUFF, Minority Assistant Staff Director SUBCOMMITTEE ON ECONOMIC STABILIZATION DONALD W. RIEGLE, JR., Michigan, Chairman WILLIAM PROXMIRE, Wisconsin ADLAI E. STEVENSON, Illinois RICHARD G. LUGAR, Indiana JOHN TOWER, Texas THOMAS F . DERNBURG, Staff (II) Director CONTENTS WEDNESDAY, J U N E 20, 1979 Opening statement of Senator Riegle Economic uncertainty Promotion of synthetic fuel production Opening statement of Senator Proxmire Synthetic fuel program compared to SST Unlimited Government subsidies justified? Page 1 1 2 3 3 4 WITNESSES Lloyd N. Cutler, Esq., Wilmer, Cutler & Pickering 5 Persuasion of synthetic fuel 5 Excessive dependence on foreign oil 7 Paul R. Ignatius, president and chief executive officer, A i r Transport Association ^ 7 Joint statement of Messrs. Cutler, Ignatius and Zuckert * 8 Cost difficult to estimate 11 Intensified conservation program needed 12 Eugene M. Zuckert, Esq., Zuckert, Scoutt & Rasenberger 13 Felix G. Rohatyn, senior partner, Lazard Freres & Company 13 Government-owned corporation 14 Financing by foreign governments 15 Financial risk to the American taxpayer 16 Break-out of imprisonment 17 Five m i l l i o n barrels a day 19 The longer a program, the more the expense 21 Alternate choices available 22 Oil companies not risking their money 24 Research program cost $3.4 billion 27 Government loans to produce gasohol 28 Program needed 30 Synthetic fuel projects can be launched overseas 32 Partnership basis could pose political problems 34 Environmental questions 35 Vice President Rockefeller's proposal i n 1976 37 Cost per barrel 39 Private capital 41 People w i l l accept sacrifices 43 45 DOE people are regulators, not producers Oversight and proper Government role is needed 46 A D D I T I O N A L M A T E R I A L S U P P L I E D FOR T H E RECORD GAO analysis of a proposal to produce synthetic fuels Response to additional questions: A i r Transport Association Lazard Freres & Company Washington Post news article, "The New Synfuel Offensive Can W i n Carter's Energy War," by Bernard D. Nossiter (Hi) 48 54 58 56 SYNTHETIC FUEL PRODUCTION WEDNESDAY, JUNE 20, 1979 U . S . SENATE, COMMITTEE ON B A N K I N G , HOUSING AND U R B A N AFFAIRS, SUBCOMMITTEE ON ECONOMIC STABILIZATION, Washington, Z).C. T h e subcommittee m e t a t 10 a.m., i n r o o m 5302 of t h e D i r k s e n Senate Office B u i l d i n g , Senator D o n a l d W . Riegle, J r . ( c h a i r m a n of t h e subcommittee) presiding. Present: Senators Riegle, P r o x m i r e , a n d L u g a r . OPENING STATEMENT OF SENATOR RIEGLE Senator RIEGLE. T h e Subcommittee on Economic S t a b i l i z a t i o n w i l l come to order. Senator P r o x m i r e is c h a i r m a n of t h e f u l l committee. T h e r e is a m o t i o n on t h e Senate floor a n d he w i l l be over here s h o r t l y . B u t I t h i n k we ought to begin. T o d a y s h e a r i n g is b o t h a c o n t i n u a t i o n a n d a beginning. I t is a c o n t i n u a t i o n of a series of hearings t h a t t h i s subcommittee has been h o l d i n g to study t h e economic i m p a c t of t h e p e t r o l e u m shortage, a n d i t also m a r k s t h e b e g i n n i n g of o u r d e t e r m i n a t i o n t o move f r o m a diagnostic phase to a phase of action designed to b r i n g about a r e s o l u t i o n to w h a t is q u i c k l y becoming t h e N a t i o n ' s single most pressing strategic a n d economic problem. ECONOMIC UNCERTAINTY O u r purpose today is to study various proposals designed to reduce or e l i m i n a t e o u r dependence on f o r e i g n sources of energy t h r o u g h t h e development o f s y n t h e t i c fuels. Reduced dependence on f o r e i g n supplies is of v i t a l i m p o r t a n c e to t h e N a t i o n a n d its economy. A s c o n f i r m e d i n o u r e a r l i e r hearings, t h e c u r r e n t petrol e u m shortage is a r e a l i t y a n d is v e r y l i k e l y to r e m a i n so i n t h e absence of m a j o r n a t i o n a l policy i n i t i a t i v e s . W e have also l e a r n e d t h a t t h e average q u a l i t y of t h e crude o i l available to us is deterior a t i n g . This, i n c o n j u n c t i o n w i t h r i s i n g demand, is p l a c i n g strains on e x i s t i n g r e f i n e r y capacity, p a r t i c u l a r l y t h e k i n d of capacity t h a t produces l i g h t p r o d u c t such as gasoline. M e a n w h i l e , f a r too l i t t l e new . r e f i n e r y capacity is u n d e r c o n s t r u c t i o n a n d most of t h a t is of t h e w r o n g k i n d . T h e decision, j u s t announced b y Saudi A r a b i a , t o increase crude o i l p r o d u c t i o n to 9.5 m i l l i o n barrels per day is welcome, b u t i t m e r e l y underscores t h e fact t h a t f o r e i g n sources of crude o i l supplies, even w h e n adequate, are subject to s t a r t a n d stop decisions beyond o u r control. T h i s adds to economic u n c e r t a i n - Cl) l 2 ty and contributes to the difficulty of rational economic planning both at the private and the public level. At the subcommittee's hearing of June 6 1 it was demonstrated by expert witnesses that both petroleum price increases and physical shortages inflict exceedingly adverse effects on the domestic economy. They push up the price level. They reduce production and employment. They add to the risk of recession. And they create the likelihood that when recession comes its impact will be worse than otherwise. Finally, dependence on foreign oil adds to the weakness in our balance of payments. The effect is to depress the international value of the dollar thus making imports more expensive and reducing the return from the sale of our exports. The outcome is a drain on our real national income and a reduction in our standard of living. PROMOTION OF SYNTHETIC FUEL PRODUCTION In view of these adverse conditions, attention to promotion of synthetic fuel production is most timely. Fortunately, the issue is now receiving much needed congressional and public attention. Under the leadership of Congressman William Moorhead, chairman of the Subcommittee on Economic Stabilization, the House Committee on Banking, Finance and Urban Affairs has favorably reported H.R. 3930, the Defense Production Act Amendments of 1979. This bill contains specific authority for the startup, through a joint Government-private industry effort, of the production of synthetic fuels and synthetic chemical feedstocks for national defense purposes. The bill would add a new section to the Defense Production Act directing the President to attempt to achieve a national production goal of at least 500,000 barrels per day of crude oil equivalent of synthetic fuels and synthetic feedstocks within 5 years of the effective date of the amendments made by the bill. Supplementing Congressman Moorhead's initiative are a number of plans that have recently been put forward by concerned private citizens. Some of these citizens are our witnesses today. Their plans have in common with the Moorhead bill the characteristic that they propose a partnership between Government and industry that will solve today's energy problem just as similar partnerships supplied synthetic rubber during World War I I and built the aluminum and steel capacity that enabled us to prosecute the war successfully. Our witnesses today are two Washington attorneys, Mr. Lloyd N. Cutler and Mr. Eugene M. Zuckert; Mr. Paul Ignatius, president and chief executive officer of the Air Transport Association; and Mr. Felix G. Rohatyn, senior partner of Lazard Freres & Co., and chairman of New York City's Municipal Assistance Corp. Messrs. Cutler, Ignatius, and Zuckert published a description of their plan in the Washington Post of June 10, 1979; and it is my understanding that they will elaborate on that today. In addition, they have agreed to include in their testimony some comments on the Moorhead bill and how their plan can be reconciled with it. Mr. Rohatyn, the financial savior of New York City, 1 Gasoline shortages, hearings before the Subcommittee on Economic Stabilization, May 22 and June 6, 1979. 3 has agreed to join the panel. He has also been deeply involved and will present his own views and proposals. I also hope that he'll react with the other gentlemen on what they're presenting today. It seems to me essential to consider how we might best proceed to try to fly through the whole conversion of this thing, the size and scale, and also, what time frame we ought to be thinking about in forcing the development of this national capacity. If Mr. Rohatyn does as much for us in national energy solvency as he's done for New York City, we'll be very grateful indeed. We're delighted to have such a distinguished panel today discussing this serious issue. Again, we appreciate your coming. Why don't the three of you who are operating as a team, go ahead and identify yourselves and make the presentation that you have for us? OPENING STATEMENT OF SENATOR PROXMIRE Senator P R O X M I R E . Before you do that, I have a short statement to make. From recent discussion in Congress and the press, you would think that synthetic fuels are the pot of gold at the end of the rainbow—that they are America's path to energy independence and the sure way to end the lines at the gasoline pump. A kind of magic wand that with little or no pain can let us solve our energy problems—without much difficulty. Synthetic fuels advocates argue that all of this can be achieved at what they consider a very reasonable cost—no more than $200 billion for the initial Government and Government-guaranteed investment plus the untold cost of Government purchase commitments and sales subsidies. These advocates also argue that synfuel technologies are proven. They cite the examples of Nazi Germany, which refined some fuel from coal 35 years ago, and of South Africa, which has operated a small synfuel plant for some years. Finally, synfuel supporters argue that a synthetic fuels program could be modeled after previous Government efforts to develop new technologies rapidly and on a massive scale. They cite the synthetic rubber program during World War II, the Manhattan project, and expansion of several mineral industries during World War I I and the Korean war. And yet, they fail to recognize that World War I I was a far different situation. We had no alternatives to developing synthetic rubber and expanding critical materials industries. Nor were we as concerned about the implications for the Federal budget. Today, we have numerous alternatives to synthetic fuels and we are very concerned about reducing Federal spending and borrowing. The wartime analogy does not fit. SYNTHETIC F U E L PROGRAM COMPARED TO SST However, another analogy does. The prospects for a Governmentsponsored synthetic fuels industry remind me of another Government subsidy program of more recent years. I refer to the poorlv conceived and enormously wasteful SST program of the late 1960's and early 1970's. America, it was argued, urgently needed the SST. Otherwise, we would lose our technological edge in a critical industry and would suffer a substantial balance-of-payments loss. Envi- 4 ronmental and economic objections were sluffed aside by those who recognized the apparent advantages of this project. And yet, despite all these advantages, private capital would not finance the program. Private industry recognized a losing proposition. Fortunately, Congress did also when it canceled SST subsidies. We should take warning from the SST debacle. Private industry unwillingness to sponsor synthetic fuel plants on its own should tell us something. If synthetic fuel technology were commercially feasible, private industry would be investing its own capital. Current synthetic fuels projects are plagued by technological and environmental problems which impede economical operations. Moreover, there is no proof that it is possible, even with unlimited funds, to develop a synfuel industry large enough to make a sigificant contribution to our energy needs. Cost considerations are blithely minimized. $200 billion is an enormous amount of money. Where is it going to come from? What defense and social programs are going to be cut back or eliminated? And how much will the budget deficit increase? What will the anticipated level of Government borrowing do to capital markets and the rampant inflation we are currently suffering? It is argued that the cost is justified because a large synthetic fuels industry would protect us against further OPEC price increases. What happens if it has the opposite effect? What happens if OPEC raises its prices when it sees our willingness to subsidize synthetic fuel production at a cost higher than what they charge? And what happens if the costs of coal and synfuel production continue to rise with the price of oil as they have in the past? Do we gain or lose? It seems to me that a large commitment to synthetic fuels rather than other, more economical energy sources could aggravate the energy cost-spiral. Furthermore, conservation is painful and certainly no magic wand and it will take years and lots of patience on the part of the American people and a great deal of leadership here in Washington. But, it may be the surest way to meet our energy problems and at the same time, ease the inflationary pressures that obviously are aggravated by rising fuel costs. U N L I M I T E D G O V E R N M E N T SUBSIDIES JUSTIFIED? I agree that synfuel production has great appeal. However, many questions have not been answered, and many problems have not been considered. Significant cost, technological, and environmental concerns must be addressed. Further research into these questions is clearly justified, but is a crash program with unlimited Government subsidies and reallocation of capital justified given the magnitude of these unanswered questions? I hope that today's witnesses will be able to address some of these questions. Although we will only hear from synthetic fuels proponents today, we will have a chance to hear a more exhaustive discussion of this issue in late July when the full committee holds hearings on all of the energy legislation currently before it as well as the Moorhead bill which will soon be considered by the House. Thank you, Mr. Chairman. 5 Senator RIEGLE. Thank you, Mr. Chairman, and certainly a number of those questions that you have put are important ones that I trust our witnesses will answer today. Senator Lugar, I gather, does not Senator L U G A R . Let me make a quick comment. I don't have a prepared statement, Mr. Chairman, but I simply join, I think a growing number of Americans, who feel that synthetic fuel production must be accelerated and accelerated as rapidly as possible. That the Federal Government try to initiate this. And I welcome these hearings this morning to highlight this necessity. It seems to me to be intolerable that we are in a situation such as we are in, with no options, at least in the petroleum area, that look very viable for the time being. The synthetic situation, it seems to me, is crucial. Thank you. Senator RIEGLE. Gentlemen, why don't you proceed with your presentation and then we'd like to hear from Mr. Rohatyn. S T A T E M E N T S O F L L O Y D N. C U T L E R , ESQ., W I L M E R , C U T L E R & P I C K E R I N G ; P A U L R. I G N A T I U S , P R E S I D E N T A N D C H I E F E X ECUTIVE OFFICER, AIR TRANSPORT ASSOCIATION; AND E U G E N E M . Z U C K E R T , ESQ., Z U C K E R T , S C O U T T & RASENBERGER Mr. CUTLER. Thank you very much. Mr. Chairman, my name is Lloyd Cutler, and I will make some preliminary remarks and then Mr. Paul Ignatius, sitting to my right, will present a brief summary of the proposal that you referred to. I'd like to say first, to Senator Proxmire, that when our mutual friend, Najeeb Halaby was the FAA administrator, he appointed me to a committee that was to consider what sort of Federal funding, if any, should be provided to the SST. The thought in those days was you would have a Comsat type of venture and I have been a counsel to Comsat. I took the position in that case, if you are going to spend that much money, that there were certainly better things we could do in our aviation system, such as building the wide body airbuses, and we should not build an SST. PERSUASION OF SYNTHETIC FUEL So, we are not totally in disagreement about when and where the Government should put its hand to the wheel. I'd also like to say that while the notion of synthetic fuel does have the risk of persuading people they don't have to do all the other painful things that need doing to adjust the world energy shortage that was going to come, whether there was an OPEC or not, we don't mean to suggest for a moment that a synthetic fuel program is a substitute for conservation, that it's a substitute for stimulating further development of oil and gas throughout the world and especially on this continent, or that it's a substitute for the ongoing programs to develop renewable sources of energy. We need every one of those things, Senator. In our view, we need a synthetic fuels program in addition, and because of the long lead times, we need to get it going before the private market will get it 48-16 9 0 - 7 9 - 2 6 going on its own, w h i c h i n due course, w o u l d probably happen anyway. B u t , we don't have t h a t time, and I ' d l i k e to explain t h e reasons w h y I don't t h i n k we have t h a t time. Before I do, I w a n t to say, since you mentioned, M r . Chairman, M r . Zuckert and I are Washi n g t o n attorneys, we have no client interest i n t h i s m a t t e r . M r . Ignatius, who is the c h a i r m a n of the A i r Transport Association, has, i f anything, only a customer interest. The airlines he represents are probably the largest single buyers of l i q u i d f u e l i n t h e country today. I f we have a n y t h i n g to contribute, it's only t h a t we're old enough to remember how we attacked w h a t I consider or we consider, respectfully, Senator Proxmire, to be very s i m i l a r and no more dangerous and c r i t i c a l problems t h a n this one i n t h e past. I can't t h i n k of a t i m e i n the last century w h e n the U n i t e d States, or w h a t we now refer to as the industrialized democracies t h r o u g h o u t the world, have been more vulnerable to a n e x t e r n a l set of circumstances over w h i c h we have v i r t u a l l y no control. We have gotten i n t o a situation—and i t wasn't anybody's doing, i t was simply following the m a r k e t to whatever the cheapest sources were—we have gotten i n t o a situation i n w h i c h probably one-third of the world's l i q u i d energy comes f r o m t h e v e r y s m a l l area i n the M i d d l e East, the Persian Gulf, w h i c h is probably politically the most fragile place i n the w o r l d today. A n d the t i m e of political t u r m o i l i n t h a t area is probably going to continue for a m i n i m u m of 50 years, probably more, as f a r ahead as we can see. We are vulnerable not only to the k i n d of instance l i k e t h e one t h a t recently happened i n I r a n , where nobody was t h i n k i n g of a p p l y i n g pressure to the U n i t e d States or the industrialized West, b u t where, i n the course of an indigenous local revolution, a very serious body blow was dealt to a l l of our economies. W i t h only a 2 percent or 3 percent o i l shortage i n the world, the price has skyrocketed w i t h i n the last year, more t h a n 50 percent. I f we learned a n y t h i n g f r o m t h a t crisis, i t was probably t h a t OPEC, the great cartel, had set the price below the m a r k e t clearing price of oil w h e n political shocks l i k e t h a t develop. I t ' s v i r t u a l l y a certainty t h a t w i t h i n the next 10 years, perhaps w i t h i n t h e next 3 years, there w i l l be other shocks l i k e t h a t w i t h at least equally serious consequences. A l l of t h a t oil goes t h r o u g h a few t e r m i n a l s , w h i c h i f destroyed, could very, very easily take us 2 or 3 years to p u t back i n t o production again. We used to—we read a l l those w o n d e r f u l spy novels about t h e m a d m a n who gets a hold of a nuclear weapon and blackmails t h e e n t i r e world. It's perfectly possible t h a t a few people could get h o l d of those t e r m i n a l s and b l a c k m a i l the w o r l d politically, or, t h a t i n the course of t h e i r own local fights for political power and for n a t i o n a l recognition i n t h e i r own countries, they could destroy facilities w h i c h would take us years to rebuild. The entire w o r l d depends on increasing our supplies of energy so t h a t we can continue to m a i n t a i n the k i n d of economic g r o w t h , not only i n the industrialized West, b u t t h r o u g h o u t the underdeveloped world, that's going to p e r m i t us to at least have a chance to operate w i t h i n democratic political structures. 7 EXCESSIVE DEPENDENCE O N FOREIGN O I L I n a stable, no-growth w o r l d or declining-growth world, we don't have a chance, we don't even have a chance to exercise the kinds of political initiatives we wish to exercise around the world. It's critical t h a t we get over this excessive dependence on o i l f r o m t h i s very small, very fragile portion of the w o r l d over w h i c h we have no c o n t r o l — m i l i t a r y , political, economic or otherwise. It's at least as i m p o r t a n t t h a t we do this as i t was to get started on the 50,000 or 100,000 airplane programs j u s t before the beginn i n g of W o r l d W a r II. I don't t h i n k any of us can take this situat i o n l i g h t l y or say t h a t w i t h conservation and solar energy, some day it's a l l going to w o r k out a l l r i g h t . We j u s t can't afford to depend on it. It's at least as i m p o r t a n t as m a i n t a i n i n g our strategic nuclear forces t h a t we do whatever we can to resolve this problem. We had problems l i k e this i n W o r l d W a r II. We lost our rubber supply. I n the beginning of the Korean war, we d i d n ' t have enough a l u m i n u m or n i c k e l to b u i l d airplanes. We found ways, w h i c h the C h a i r m a n has referred to, to b u i l d t h a t capacity by using the Government as the engine of construction, contracting w i t h private i n d u s t r y to do i t , leasing plants to private industry, h i r i n g private industry as managers. A n d i n the K o r e a n w a r we did something even better. We got private i n d u s t r y to b u i l d the plants under m a r k e t guarantee contracts w r i t t e n by the Government. The Government took risks w h i c h you could readily measure i n billions of dollars. B u t the u l t i m a t e cost of those programs to the Government was substantially nil. We t h i n k we're i n a situation very comparable to t h a t , w i t h due respect to Senator Proxmire, and t h a t once again, forced d r a f t f r o m the Government, organized perhaps i n the same corporate f o r m t h a t we used i n W o r l d W a r I I and i n the Korean war, is the way to go about it. A n d w h i l e there w i l l be, of course, substantial diversions f r o m other capital markets, w h i l e there are problems of the environment t h a t need consideration, it's an absolutely indispensable element of p u t t i n g ourselves together, getting off our tails and doing something about the gravest t h r e a t to the political and economic and m i l i t a r y security of the U n i t e d States, t h a t we have faced, at least, since t h e beginn i n g of W o r l d W a r I I . M r . Ignatius w i l l describe to you the p l a n t h a t we have p u t forth. We are not energy experts. B u t we do remember how the Government organized itself to deal w i t h this sort of a problem i n the recent past. We t h i n k t h a t method can be readily adapted to this situation. Senator RIEGLE. T h a n k you very much. P A U L R. I G N A T I U S , P R E S I D E N T A N D C H I E F OFFICER, AIR TRANSPORT EXECUTIVE ASSOCIATION M r . IGNATIUS. M r . Chairman, we've furnished for you and the members of the committee a statement w h i c h is the article t h a t appeared i n The Washington Post a couple of weeks ago, and we've also furnished a s u m m a r y statement, w h i c h I w i l l i n t u r n summarize here. We would request t h a t the f u l l statement be made p a r t of the record. 8 Senator RIEGLE. W i t h o u t objection, i t w i l l be made a part of the record. [The j o i n t statement of Messrs. Ignatius, Zuckert, and Cutler follows:] S T A T E M E N T OF P A U L R . I G N A T I U S , E U G E N E M . ZUCKERT, A N D LLOYD N . CUTLER M r . Chairman and members of the committee, the price of imported crude oil has increased by 50 percent this year, and i t now appears that the real price of imported oil w i l l double again w i t h i n the next 10 to 20 years. We are entering an era of chronic oil shortage, and much of the available supply is subject to sudden and periodic interruption because i t is produced i n areas of recurring political turmoil. To cope w i t h these dangers, i t is useful, of course, to conserve and to stimulate the discovery and production of additional petroleum supplies. But that is not sufficient. We need to create a substitute for natural petroleum. Because of the long lead times involved, we need to do so at once. The United States could create additional capacity from synthetics—a vast oil reserve, i n effect, that could be called into use to overcome shortages or to hold down the world price of oil i f the OPEC cartel is t r y i n g to move prices upward. This would give us the leverage we have lacked on oil prices and also insure a less bumpy transition to the distant future of alternative energy sources. I n this uncert a i n world, this is an insurance policy we need to buy—now. The United States, i f i t has the will, can create a synthetic oil industry capable of producing 5 m i l l i o n barrels a day—more t h a n 20 percent of our current needs. This can be done w i t h i n five to ten years from sources such as shale, tar sands, heavy oils, coal, and f a r m crops. The synthetic fuels program would draw upon the proven experience of the innovative government-industry programs developed to meet comparable materials shortages i n World War I I and the Korean War. Three months after the attack on Pearl Harbor i n December 1941, 90 percent of the world's natural rubber facilities came under the enemy's control. By 1945, when World War I I ended, 87 percent of the rubber consumed i n the U n i t e d States was synthetic. Nearly a l l of i t came from government-owned plants b u i l t d u r i n g the war w i t h the Reconstruction Finance Corporation financing and operated by private industry. Other critical materials shortages during World War II, notably i n a l u m i n u m and steel, were met by additional plant capacity financed by the Defense Plants Corporation and other government agencies and operated by private companies under leases or management contracts. I n the Korean War we also faced serious shortages. This time we developed another method, under which the General Services Administration entered into market guarantee contracts w i t h private industry to build new aluminum, copper and nickel capacity. Under those agreements, the private f i r m obtained private financing to build specifed facilities, i n exchange for 5-year tax amortization certificates and the government's commitment to purchase, at specified prices or prevailing market prices, any part of the output that could not be sold to m i l i t a r y or commercial users. Some of these facilities employed known processes w i t h predictable costs (e.g., p r i m a r y a l u m i n u m reduction), but others involved new products (e.g., ferro-nickel) w i t h uncertain costs and marketability. The long-run cost of these programs to the government was negligible. Most of the government-owned World War I I plants were sold to their private operators or others at prices that largely recouped government costs. Under the Korean War market guarantee contracts, the new capacity was privately financed. The government did have to purchase some a l u m i n u m and other materials i n excess of its own stockpile goals, but these excess inventories were later resold to private buyers or to the original producers at higher prices t h a n the government had paid. Today, about half the petroleum we use is imported. More t h a n h a l f of our imports and even higher percentages of European and Japanese imports come f r o m the Middle East. Our heavy depenence on these sources makes us highly vulnerable to sudden upward price movements resulting from interruptions to supply or from the actions of OPEC. Moreover, no one can be certain, looking ahead to the next five or ten years, that this oil w i l l continue to flow uninterruptedly to our shores. Political changes, terrorist activities, overt m i l i t a r y action and natural disasters could lead to a significant reduction or even a halt of deliveries. Each time one of these contingencies occurs, the stress on the economic and social fabric of the 9 industrial democracies w i l l be enormous. The risks of not t r y i n g to correct the present situation are too great to bear. The Department of Energy (DOE) is pursuing a broad program to advance technology i n a number of energy areas. Promising long-range applications, such as laser fusion, and medium-range applications such as those based on solar technology, are expected to emerge. The substitute fuel program would not replace these DOE research efforts. But i t would help greatly to f i l l the gap i n the years before the DOE programn can meet a significant portion of our energy requirements. Our concern is the immediate future, the next five to fifteen years. For this period our present program relies p r i m a r i l y on savings from conservation and the increased output from domestic petroleum resources. The President estimates that the various conservation measures outlined i n his A p r i l 5, 1979 program, together w i t h new domestic oil production resulting from decontrol, w i l l save from 864,000 to 1,539.000 barrels a day. Since we are using upwards of 20 m i l l i o n barrels a day— about half of i t imported—we w i l l still be heavily dependent on foreign oil even i f the program produces savings at the high end of the estimate. Substantial additional supplies can be attained only i f we undertake an expedited program to produce synthetic oil from sources and technologies that are already at hand. The production program would be based on today's technology. Through joint government-industry efforts, we would create a synthetic oil industry i n much the same way that we created a synthetic rubber industry almost 40 years ago and doubled our non-ferrous metal capacity almost 30 year ago. ADDING OPTIONS The technology of synthetic oil is not i n an early stage of research and development comparable to the intercontinental ballistic missile i n 1950, the moon-landing program at its outset i n 1960, or laser fusion today. I t is a proven technology. Germany waged World War I I on synthetic fuel produced from coal. South Africa has been producing synthetic oil since 1955 and has under construction a much larger production facility. I n the United States, a number of studies as well as prototype developments contemplate the eventual production of synthetic oil from coal. Synthetic crude oil (comparable i n its characteristics to import crude oil) can also be produced from oil shale, which is also available i n enormous quantities i n the United States. There are large deposits of oil shale i n Colorado, U t a h and Wyoming, although environmental and other problems associated w i t h its use and disposal appear difficult to overcome at present. Fortunately, there are important oil shale resources i n Kentucky, Ohio, Indiana, Tennessee, and Alabama that seem to be generally free of the problems w i t h Western shale. The Canadian tar sands can also be converted into fuels w i t h existing technology. The production program might also include substitute fuels made from farm crops. Fuel mixtures of alcohol made from farm crops and gasoline have satisfactorily powered automobiles and agricultural vehicles and offer the promise of saving worthwhile amounts of gasoline. Large quantitites of petroleum products or substitutes like alcohol could be made w i t h known technology at costs of production still above the present world prices of natural petroleum and its products. But while the future course of world oil prices remains uncertain, the trend w i l l surely be upward i n real terms—the only questions are how sharply upward i n real terms and how soon. A standing capacity to produce 5 m i l l i o n barrels daily from substitute sources would be of incalculable value to the United States and the free world—whether or not this capacity is continuously operated. Its existence—in operation or standby— would cushion the potential consequences of future political shocks, such as occurred i n I r a n this year and may well occur there or i n other vital production centers again and again. By adding a significant additional operating or standby source of supply, we would also tend to dampen the inevitable upward trend of oil prices. A n d i t would be an important step i n developing the synthetic fuel capacity that w i l l certainly be needed when conventional oil sources r u n down. Depending on cost-price relationships, the politcal stability of the world oil trade and balance-of-payments considerations, the United States and its friends would have several valuable options they do not now enjoy: 1. We could currently market and consume the new output, i f necessary, by subsidizing any difference between production costs and market prices, and reduce imports by an equal amount. This might i n t u r n lower world prices for the remaining oil that we must import. 2. We could currently purchase the new output and stockpile i t as insurance against future political shocks. 10 3. Whenever supplies of natural petroleum at prevailing prices are deemed more attractive, we could shut down some or all of the new plants. In the case of those privately built under market guarantee contracts, we would pay the owners a standby fee to cover their loan amortization needs plus a reasonable return on equity, with the right to order them reopened whenever it becomes timely to shift to option 1 or 2. A NEW CORPORATION To carry out such a program, the United States should create a Petroleum Reserve Corporation, under the leadership of a proven business executive like John deButts, the recently retired Chairman of AT&T. The Corporation would be authorized to design and execute the program to create up to 5 million new barrels of petroleum and alcohol capacity a day. It would be authorized to issue federally guaranteed bonds. It would have authority to build new plants to be initially owned by the government (financed by its bond issues or perhaps by using part of the proceeds of the proposed windfall profits tax) and operated by private industry under leases or management agreements. It would also have authority to enter into market guarantee agreements for new plants to be built and owned by private industry, with a government commitment to a) buy any part of the output that is not commercially sold, or b) pay the subsidy needed to make commercial sales, or c) order shutdown and pay a standby fee to cover amortization of debt and a reasonable profit, with the right to order reopening at any later time under option a) or b). The Corporation would analyze the feasibility of achieving its goals by employing various mixes of the sources, technologies and financing options available, and would then design its program and negotiate its contracts to suit. The Corporation would also be empowered to finance the building of plants in Canada (e.g., for tar sands) and perhaps elsewhere, under firm intergovernmental agreements for making the output available. It could also be authorized to enter into joint ventures with other nations, under which they would participate in the financing risks in exchange for the right to a share of the output. It would also serve as a focal point for helping to identify environmental issues relating to the production program that require prompt resolution by the President. Estimates used by energy planners suggest that the one-time investment cost might be $20 billion to $40 billion for each one million barrels of synthetic capacity—or $100 billion to $200 billion for the proposed program. The cost to the taxpayer, however, is likely to be much less, depending on how many of the plants can be privately financed under market guarantee contracts, on the extent that other countries participate in the governmental financing risks, and on whether any government-financed plants ultimately can be sold to private industry. Recently, the Japanese and the West Germans agreed in principle to participate in a U.S. Government-sponsored substitute fuel venture and to contribute half of its expected $700 million cost. While the ultimate cost to the taxpayer could be significant, it pales beside that fact that we already incur a trade deficit in the range of $30 billion a year for each 5 million barrels a day of oil we import, even at the current $17- to $20-a-barrel price, which seems likely to increase with every passing year. Looking at the downside risks of our petroleum future, to invest in a 5 millionbarrel-a-day synthetic production program is a worthwhile insurance premium. Once this capacity exists, we could respond more flexibly to any future energy development. If real oil prices stay level or go down, we could place the capacity in standby and this would be our only cost. Or, if we preferred to reduce our oil imports, we could operate the capacity at the additional cost of any required operating subsidies. If real oil prices continue to go up—which now seems the most likely possibility— the plants would be self-supporting or close to that, and most of our investment would be returned. ADDITIONAL ADVANTAGES Apart from what it would do to resolve our present petroleum predicament, the proposed program would have other valuable psychological and economic advantages. First, it would give us all the psychological lift of "doing something" instead of just doing without. It would employ our managerial, technological, engineering and organizing talents to achieve a productive rather than a restrictive result. 11 Second, i f present expectations of a n a t u r a l or induced recession by 1980-81 prove correct, the program would stimulate the capital goods and construction markets at the very t i m e when a stimulus would be helpful. T h i r d , the program would give us a vehicle for acting j o i n t l y w i t h other concerned industrial democracies to meet the j o i n t actions of OPEC i n a non-confrontational manner t h a t OPEC's members could not oppose and m i g h t even support. The public reception to such a program should be highly favorable. The r i g h t t i m e to adopt i t is now. M r . IGNATIUS. We selected a figure of 5 m i l l i o n barrels a day of synthetic oil to be made f r o m coal, shale, t a r sands, and agricultural products. We t h o u g h t t h a t figure was a significant one because i t represents about h a l f of our c u r r e n t imports, and w o u l d show a determination to deal w i t h the kinds of problems t h a t M r . Cutler has already emphasized. We t h i n k whatever the figure is, there should be a specific goal, because we are t a l k i n g here about an urgent problem where there should be a goal w i t h associated t i m e schedules. We believe that's necessary i n this case. COST DIFFICULT TO ESTIMATE The cost is very d i f f i c u l t to estimate. We have talked to a number of people, and we get different answers f r o m them. Accordingly, we have bracketed somewhere between $100 b i l l i o n and $200 b i l l i o n the price tag for a capability to produce 5 m i l l i o n barrels per day. T h a t amount, however, would be reduced substantially to the extent t h a t other countries participated i n the f i n a n c i n g of these ventures. Second, to the extent to w h i c h private i n d u s t r y involved itself, and whether these plants could be sold to the producing companies, as was the case i n the rubber p r o g r a m to a great extent. Also we believe the corporation t h a t we have i n m i n d is the i n s t r u m e n t a l i t y for b r i n g i n g this program i n t o being. I t should have the a u t h o r i t y to issue bonds and, i f t h a t were the case, the amount of money t h a t would have to be put up by the U.S. taxpayer would also be reduced. I n addition to a specific goal, a program of this k i n d needs a concentrated effort. Reference has been made already by Senator P r o x m i r e and M r . Cutler to m a n y other things we need to do— solar energy being a case i n point. I n no way are we suggesting t h a t a synthetic fuels p r o g r a m on an urgent basis should displace activities of this k i n d . There is a large-scale research and development program sponsored by the Department of Energy conducted by a number of private corporations investigating m a n y promising techniques. Those should go forward. W h a t we are saying, however, is t h a t we believe some of the processes for m a k i n g snythetic fuels could be taken f r o m a research, development, and demonstration posture and placed i n production. A n d because of the lead times, and because of the t h r e a t to our n a t u r a l petroleum supplies, we t h i n k it's essential t h a t this be done. I a m quite certain, Senator Proxmire, t h a t over a period of t i m e the m a r k e t for these fuels w o u l d call f o r t h the private investment, as i t n o r m a l l y does. 12 The concern I have is that I don't believe it will happen in the near-term. I think it will eventually happen. And because Fm concerned, as Mr. Cutler and Mr. Zuckert are, about the threat that we face because of the reliance on unstable sources of supply for natural petroleum, that we get on with a government-sponsored program in order to do more quickly what is likely to happen at a slower pace through private financing. That's the essence, I think, of why we believe a governmentindustry cooperative program is necessary. Now the management of this effort is terribly important. We have in mind the establishment of a corporation authorized by the government. It would be headed by an executive of proven abilities. It would be empowered to do a number of things: to issue bonds guaranteed by the U. S. Government; to enter into market guarantee contracts under which new plants would be built, owned and operated by private industry; to finance directly the construction of new plants where appropriate; to finance the construction of plants outside the United States such as, for example, in Canada utilizing tar sands; to enter into joint ventures with other nations; and to carry out other responsibilities. I N T E N S I F I E D CONSERVATION P R O G R A M NEEDED We've said earlier this is no substitute for other energy approaches, and certainly no substitute for a continued—and I believe intensified—conservation program. We clearly need that, and must have a very effective program. We also need solar. We need some of the other energy applications that rely on long-range opportunities, laser fusion, many years in advance, but one of a number of promising approaches. And finally, there has to be, as in any kind of program, proper concern for environmental issues. They must be identified. We believe, in addition to identifying those problems, however, there has got to be a judicial and conclusive way of resolving them, particularly if we want to embark on an urgent program to provide the kind of insurance policy that we need. In summarizing our thoughts, then, we believe a program of this kind is in the national interest, because it would lessen our dependence on foreign sources and would alleviate the impact of a halt in delivery, should that occur. It would dampen the inevitable upward trend of oil prices, because we would have a lever of our own that we think would be helpful in counteracting the otherwise inexorable rise in prices. We think it would give the country a psychological lift of doing something, instead of just doing without. It would employ our managerial and technological talents to achieve a productive, rather than restrictive, result. It would stimulate the capital goods in construction markets at a time when such stimulation might or could be helpful. It would certainly provide employment at a number of places where it would be needed, and it would permit the United States to act jointly with other concerned industrial democracies to meet the joint actions of OPEC in a nonconfrontational manner. 13 For those and other reasons, then, we are pleased to have an opportunity to describe this p r o g r a m and know t h a t this committee w i l l give i t very thorough and careful consideration. T h a n k you. S T A T E M E N T O F E U G E N E M . Z U C K E R T , ESQ., Z U C K E R T , & RASENBERGER SCOUTT M r . ZUCKERT. Just briefly, M r . Chairman, I a l l y myself w i t h the comments of both M r . Cutler and M r . Ignatius, and it's I t h i n k i m p o r t a n t to say w h a t this program is not, w h a t we k n o w i t not to be, as w e l l as w h a t i t is. We don't regard i t as a t o t a l solution of the problem. We t h i n k i t would be w r o n g i f the country got this perception. It's not an easy solution. It's going to take a special k i n d of organization, and there are lead times involved, long lead times involved, as we know. We can't recover the lead times t h a t have been lost. Inaction since 1973 to date inevitably cannot be recovered. A n d the program depends, as we see it, on a psychology resulting f r o m the national recognition of the problem. I f we agree t h a t M r . Cutler is r i g h t i n his analysis, t h a t is the psychology t h a t w i l l produce the results t h a t we are t a l k i n g about. We've seen i t i n our own experience. I've seen i t i n the development of the nuclear submarine, as a member of the A t o m i c Energy Commission. I've seen i t i n the i n t e r c o n t i n e n t a l missile programs i n the A i r Force. These depended upon a determination t h a t we could and would do something of great difficulty. A n d the results were better t h a n we could have foreseen. B u t i t is essential there exists a belief t h a t the situation is as serious as M r . Cutler described. T h a n k you. Senator RIEGLE. I ' m going to w a n t to come back and t a l k about the defense side of this thing, p a r t i c u l a r l y w i t h those of you who have been i n the defense business i n the past, i n terms of t h a t particular strategic variable. B u t before I do, I t h i n k it's i m p o r t a n t now t h a t M r . Rohatyn have a chance to p u t his notion forward, and i n so doing perhaps react to s i m i l a r points t h a t you raised here, agreements and disagreements. S T A T E M E N T O F F E L I X G. R O H A T Y N , S E N I O R L A Z A R D F R E R E S & CO. PARTNER, M r . ROHATYN. Senator, t h a n k you very much. I've appeared i n f r o n t of this committee i n other incarnations. I've been g r a t e f u l for its patience. I've always been p a r t i c u l a r l y grateful to Senator Proxmire's u n f a i l i n g good h u m o r and courtesy i n listening to w h a t he obviously believes to be m y bizarre view on things, I ' m afraid. Senator PROXMIRE. YOU always won, too. M r . ROHATYN. It's going to be another test of your good humor. I a m grateful for the privilege of testifying on a subject w h i c h i n m y j u d g m e n t presents potentially the greatest t h r e a t to our system since W o r l d W a r I I , and at the same t i m e w i t h our most exciting i n d u s t r i a l o p p o r t u n i t y since the t u r n of the century; namely, our overdependence on foreign sources of energy. O n l y a major nation- 48-169 0 - 7 9 - 3 14 a l effort i n v o l v i n g the Federal Government and the p r i v a t e sector, i n v o l v i n g new production and conservation, can b r i n g about a solution. GOVERNMENT-OWNED CORPORATION The proposal to consider a Government-owned corporation set u p along the lines of the Reconstruction Finance Corporation to create additional capacity for synthetics is, i n m y j u d g m e n t , w o r t h y of serious support. I w i l l leave to others the discussion of the kinds and amounts of synthetics, the technologies to be used, et cetera. I a m a f i n a n c i a l person and w i l l address myself to f i n a n c i a l and nontechnical issues involved. Before t a k i n g those up, I w o u l d l i k e to make a more general point. More i m p o r t a n t t h a n any single issue, i n m y j u d g m e n t , is t h e need for a national concensus t h a t a n energy crisis indeed exists. I believe the President should appoint a blue-ribbon panel whose membership would be t o t a l l y credible to develop the facts for t h e A m e r i c a n people. W i t h respect to the synthetic project itself, there are several key policy alternatives to be faced here and I w i l l t r y to address myself to as m a n y as I can. One, the activity should be centered i n a new, separate, Government-owned corporation, and not i n a department of the Federal Government. I t w i l l be more visibly accountable, w i l l be able to enlist better management, and can be liquidated after a f i n i t e period of time. I believe the corporation's life should be no more t h a n 10 years unless specifically extended by the Congress. Two, the corporation should have the option of b o t h o w n i n g the plants as w e l l as financing private operations. I n i t i a l l y I believe, as a general rule, direct ownership w o u l d be t h e most straightforward. U n d e r t h a t option, the plants should be managed by p r i v a t e companies under management contracts. These should contain incentives for construction cost l i m i t a t i o n s , operating performance, and early resale to commercial interests. A r r a n g e m e n t should be made to insure accelerated resolution of s i t i n g problems, environm e n t a l permits, litigation, and w o r k stoppages. Government ownership w o u l d provide greater leverage t h a n p r i v a t e ownership i n those areas. The alternative is private ownership w i t h a v a r i e t y of take-orpay contract, price guarantees, debt guarantees, t o t a l or p a r t i a l , and m a n y other s i m i l a r mechanisms. The corporation should have the f l e x i b i l i t y to engage i n as m a n y as possible of these arrangements, since i t w o u l d be unwise i n advance to be dogmatic about any singular approach. Three, the corporation's capital should be $5 b i l l i o n , paid by the U.S. Government. The corporation should have b o r r o w i n g capacity of 10 times its capital, or $50 billion, for a t o t a l f i n a n c i n g capacity of $55 billion. The b o r r o w i n g should take place either by h a v i n g the corporation sell its obligations i n the public markets, f u l l y guaranteed by the U.S. Government, or by h a v i n g the Federal F i n a n c i n g b a n k buy its obligations. I w o u l d favor the l a t t e r because I believe i t would be cheaper and w o u l d provide for a more o r d e r l y method of financing. 15 The size of t h e corporation is obviously a critical element. I believe i t has to be large enough to be meaningful and yet not so large as to t h r o w financial markets out of equilibrium. O n t h e assumption of a 5-year construction cycle this would mean financi n g slightly over $10 b i l l i o n per a n n u m of incremental Government financing, w h i c h I believe the markets could handle w i t h o u t sign i f i c a n t l y increased cost. On the basis of c u r r e n t estimates, this level of investment would result i n p u t t i n g i n place capacity for the equivalent of about 1,500,000 barrels per day, or almost 20 percent of present imports. A t a price of $20 per barrel, i t w o u l d mean a saving of over $10 b i l l i o n per a n n u m i n our balance-of-payment. Four, the objective of the corporation should be to sell the plants to commercial interests as soon as practicable and to reinvest the proceeds, i f necessary, i n the next level of technology. I t is therefore altogether possible that, at the end of its 10 years, i t w i l l have actually invested over $100 billion. F I N A N C I N G BY F O R E I G N GOVERNMENTS Five, i t w o u l d seem desirable, and indeed equitable to me, to suggest t h a t the German, Japanese, and Saudi A r a b i a n Governments, as w e l l as any other governments w h i c h w i s h to j o i n , participate i n the financing of the corporation and be assured of a portion of its output. These governments could be asked to acquire $15 to $25 b i l l i o n of the corporation's bonds, over the 5-year period, thereby m a k i n g t h e m significant partners i n the project, possibly equal partners. T h e i r bonds should not be guaranteed by the U.S. Government, and they would be entitled to t h e i r proportionate share of the output, either for use or resale. Six, Saudi A r a b i a and other producers m i g h t be persuaded to increase t h e i r c u r r e n t production i n the l i g h t of t h e i r share of the output of the corporation down the road. Seven, the impact on the Federal budget should not be significant. The corporation's original $5 b i l l i o n capital could be funded w i t h the proceeds of the w i n d f a l l profits tax. Domestic borrowings could be off-budget w i t h the use of guarantees or, to the extent budgetary impact is foreseen, the w i n d f a l l profits tax could be used i n later years. Sales of nonguaranteed bonds to foreign governments w o u l d of course reduce any such pressures. Eight, the potential i n f l a t i o n a r y impact of such an endeavor on the economy cannot be overlooked. Therefore, to cushion any such impact, b i n d i n g commitments on the p a r t of business and labor w i t h respect to wage and price restraints, w o r k stoppages, et cetera, should be p a r t of such a program. I n a real sense, a social contract should be negotiated. Nine, the charter of the corporation m i g h t be made sufficiently broad to include financing some of the r a i l and barge capacity w h i c h w i l l be required to handle planned coal movements over the next decade. Some estimates of the investment required by 1985 for coal movements both for private railroads and ConRail range up to $10 billion. Some of the weaker roads may not be i n a position to make the investment on a t i m e l y basis, and the a b i l i t y to i n v e n t o r y 16 equipment and lease it to the user may be an important one. This is obviously a peripheral issue, but might be worth considering. Ten, it is obvious that the corporation's activities will generate— both directly and indirectly—significant incremental capital spending and manufacturing activity. A significant amount will be standard manufacturing activity vital to this country's well being. It should be the policy of the corporation to require contractors and subcontractors to perform a certain percentage of the work in the higher unemployment, impacted areas of the country. Industrial parks in urban areas can be made available and the synthetic energy program can and should be used to attack some of the more stubborn unemployment problems. Eleven, smaller regional development corporations such as the presently planned ENCONO—Energy Corporation of the Northeast—can be an integral part of such a program. They can focus on medium-sized projects and be an important element in creating nationwide local participation. Twelve, the board of directors of the corporation should consist of private citizens appointed by the President with the advice and consent of the Senate. All financing should be approved by the Secretary of the Treasury. The President, Secretary of the Treasury, and Congress should receive annual reports, independent audit reports, and a biannual independent evaluation of the corporation's activities. F I N A N C I A L RISK TO T H E A M E R I C A N TAXPAYER There is no question in my mind that significant risks are involved in such a project. Real financial risk to the American taxpayer as a result of new technology, risk of corruption, waste, et cetera, in the management of the enterprise, risk of relaxation in conservation effort, in the development of other types of technology, and many others. In my judgment, however, the risks are minute compared to the risks of inaction. It is already a disgrace that nothing of substance has happened since the 1973 oil embargo to promote our independence from foreign sources. Not only has nothing been done, but we are more dependent than before. It is an unacceptable security risk to so remain; it is an unacceptable industrial risk to face supply disruption; it is an unacceptable financial risk to expose the dollar to constant pressure and make our banking system hostage to OPEC short-term deposits. When I indicated at the beginning of my testimony that I believe this problem to be a potential threat to our system, I was not engaging in empty rhetoric. I believe we underestimate the fragility of western democracy. I would not like to gamble on how it would fare in a lengthy period of reduced standard of living, which our energy problem and inflation can lead to. This proposal will be attacked ideologically from both ends of the political spectrum. Liberals will charge that Government guarantees will be give aways to big business; conservatives will charge that this puts the Government in the energy business. Nonetheless, the fact that both privately owned plants and publicly owned plants will be involved will provide a most useful check 17 on construction costs and operating performance and w i l l measurably accelerate the program. The only relevant ideology here is the need for independence. We should move ahead w i t h this or a similar project i n short order. We should do so as the beginning of the A m e r i c a n answer to the problem. We should offer foreign governments a participation b u t we should go ahead whether they participate or not. This is not a revolutionary concept; the European Coal and Steel A u t h o r i t y , the Common M a r k e t , and other European structures were m u c h more venturesome i n concept and r e m a r k a b l y successful i n achievement. I t is t i m e for us to innovate again, to act instead of just hoping for the best. I f there ever was a r i s k / r e w a r d r a t i o t h a t favored action, this is the one. T h a n k you, Senator. Senator RIEGLE. Well, t h a n k you very much, a l l of you, for your presentations. Let me ask first, M r . Rohatyn, do you detect i n the circles i n w h i c h you travel, i n the business c o m m u n i t y and the financial community, t h a t there is a consensus developing t h a t supports both the need and this concept for breaking out of this box? Is there t h a t k i n d of developing consensus t h a t you can detect? B R E A K - O U T OF I M P R I S O N M E N T M r . ROHATYN. Well, certainly, Senator, i n the business communit y I would say both here and abroad there is a n enormous feeling t h a t we have to break out of this imprisonment t h a t we're in, both f r o m the point of view of the dollar, f r o m the point of view of our security interests. F r o m the point of view of being able to p l a n the f u t u r e for a lot of A m e r i c a n businesses, assurance of supply is even probably more i m p o r t a n t t h a n price. A n d second, t h a t i n terms of i n f l a t i o n a r y impact here, this year we have had a $20 b i l l i o n increase simply i n the price of imported crude. We haven't gotten more crude; you j u s t paid $20 b i l l i o n more for it, or we're paying $20 b i l l i o n more for i t , w h i c h is simply l i k e b u r n i n g the money up i n a furnace, because i t doesn't create another job or tax dollar i n terms of our receipt. I t seems to me to be an intolerable pressure on the A m e r i c a n economy and financial system. Senator RIEGLE. SO I gather w h a t you're saying is t h a t you do detect there is a consensus "developing among the top people i n the business sector and i n the financial sector to move i n this direction, a sort of common identification of the need to strike out i n a dramatic fashion? Is t h a t a f a i r summary? M r . ROHATYN. Yes, I w o u l d say so. Senator RIEGLE. DO you t h i n k the business and financial communities are prepared to be f u l l partners? Is the perception s t a r t i n g to develop into the k i n d of consensus where there would be the talentsharing, and c o m m i t m e n t of effort t h a t i f we were to seek top operating executives now to come i n could we really get the show on the road? Is i t your sense t h a t the perception of the urgency of the need is such t h a t we get t h a t k i n d of a response, absolutely a top t a l e n t level? 18 M r . ROHATYN. Yes. I don't t h i n k there's any question of t h a t . Senator RIEGLE. L e t me j u s t ask the others. W o u l d t h a t be y o u r sense, as well, i n the circles i n w h i c h you are traveling, t h a t there is a developing consensus b o t h i n terms of t h i n k i n g now i n t h e private sector and the business and financial community t h a t t h i s needs to be done, and t h e y ' r e w i l l i n g to come f o r w a r d and be f u l l partners i n terms of sharing t a l e n t and m a k i n g a c o m m i t m e n t i n a l l forms t h a t w o u l d be needed to r e a l l y move this t h i n g and move it in a hurry? M r . CUTLER. Senator, f r o m the responses we have had, I don't t h i n k there's the slightest doubt. I agree w i t h Felix e n t i r e l y on that. Sam Johnson had a w o n d e r f u l saying t h a t the t h r e a t of h a n g i n g w o n d e r f u l l y concentrates the m i n d . A n d I do t h i n k w h a t y o u m i g h t call the ' l e a d e r s h i p c o m m u n i t y of the U n i t e d States," t h e business and financial communities and the general public are w a y out and ahead of the Government i n a l l of its forms on this general subject today. The public cannot understand w h y the Government cannot m a k e up its m i n d . I t h i n k it's j u s t t h a t simple. I t h i n k there's no question you could r e c r u i t m e n l i k e J o h n DeButts, as we suggested, w h o has no connection w i t h the o i l i n d u s t r y and has recently r e t i r e d as c h a i r m a n of A.T. & T. He's l i v i n g j u s t a few miles f r o m here i n r e t i r e m e n t . There's no question you could a t t r a c t m e n of t h a t caliber. I don't k n o w about M r . DeButts himself. B u t i f you don't create this i n corporate f o r m , i f you p u t i t i n charge of an assistant secretary of energy and ask M r . DeButts or M r . Rohatyn to go to w o r k for h i m , you can forget it. Senator RIEGLE. Let me go to the question of the scale of effort here. I ' m going to t r y — w e have a practice i n the f u l l committee to t r y to go i n 10-minute segments. I ' m going to t r y to abide by t h a t . We have a l i g h t system here, b u t I don't t h i n k we've got anyone to operate it. W e ' l l t r y to do i t by w a t c h i n g t h e clock. I n terms of the scale of operation t h a t you're t a l k i n g about, today there's some difference of opinion here. Moorhead starts out, he proposes a 500,000-barrel-a-day capacity. A n d M r . Rohatyn, you're t h i n k i n g i n terms of IV2, something i n the range of IV2 m i l l i o n barrels a day as the sort of target capacity to shoot for. A n d you folks are t a l k i n g i n terms of something on the order of 5 m i l l i o n barrels a day, and those are quite different i n terms of the range of capital requirement and how fast you could get this done. I t h i n k i t also relates i m p o r t a n t l y to how concentrated the effort has to be as to w h e t h e r we t r y to do i t over a 5-year stretch, or w h e t h e r we have to extend i t out over a longer period of time. I ' d l i k e you to consider some of the financial and economic impacts coming out of these quite different notions about scale. M r . Rohatyn suggested the capital cost per m i l l i o n barrels of synthetic fuel capacity w i l l be about $35 billion. I ' m wondering: W o u l d n ' t the capital cost per u n i t of o u t p u t rise r a p i d l y as t h e scale of the project were expanded because of supply pressures on those resources t h a t w o u l d be needed i n a construction of synthetic f u e l facilities and the pressures t h a t w o u l d otherwise arise f r o m w i t h d r a w i n g these resources f r o m a l t e r n a t i v e uses? 19 A n d i t concerns me, because i t seems to me there's probably sort of a digestable scale t h a t we can handle w i t h o u t enormous distortion, and beyond t h a t point w e ' l l probably get a sharply rising cost. I ' m j u s t wondering how you h i t upon your scale, and how you see the economics of t h a t scale. A n d t h e n I w o u l d l i k e also to get a reaction. 5 M I L L I O N BARRELS A DAY M r . CUTLER. We consider 5 m i l l i o n barrels a day, M r . Chairman, as a goal somewhat s i m i l a r to President Roosevelt's 100,000 airplanes j u s t before W o r l d W a r I I . The issue is not really t h a t i m p o r t a n t an issue for the first year or so of the program, and none of us w o u l d really k n o w u n t i l you worked your way t h r o u g h t h a t first year how deep the problems w o u l d be. B u t i f you t h i n k of a synthetic fuel p l a n t on the order of 50 to 100,000 barrels a day as being a desirable scale for a plant, even i f you had a m i l l i o n or a 1 y2-million-barrel-a-day program, i t would take M r . DeButts and M r . Rohatyn, j u s t to use names, a year or I V 2 years at least to make 20 deals of t h a t order of magnitude. So i f we j u s t got started and gave them, let's say, a first-year goal, or first 2-years goal to get under t h e i r belts, by t h a t t i m e we would know a lot more about how fast the program could go, and whether i t is possible to reach the 5 m i l l i o n barrels, w h i c h would certainly be desirable, i f i t could be reached w i t h o u t excessive i n f l a t i o n or h a r m to the environment. I f we get the recession we're a l l t a l k i n g about, and a couple of more oil shocks i n the M i d d l e East, m i g h t very w e l l guarantee it, this m i g h t be the perfect k i n d of program to stimulate the capital goods m a r k e t and employment at a t i m e w h e n we w a n t to do so, and w i t h o u t m u c h pressure on the i n f l a t i o n side. Senator RIEGLE. B u t I gather w h a t you're also saying is t h a t almost regardless of w h a t other factors we r u n into, as you see the strategic merits here, i t has to be done. I t has to be done w i t h i n this t i m e f r a m e regardless of how the economy effect plays itself out. I guess you're a r g u i n g t h a t i t m i g h t be a countercyclical gain here i f the forecasts on recession hold up? M r . CUTLER. I f n o t h i n g else happened, it's conceivable. We can't depend on i t , b u t it's conceivable t h a t the stimulus we have already given to new o i l and gas d r i l l i n g around the w o r l d m i g h t produce a few great bonanzas i n a few years. I f i t does, you could moderate this k i n d of program, because your degree of dependence, at least on this one very fragile area, would be diminished. Senator RIEGLE. You're saying you would probably set the goals i n stages i n a way t h a t , takes the first bite at 2 years. W h a t you m i g h t t r y to do m i g h t not be t h a t m u c h different f r o m w h a t M r . Rohatyn suggests. I t would be more a question of how sharply you t r y to b u i l d up beyond t h a t point after you really get i n t o the game and you start generating some results. M r . CUTLER. I t h i n k the three of us would be entirely happy w i t h M r . Rohatyn's proposal, w h i c h we t h i n k is an excellent proposal, i f you b u i l t i n t o i t t h a t the President was directed to study and recommend to the Congress w h a t f u r t h e r should be done to b u i l d 20 up toward a higher goal, and let the Congress decide whether to expand this program. What he proposes will keep the best people we have in and out of Government very busy for at least a year or 2, getting that many projects going. Senator RIEGLE. Could you help us understand better your sense of the overall financial lay of the land as to why you pick that scale of capital availability as being one that is sufficient, but yet doesn't overreach in terms of causing other adverse things to happen? Mr. R O H A T Y N . Well, Senator, I kind of backed into this I V 2 million-barrel figure by my essentially making a judgment as to what the commitment in terms of size to the project would be, large enough to be an ultimate possible deterrent to OPEC, and a beginning for the independence without so—without terrifying the finance markets and beginning to suggest that the Government would pump so many dollars out of the economy for this purpose as to create a real problem. I came to the view that probably financing an incremental $10 billion a year, as long as at the same time it was known that it would not exceed $50 billion over a 5- to 7-year period, that that was an absorbable amount without making other financing efforts for the Government, which would be too troublesome. I also think there are two other aspects of this that I feel reasonably strong about: (a) that you limit the total outstanding commitment to a number like $50 to $55 billion in order to force the resale of the plants into the private sector if you want to go on to a second level of investment. And second, that the corporation go out of existence after some finite period of time, whether it's 10 or 15 years, is not terribly important to me; but that at some point everybody knows that this will be a project that will be liquidated, that it's a bridge to get us from here to there, but it is not intended to create a permanent entity where the Federal Government will subsidize any kind of a fuel program. So I backed into the IV2 million barrels, because I've seen studies from the CED, from all kinds of other people, suggesting that with about $50 billion of investment you get about a 1V2 million barrelsa-day of synthetic capacity. But as I said, I am not a technician. Sometimes I'm not quite sure what I am, but I'm sure not a technician. And the 1 Vk-millionbarrel-a-day figure was derived. It seems to me, however, since it represents maybe close to 20 percent of our imports, that at least it would be a significant number in terms of the term. Senator RIEGLE. I'm impressed by that argument. It seems to me the target size has to put a big enough bite in the problem that you get a whole second level set of gains in terms of putting everybody on notice that this is a deadly serious commitment proposition from the worried American consumers to foreign oil suppliers. And I'm concerned that it be within our capacity to handle it, especially if we are going to be in a sliding economic situation. Mr. I G N A T I U S . Senator, could I make a brief comment? I agree with what you said. I would add the further thought that the commitment to production, as opposed to the continuation of re- 21 search and development, is also extremely i m p o r t a n t i n showing the w i l l t h a t we w o u l d have i n this country to do something about our predicament. I t h i n k that's an a w f u l l y i m p o r t a n t p a r t of it. Essentially, w h a t we're saying is we have a number of research projects going on. By 1995, certain things w i l l happen. I don't t h i n k the situation we face permits t h a t k i n d of orientation. We've got to commit to production. The q u a n t i t y ought to be reasonable and as orderly as i t can be i n order to avoid b u i l d i n g up prices i n the manner you said i n your earlier comment. M r . ZUCKERT. Excuse me, M r . Chairman. I f i n d myself perhaps i n j u s t a l i t t l e disagreement on this business of 5 m i l l i o n barrels. I ' m not a technical person, b u t f r o m listening to the technical people, I t h i n k t h a t 5 m i l l i o n barrels, say by 1990, is a practical goal. I don't t h i n k i t can be reached unless t h a t is though of as the objective; i t won't happen i f it's j u s t done bite-sized. T H E LONGER A PROGRAM, T H E MORE T H E EXPENSE M y experience is, at least looking at defense production, the longer a program goes on, the more expensive i t becomes. I t h i n k there needs to be a lot of t h i n k i n g and p l a n n i n g at the outset i n terms of 5 m i l l i o n barrels. This doesn't mean t h a t you don't have the power to t u r n i t off or moderate i t or slow i t down, b u t the p l a n n i n g for 5 m i l l i o n barrels is of tremendous importance i f you ever expect to reach the goal. The k i n d of p l a n n i n g I envision w i l l identify the long lead t i m e components of the program. Senator RIEGLE. We've got a number of areas t h a t I t h i n k we need to explore here t h a t relate to the e n v i r o n m e n t a l problems and how we m i g h t deal w i t h them. We also have some comparisons w i t h w h a t our experience was i n W o r l d W a r I I , where there are some useful insights we can t r y to establish here today. But, before I y i e l d to C h a i r m a n P r o x m i r e for questions, I j u s t w a n t to respond myself to a couple of things t h a t have been said here. I t h i n k the problem is exactly as serious as it's been stated here today. I k n o w we need the consortium effort between the public and private sector. A n d I t h i n k t h a t we've let our adversary feelings grow beyond any reasonable point i n terms of various sectors of our economy, whether we're t a l k i n g about management versus labor or business versus Government or regions versus one another. I t h i n k we are i n a war-type situation. I t j u s t doesn't make sense when we've heard other testimony to the effect t h a t we're i n a situation where we've got a 5-day supply of oil i n the U n i t e d States and we are depending upon 45 percent of our supply f r o m abroad, and Europe is s i t t i n g there w i t h roughly a 90-day reserve, i n the event t h a t one of those hopefully avoidable shocks m i g h t come i n terms of the i n t e r n a t i o n a l supply side. We're going to have to move very rapidly, and I t h i n k the only way you can do t h a t is w i t h an authentic team effort. It's going to have to be streamlined and i n the hands of compet e n t people. I must say, I l i k e very m u c h the idea of a board i n w h i c h a l l the key players are represented. There's no reason to freeze anybody out i n terms of h a v i n g the public interest f u l l y and broadly and i n the f u l l sense, represented i n the k i n d of oversight 48-169 0 - 7 9 - 4 22 t h a t ought to go on here. I know i f we—unless we're w i l l i n g to t h i n k i n big terms, I t h i n k that's w h a t this is, b u t it's b i g i n t e r m s of the departure f r o m the way we've been sort of t i n k e r i n g w i t h our problem here, and basically spending t i m e probably finding people to blame—rather t h a n finding answers and a way forward. T h a t is w h y I t h i n k these ideas are on track. A n d I t h i n k finally, t h a t the best test of t h a t w i l l be the degree to w h i c h there's a n a t i o n a l consensus t h a t develops. That's not to say t h a t anybody has a perfect f o r m u l a t i o n at this stage of the game. Y o u ' r e saying t h a t you feel t h a t you do, and clearly, we don't have t h a t check. B u t i t seems to me, w h a t I ' m h e a r i n g f r o m t h e public and private sectors, and even f r o m people i n Government t h a t are charged w i t h the energy problem, is more and more a consensus view t h a t we're going to have to take a bold set of steps. A n d this is one, perhaps the most promising, because here we're not t a l k i n g about h a v i n g to i n v e n t technology. We k n o w clearly w h a t to do and how to do i t , and probably can b r i n g i t on l i n e faster t h a n a n y t h i n g else, i n addition to things l i k e conservation and other steps we ought to be taking. I w a n t to make i t clear t h a t at least I feel very strongly, t h a t t h i s is essentially something t h a t is absolutely essential, and the t h i n g that's f r u s t r a t i n g is we're late and we're getting a late start. A n d t h a t means we have to do a n even better job of assembling t h e talents so we make up for lost time. Senator Proxmire. Senator PROXMIRE. M r . Rohatyn, as always, you're extraordinari l y i n t e l l i g e n t and t h o u g h t f u l and c e r t a i n l y h e l p f u l on t h i s puzzling situation t h a t confronts us. But, I ' m not sure w h y you settle on synthetic fuels w i t h such enthusiasm, since you indicate to us you're not an expert i n the field. Y o u ' r e an expert i n financing. There are lots of other options. A L T E R N A T I V E CHOICES A V A I L A B L E For example, the Workshop on A l t e r n a t i v e Energy Strategy sponsored by M I T , i n c l u d i n g the president of A t l a n t i c Richfield, r e t i r e d board c h a i r m a n of D e t r o i t Edison, the board c h a i r m a n of A l l i e d Chemical, and others w i t h s i m i l a r credentials concluded: " E n e r g y conservation m a y w e l l be the very best of the a l t e r n a t i v e energy choices available. Its advantages and benefits are substantial. It's been estimated we can reduce energy consumption by 40 percent w i t h k n o w n technologies w i t h o u t u n d e r m i n i n g our q u a l i t y of life." Lester Lave, of the Brookings I n s t i t u t e concluded t h a t i f we could b u i l d an automobile engine factory to replace a l l the engines w h i c h get less t h a n 27 miles per gallon or less, the energy saving w o u l d be greater t h a n the a m o u n t of synthetic fuels produced, and the cost w o u l d be less. Now, you said—and you had an excellent statement here about how we do r u n a big risk, r i s k of c o r r u p t i o n and waste, r i s k to t h e A m e r i c a n taxpayer, risks of relaxation i n the conservation effort. T h e n you said we've done nothing. We've done a lot of things. A n d we're about to do other t h i n g s t h a t w o u l d address this problem. The C h a i r m a n of the Energy 23 Committee, Senator Jackson, has introduced a b i l l w h i c h provides the following: $500 m i l l i o n for solvent refined coal, No. 1. This is a construction project. Solvent refined coal, No. 2, $700 m i l l i o n . I B T U coal gasification plant, $600,000. Low I B T U coal gasification, $75 m i l l i o n . 50 megawatt geothermal, $175 m i l l i o n . A n d t h e n I B T U coal gasification, $600 m i l l i o n . A n d so on—a t o t a l of $3.4 b i l l i o n that's been introduced. It's been sponsored by 15 or 20 other senators, and, obviously, is going to get very serious consideration. As you know, we're spendi n g about h a l f a b i l l i o n dollars now i n synthetic fuels research a year. So we are doing something. Now, w h a t you folks seem to say is a verdict first, t r i a l later. We don't know whether this research is going to do any good, b u t let's start b u i l d i n g plants r i g h t now. A f t e r all, it's only the taxpayers' money. We only stand to lose a few hundred b i l l i o n dollars. So, what's your answer to that? M r . ROHATYN. Well, obviously, it's not a short answer, Senator. As I said, I a m not a technical man, b u t I do read a f a i r amount and I've read some f a i r l y persuasive arguments t h a t at least this is something t h a t should be tried. Second, w h e n I said t h a t I t h i n k n o t h i n g has been done since 1973, I really don't t h i n k a lot has been done. I t h i n k when this 1973 OPEC p u t the h a n d w r i t i n g up on the w a l l and we find t h a t today, we i m p o r t a greater percentage of our energy t h a n we did i n 1973, t h a t the price of the energy has quintupled. T h a t recycling of the dollars is s t i l l the same fantasy t h a t i t was before. A n d t h a t we're about to either b a n k r u p t the system—which I t h i n k is a real possibility here, i n terms of a financial capacity of the b a n k i n g system. I really don't t h i n k we've done a h e l l of a lot, and I don't t h i n k the perception, at least i n m y world, is t h a t we've done a great deal. I don't t h i n k the perception abroad is t h a t this country conducts itself as the leader of the western world, because we're so vulnerable today. Senator PROXMIRE. YOU say we haven't done a lot. Isn't i t t r u e t h a t we have engaged, as some of these figures indicated, i n stepped-up research i n t o the technology? Y o u j u s t can't say you w a n t those results i n 30 days and expect to get them. I t takes a w h i l e for these breakthroughs to develop and we need some patience here. M r . ROHATYN. W h a t I gave was m y view of the financial struct u r e and the nontechnical structure of this corporation, w h a t i t should be i f its decided to go ahead w i t h . Senator PROXMIRE. YOU know how often M r . ROHATYN. I f I may j u s t finish. Senator PROXMIRE. Yes, sir. I beg your pardon. M r . ROHATYN. The reading t h a t I've done—and these gentlemen are obviously m u c h more knowledgeable t h a n I—suggest t h a t the technology is there. I f indeed that's the case, t h e n I t h i n k the risk of going ahead is smaller t h a n the r i s k of not going ahead. Senator PROXMIRE. T h a t may w e l l be. Let me j u s t say t h a t we've seen over and over again, especially i n this committee, we get a problem. We t h r o w money at it. We t h r o w money at the education problem, at the cities problem, and we 24 don't get any solutions. It doesn't get better; it gets worse. Education, in the last 15 years, has been a disgrace in this country. Every year, we pour more money into it. We're pouring four times as much money as we were 15 years ago. Of course, in the cities we were putting $2 billion a year into our cities. And now, $85 billion a year. And according to a study by Brookings 2 months ago, it's worse. It's not a matter of just saying, "Let's have the guts and courage to act boldly and put the taxpayers' money into it." We want to know what we're doing, and how do we know what we're doing until we have research that tells us whether or not a particular way of going is the best way to go. Mr. CUTLER. Senator, you're right on target. 500 of you can't decide how many hundreds of millions of dollars to put in a coal gasification project or each of those projects in Senator Jackson's bill that you read off a few moments ago. The Congress of the United States can't decide those things. We've been 13 years figuring out how to get Alaska oil to the Midwest and you haven't figured it out in Congress yet. It's a very difficult problem. Senator P R O X M I R E . Some of us did. I voted against that line. Mr. CUTLER. Someone will run against Congress and say, I had the right idea. What we're talking about is giving this job of decisionmaking to somebody and creating a corporate structure with which it can be done. Now, MIT—you brought up the M I T people. Of course, conservation is important. But, you must have read Carroll Wilson's piece in the Post yesterday or the day before, in which he and his colleagues at M I T are proposing, essentially, the same thing we're proposing. They're saying: Let's do it for 10 percent of our oil imports instead of Felix's 20. And they have a somewhat different method. They say: Let's make every refinery use at least 10 percent of synthetic oil, as soon as we get into production. They think the technologies are here. The South Africans are building these plants. The Germans built them in World War II. The technology is there for some of these processes, which can proudce for very close to the present market price, and the present market prices in 1979 dollars are going to double in the next 10 or 20 years anyway, and we all know that. And that's not inflation. That's in 1979 dollars. Unless we add to the supply, you must decrease the demand side. But we must add to the supply. And the only way we've ever known how to add to supply is to give the job to a couple of top people and let them figure out what to do. OIL COMPANIES NOT R I S K I N G T H E I R MONEY Senator P R O X M I R E . Mr. Cutler, if the technologies are there, we have oil companies and others with massive amounts of capital. They are very happy to do what they can to make money. I f the technology is there, why don't they invest in it? These are practical men. They know the business. That's their life. But, they're not putting the risk in their money. Mr. CUTLER. The risks go beyond business risks. There are, to a very high degree, political risks. It will be another 5 to 10 years before it is so clear to the private market that you can make 25 money going this way. A n d that's 5 or 10 years t h a t we cannot afford to lose. Senator PROXMIRE. YOU gentlemen are some of the finest lawyers i n the country. I have great a d m i r a t i o n and respect for you. Y o u a l l say you're not experts i n this area. W h y don't the people who are experts i n the energy field, i f this is so promising, w h y don't they come up and t e l l us that? W h y do we have people l i k e the head of A t l a n t i c Richfield and others t e l l us t h a t the best way we can go for now is conservation? W h y don't we rely on the private sector? That's p a i n f u l — w e ' l l pay a higher price, b u t a price t h a t w i l l eventually make i t feasible to go this way? M r . IGNATIUS. I t h i n k m a n y of those experts, and we've talked to some of t h e m who believe this is feasible and should be done, would be prepared to testify i f the committee were to ask them. The burden of our argument, I t h i n k , is t h a t w h a t m i g h t happen i n the n o r m a l course of events, over a period of time, needs to happen more quickly because of the perilous situation t h a t we face as a country. A n d t h a t being the case, we need to involve the Government as a catalyst to get this going w i t h the i n t e n t t h a t the plants would be sold as quickly as they could, to generate more funds, to get additional plants going i n the way of a revolving fund. A n d t h a t we have a specialized k i n d of management here t h r o u g h an accountable corporation w i t h assigned goals and results to be expected, i n order to avoid the kinds of problems you mentioned i n the cities and i n education, and so forth. There should be a specific target and a d e t e r m i n a t i o n to carry i t out. Senator PROXMIRE. HOW did you w o r k out your timetable? Y o u say by 1990, a m i l l i o n barrels. We expect only to b r i n g i n 230,000 barrels by 1989. A n d of course, it's a long, long t i m e to construct these plants. Permits, and so forth, it's not easy. M r . IGNATIUS. Yes, sir. We make the assumption t h a t there could be some way of s t r e a m l i n i n g the process of s i t i n g and the obtaining of licenses. B u t w i t h i n t h a t assumption we t a l k e d to three or four technical, qualified people who thought t h a t a capacity of 5 m i l l i o n barrels a day, i n 10 years, we said 5 to 10—and I t h i n k we're overly optimistic on the 5 p a r t of it, M r . C h a i r m a n — b u t 10 years, or i n t h a t general range, was a feasible t h i n g to do. There are other proposals t h a t have been made t h a t go beyond that. There is one t h a t we've seen t h a t talks about a million barrel-a-day capacity by the year 2000, and a 5 m i l l i o n barrel-a-day capacity by 1995. We're saying t h a t by 1990 i t could be done, and a number of technical people have t o l d us t h a t can be done i f there is an urgent program. Senator PROXMIRE. Let me ask one more question before I yield. B u t M r . Rohatyn, you would settle for IV2 m i l l i o n barrels a day, w h i c h is a one-third of w h a t the distinguished gentlemen on your r i g h t are calling for. Saying t h a t you thought t h a t more m i g h t have a crowding effect on the capital m a r k e t and m i g h t affect some of the weaker applications, such as N e w Y o r k City's. We're very concerned about t h a t i n this committee, of course, and we're concerned about the capital m a r k e t generally. 26 I f we go as far as they advocate, because it's technically feasible, and so f o r t h , isn't t h a t l i k e l y to have adverse effect on capital markets? M r . ROHATYN. Well, as I said, Senator Senator PROXMIRE. Inflation? M r . ROHATYN. Those are numbers larger t h a n the numbers I ' m t a l k i n g about. Senator PROXMIRE. That's larger by threefold. M r . ROHATYN. Well, w h a t I ' m suggesting, though, Senator, is t h a t — a n d I ' m not sure t h a t there is t h a t m u c h difference between us. M r . IGNATIUS. You're t a l k i n g 1985, too, aren't you? M r . ROHATYN. T a l k i n g about u l t i m a t e l y where we get to. I w o u l d l i k e to l i m i t the amount of commitments t h a t are outstanding at any one t i m e f r o m this corporation to $50 billion. I f the corporat i o n — i f the need is to go beyond, I w o u l d t h e n push to have as m a n y of these plants resold to the private sector as early as possible and a reinvestment program take place. I f u l t i m a t e l y there is a need to spend $100 billion, fine. B u t let's not a l l do i t w i t h public sector money. Let's have a revolving fund. M r . CUTLER. Some of the plants m i g h t be i n the private sector i n the very beginning. We doubled a l u m i n u m capacity d u r i n g t h e K o r e a n w a r and we almost doubled n i c k e l capacity, i n c l u d i n g new products t h a t had never been marketed before, w i t h o u t spending a dime of Government money. We issued m a r k e t guarantee contracts and we gave 5-year tax amortization certificates. The Government's c o m m i t m e n t was t h a t any p a r t of the o u t p u t t h a t you can't sell for 5 years, at either m a r k e t price, as some contracts said, or at some f o r m u l a price, the government w i l l buy. Senator PROXMIRE. The plants you described had no competition. M r . CUTLER. O f course they did. Senator PROXMIRE. These plants w i l l have competition f r o m cheaper imported oil. M r . CUTLER. These plants had competition. They had higher costs t h a n the existing a l u m i n u m plants. They were b u i l t to meet t h e accelerated demand for a l u m i n u m d u r i n g the K o r e a n w a r because of the airplane program, and r a n the r i s k t h a t as soon as t h a t was was over, and i t ended i n 2 years, the demand w o u l d drop and t h e a l u m i n u m would no longer be needed. Senator PROXMIRE. We're very hopeful we w o n ' t have an accelerated oil demand. M r . CUTLER. The principle is exactly the same. I n fact, there was a drop i n demand after t h e w a r and a good b i t of t h a t a l u m i n u m o u t p u t for a year and a h a l f was sold to the Government. A n d M r . Ignatius and I negotiated across the table for a year, w h e n he was i n the Defense Department, to buy back t h a t a l u m i n u m f r o m the Government. U l t i m a t e l y , w h e n the m a r k e t t u r n e d , i t was a l l resold by the Government at higher prices t h a n t h e Gove r n m e n t had paid. A n d the net cost of the a l u m i n u m expansion p r o g r a m d u r i n g the K o r e a n W a r to the Government of the U n i t e d States, f r o m beginning to end, was zero. Senator PROXMIRE. M y t i m e is up. 27 RESEARCH PROGRAM COST $3.4 B I L L I O N M r . ZUCKERT. M a y I address myself to one more point? Y o u talked about the research program of the Department of Energy. I t h i n k they're spending $3.4 billion, something l i k e that, on research. But, those programs have a far out goal. I t h i n k they're looking for the best way to go. A n d this is far different f r o m f i n d i n g the fastest way to go. There's a point at w h i c h you have to take i t out of research and development, as you know, and put i t into production. That's what we're t a l k i n g about. It's an entirely different philosophy t h a n what we've been pursuing i n the Department of Energy for the past few years. Senator LUGAR. M r . Chairman, I w a n t to take j u s t a moment to t r y to set the stage i n a l i t t l e different way, because our distinguished committee chairman, Senator Proxmire, has t h r o w n out the idea t h a t a "verdict now, t r i a l l a t e r " situation is involved i n your testimony. I n short, I ' l l ask M r . Rohatyn whether, i n fact, the 40 percent increase i n conservation t h a t a group at M I T purported to have come up w i t h now is a more appropriate solution t h a n the product i o n effort t h a t you had suggested. I t h i n k t h a t this type of rhetoric, t h a t conservation of t h a t dimension is a viable alternative, abounds i n this country among certain groups. But, i t has almost no relevance whatever to w h a t we're t a l k i n g about today for very good reasons. T h a t a good number of groups, W o r l d W a t c h comes to m i n d as one t h a t has been t a k i n g a look at production of grains and wool and energy sources, including n a t u r a l gas and petroleum, found t h a t i n the 1970's, long before we came to this particular year, the per capita production of a l l these basic items needed for h u m a n beings has been i n decline a l l over the world, and w i l l probably stay so for a long time. Even i f we dealt w i t h the food production of the w o r l d i n the next 40 years, we would s t i l l have less per capita t h a n we have now, by doubling production, so t h a t more food is produced t h a n i n the 12,000 years before this point—the point t h a t I ' m t r y i n g to make is simply t h a t w h a t is t r u e i n the food area is very clearly t r u e i n the energy area, too. I f we're even to m a i n t a i n a basic standard of l i v i n g i n the world, we're going to have to have as m u c h as a doubling of resources against very considerable constraints. A n d this takes i n view a l l the population control devices, a l l the governmental plans, a l l the r a t i o n a l choices people m i g h t make i n the next 40 years. I t h i n k t h a t we're faced r i g h t now w i t h a situation i n w h i c h the oil minister i n I r a n is quoted i n the W a l l Street J o u r n a l w i t h the I r a n i a n strategy of saying, i n fact, there is no need to p u m p more. Y o u simply charge more for i t and t h a t would be t h e i r strategy. A n d second, he says: "You, i n the U n i t e d States, w o n ' t get any of it, anyway." This is not only a critical situation. One can become perhaps too h i g h l y emotional about it. But, I t h i n k you are i n saying t h a t we have a situation here i n w h i c h our national economy or democracy, everything we're t a l k i n g about, could falter very substantially. A n d 28 you're coming before us as four gifted attorneys, saying we've got to have some leadership. T h a n k goodness, you've provided it. The article i n The Washington Post was t h r i l l i n g — e v e r y b o d y saying where i n the w o r l d is some leadership? I f I were President of the U n i t e d States, I w o u l d have t a k e n your article, gone on T V and said this is a good plan. The A m e r i c a n people w a n t p r o d u c t i o n now, and they are not about to quibble around w i t h w h e t h e r 40 percent conservation is possible. They w a n t more o i l now, a n d t h e y deserve more oil now. A n d they're not going to get more o i l now, because your timetable, good as i t is, is 1, 2, and 5 years down t h e trail. B u t the facts of life are, there is a constituency i n this c o u n t r y for your ideas, a very, very, large one. Now, i n a v e r y modest a t t e m p t last Thursday on a n a g r i c u l t u r a l b i l l , I offered an amendm e n t t h a t extended something we h a d already done i n Committee i n the gasohol area the A g r i c u l t u r e Committee b i l l provided $180 m i l l i o n i n loan guarantees for various ways i n w h i c h alcohol m i g h t come f r o m a g r i c u l t u r a l products. I suggested t h a t t h a t r e a l l y is unsatisfying to anybody at this point, on the gasohol, whatever people t h i n k about it. The Senate accepted by a vote of 82-10 m y amendment to increase this figure to $500 m i l l i o n . A n d there are a great deal of scientific controversies, as w i t h things you're t a l k i n g about, alcohol production is a k n o w n productive process. It's being pumped i n people's tanks i n the state of I n d i a n a i n 70 locations now. I t is not hypothetical. G O V E R N M E N T LOANS TO PRODUCE GASOHOL The question is, H o w do we get more of i t i n t h e t a n k s t h i s coming year? A n d you do so at least, as I suggested, by $500 m i l l i o n w o r t h of Government-guaranteed loans to people w h o are going to produce gasohol out of sugar cane residue, or a n y t h i n g y o u can f i n d to get the job done. It's a Government-guaranteed loan process w i t h something that's a k n o w n q u a n t i t y . N o one's going to lose a dime on these gasohol loans. The q u a l i t y is known. The m a r k e t is inexhaustible for it. I j u s t w a n t to say t h a t I believe t h a t we could quibble back and f o r t h on w h a t there ought to be precisely, who implements t h e m and how long t h e i r terms m i g h t be. B u t over the need to produce, and t h a t is the essential i t e m of your testimony today, is there's no longer t i m e for quibbling around, b u t the need for producing gallons of something i n t o our economy. Now, the real question I w a n t to raise w i t h you, because perhaps you do not w a n t to f r i g h t e n t h e public w i t h pots t h a t are too big, b u t you suggested as an overall goal, and by m u c h the same analogy as the 100,000 plane idea, t h a t 5 m i l l i o n barrels a day by 1990 is a reasonable t h i n g to shoot at. Is i t feasible, as a m a t t e r of fact, to produce u l t i m a t e l y a l l of w h a t we are i m p o r t i n g ; or, to state i t another way, i f m y suppositions are correct, by the t i m e we get to 1990, the demand i n t h i s country, even w i t h every conservation i t e m i n place, is going t o be substantially greater for petroleum or petroleum substitutes t h a n 29 i t is now. A n d that's because the people i n this country w i l l have a demand and a legitimate one i n terms of standard of living. Really, w h a t is the potential i n terms of synthetics? W h y depart f r o m w h a t appears to be a reasonable, phased-in, nonupsetting capital flow i n this type thing? Or is there any other alternative? A r e you supposing t h a t the w o r l d w i l l r e m a i n stable enough t h a t w e ' l l get h a l f of our imports s t i l l at a reasonable price? Or is there a very real possibility we shall have to be t h i n k i n g about u t i l i z i n g considerably more expensive aid at t h a t stage? M r . IGNATIUS. Senator Lugar, a 5 m i l l i o n b a r r e l per day goal by 1990 or thereabouts is a realizable b u t ambitious and d i f f i c u l t goal, and would require the k i n d of urgencies t h a t we've t a l k e d about and w h i c h I t h i n k you alluded to i n your comment. W h e t h e r you could be w h o l l y free of the need for imported o i l by then, I w o u l d doubt. B u t I t h i n k , i n addition to the k i n d of program t h a t we're t a l k i n g about here, there are other things w h i c h by 1990 and beyond could help to lessen our dependence on i m p o r t e d petroleum. A n d we ought to get on about those i n appropriate ways, j u s t as we believe the corporation we're t a l k i n g about is the appropriate way to get on w i t h the production of synthetic fuels. Certainly, solar energy by 1990, and perhaps i n the decade of the 1990's to the year 2000, offers great promise and should be pursued aggressively, I t h i n k , i t is now beginning to be. Certainly we can do a great deal i n the area of conservation i n our homes, i n our ways of getting to w o r k , i n m a n y other ways, and i n industry. A n d increasingly, those activities are occurring, i n part, because of the h i g h cost of the energy t h a t we're buying. A l l of these, i f successful, w i l l tend to lessen t h a t dependence. B u t I do not believe we are l i k e l y to be w h o l l y free of i t by 1990. A n d i f we have a w o r l d i n w h i c h w h a t you're doing here i n synthetic fuels enables us to deal w i t h the OPEC countries i n w h a t we've called a nonconfrontational way and extend the life of t h e i r oil asset, w h i c h is the only asset t h a t they have, t h e n maybe there can be a comity among nations and a feeling of greater security t h a n perhaps is now present. So t h a t the notion of i m p o r t i n g some doesn't s t r i k e fear i n our hearts. O u r problem today is the extent of those imports, our dependence on them, the insecurity i n the area, and the consequences t h a t occur as a result of those instabilities. M r . CUTLER. Senator, I would j u s t l i k e to add to that. There's no way i n w h i c h we can answer t h a t sort of question now. For one thing, i t isn't so m u c h our own dependence on imports, it's the world's dependence on one very small area. Conservation is tremendously i m p o r t a n t , as Senator P r o x m i r e has been stressing. B u t i f we were to reduce our level of energy consumption for a u n i t of G N P to the European or Japanese level, we would s t i l l find the supply and demand lines crossing i n around 1990 or thereabouts, because of the g r o w t h of energy requirements throughout the world, and especially the T h i r d World, for w h i c h development and economic g r o w t h is so vital. Y o u cannot have i t w i t h o u t more energy. 30 PROGRAM NEEDED B u t w h a t we need to do is get started on a program. Y o u were r e f e r r i n g earlier to the desire of the public to see something done. The Italians, as you know, have a saying about t h e i r own politics, t h a t the situation is desperate b u t not serious. N o t h i n g gets done. W h e t h e r we need u l t i m a t e l y 5 m i l l i o n barrels a day f r o m synthetic sources or 10 m i l l i o n barrels a day, whether either of those numbers is even remotely feasible doesn't really m a t t e r r i g h t now. We can get started. C e r t a i n l y 1 to I V 2 m i l l i o n barrels a day is w i t h i n a l l of our f i n a n c i a l and technological capabilities, w i t h k n o w n methods of doing i t t h a t other people are using today. M r . ROHATYN. I j u s t t h i n k , Senator, t h a t leaving aside the issue of the level of our consumption i n terms of i n d u s t r i a l requirements, w h i c h is obviously way too high, I j u s t don't t h i n k we can live w i t h a financial d r a i n of spending $60 b i l l i o n a year of balance of payments outflow. I don't t h i n k we can finance this i n d e f i n i t e l y . I heard the other day t h a t Saudi A r a b i a is supposed to have $140 or $160 b i l l i o n of dollar assets l y i n g around i n this b a n k i n g system. A n d I t h i n k this is w h a t you're going to face: The c r u n c h of our financial problem, m u c h earlier t h a n you w i l l face any k i n d of r e a l i n d u s t r i a l crisis because of supply terms, I t h i n k , unless t h e w o r l d goes to war. I t h i n k you have not only got to do this, b u t you have—Senator Proxmire's absolutely r i g h t . We're going to have to conserve. We're going to have to use less. I w o u l d p u t an absolute dollar l i m i t a t i o n on t h e i m p o r t s of crude o i l at today's level of dollars, no m a t t e r w h a t the price is, and p u t r a t i o n i n g on i f the price goes too high, as a m a t t e r of absolute law. I don't t h i n k we can afford to do this. I don't t h i n k next year, i f this year i t pleases t h e southern middle eastern shiek to p u t the price at God knows w h a t , so we're going to have to spend $65 b i l l i o n next year—we j u s t can't live w i t h this. There was an old cartoon i n the N e w Y o r k e r Magazine. I t showed a m a n and lady f a l l i n g head-down, heads t h r o u g h e m p t y space, and i t said: " W e can't go on l i v i n g l i k e this." Senator LUGAR. F o l l o w i n g t h a t up, is i t your j u d g m e n t t h a t t h e only way i n w h i c h the OPEC cartel could be b r o k e n successfully w o u l d be to put a dollar l i m i t on our imports and to go i n t o a f u l l production policy of synthetic fuels? Is t h a t a strategy we ought to employ, or is there a strategy? M r . ROHATYN. I don't t h i n k j u s t reasoning is a strategy or hoping. I mean, hope is the biggest enemy of things, because you don't act. I t h i n k you have to be rational. I t h i n k you have to offer t h e m to participate w i t h us, because i t w i l l lengthen t h e life of t h e i r research. B u t I t h i n k we have to be able to do w i t h o u t . I t h i n k we have to show some discipline. A t some point, they're going to have to understand we can live w i t h o u t them. As long as they know, w h i c h they do today, t h a t we can't live w i t h o u t them, where are t h e pressure points? There aren't any. 31 Senator LUGAR. B u t briefly, is t h a t going to be enough of a demonstration? T h a t is, i m p o r t controls for the level on how m u c h we i m p o r t on the production place t h a t is a 1- to 5-year situation? M r . ROHATYN. I t h i n k i f we can show we can do w i t h less of theirs and we can make more of ours, that's a beginning of a policy. Senator LUGAR. One final question. Have you had any communication f r o m the President or f r o m anyone i n the W h i t e House t h a t read your article t h a t lends some support or encouragement? Is this the first public f o r u m you've had since going to press? M r . CUTLER. Senator Lugar, w i t h o u t giving you a direct answer, I t h i n k i t clear by now t h a t the a d m i n i s t r a t i o n is determined to go f o r w a r d w i t h a program b u i l t on Congressman Moorhead's b i l l and of a somewhat larger size and perhaps incorporating some of the features of organizational structure t h a t we have suggested. Senator LUGAR. T h a n k you. Senator RIEGLE. A t this point let me pick r i g h t up where we were here i n terms of this colloquy t h a t was j u s t going on. M a n y people say t h a t the p r i n c i p a l benefits t h a t w o u l d come f r o m synthetic fuel development is t h a t i t would free us f r o m dependence on foreign sources of supply t h a t are unreliable; to some extent liberate us f r o m the OPEC p r i c i n g qualities. It's essential to the nationa l defense. A l l these things seem obvious. B u t i t seems to me there is a way to p u t this i n a negative frame. A n d t h a t is, one m i g h t say, we really would only be t o t a l l y free f r o m dependence on foreign oil i f we were to suggest domestic energy production of the equivalent of some 8 to 9 m i l l i o n barrels of crude oil today. I don't t h i n k this is probably possible w i t h i n any k i n d of t i m e frame t h a t we can see, doing w h a t you're t a l k i n g about—what I ' d l i k e to see us do. B u t even s t a r t i n g one effect of this w o u l d be, as we're going around to synthetic fuel development at a p r e m i u m price, t h a t it's possible t h a t the i n t e r n a t i o n a l price of oil w i l l drop, we get out of the i n t e r n a t i o n a l m a r k e t , and therefore the beneficiaries of our crash program could very w e l l end up being some number of foreign consumers. We m i g h t t h e n be stuck w i t h a higher-cost technology and using up our own resources at a rapid rate. I ' m j u s t wondering how we deal w i t h t h a t side of this issue or w h a t your thoughts m i g h t be about it. I ' m interested i n reactions f r o m a l l of you. M r . IGNATIUS. TWO comments. One of the reasons for i n v o l v i n g our friends i n other countries i n some of these ventures w o u l d be for the cost d i f f e r e n t i a l possibilities t h a t you t a l k e d about. Second, we said i n our article t h a t i f we could buy petroleum for less t h a n w h a t we could make i t f r o m substitute sources here at home, we have the option of placing these plants i n standby. They are effective as a lever on price only i f they're i n being and capable of production. Senator RIEGLE. I understand. T h a t s t i l l doesn't solve some of the problems we're t a l k i n g about here. T h a t is, on doubling of the supply. It's solving the balance of payments situation. I a m impressed w h e n I hear i t said by M r . Rohatyn t h a t i n his view we can't continue to handle the outflow of the balance of 32 payments deficits here, and in fact that might trip us up sooner than the shortfall in oil supply, which I think is a very powerful point we have to consider. It seems to me that we don't get that gain if in fact we've got the facilities and we're not using it. It seems to me we've got to decide to make them and use them to get the full range of benefit. SYNTHETIC F U E L PROJECTS C A N BE L A U N C H E D OVERSEAS Mr. CUTLER. There's also the strong possibility, Mr. Chairman, that synthetic fuel projects can be launched outside the United States, but within the other western industrial democracies. There are lots of potentials for coal-based programs in Western Europe, for example. There would probably be potential for coal-based or shale-based programs in Australia. It isn't just to be free of imports that is so critical. It isn't a terrible thing to have Canadian imports or Venezuelan imports or North Sea imports. They're all parts of a single trading area, the loss of any one of which wouldn't be that serious. It's a global problem in that sense. But there are certainly ways, and I gather that they're going to be explored at the summit meeting in Tokyo, among the seven principal western countries or industrialized democracies, of forming joint ventures on a multination basis and financing one another's projects and joining in projects throughout the free world. That would add to the supply side and the ability to become independent from Middle East oil, just as conservation is going to taper down the demand side. Senator RIEGLE. I want to get to that. I want to get to the suggestion Mr. Rohatyn made in his presentation, that perhaps the Germans or the Japanese or South Iranians might be persuaded, and there might be good reason to persuade them in parting from the corporations. I'm wondering what your reaction would be to the question I posed a moment ago. The issue is that if we lock ourselves into an increasing amount of higher-priced alternative synthetic fuels, might we not find ourselves in a situation where that accrues certain benefits to other international buyers and consumers, and therefore you might have a situation developing where American consumers would find this hard to swallow? Mr. R O H A T Y N . Y O U mean, Senator, where the producers would sell cheaper to the Europeans than to us, for instance? Senator RIEGLE. It would seem to me that there would very well be some difference there. If we're coming in at a synthetic fuel component of our total supply that's got a premium cost associated with it, our average cost is going to have to be higher than somebody else's that is relying solely on foreign sources that are available, more available because we've withdrawn part of our demand for that foreign supply. It might well be they might end up with a lower price than we have. Mr. R O H A T Y N . I don't see for the foreseeable future that we would be less than 25, 30 percent dependent on import crude in any case. I think that would be inevitable. We're going to be, for the next decade, unless there is a supply interruption, dependent 33 for a significant amount of i m p o r t crude. I f they drop the price, i f they drop the price overall, we w i l l benefit. We may have some m a r k e d larger i n t e r n a l costs because of our dependence on the relatively h i g h cost of synthetics. B u t at the same time, I t h i n k t h a t would be offset by h a v i n g reduced pressure on the dollar and reduced cost of our imports. I t h i n k I w o u l d t h i n k i n terms of an i n f l a t i o n a r y portion, i t would probably balance out very much. A n d i n terms of the secur i t y , you would have been a large step ahead. I don't t h i n k you can predict everything. Senator RIEGLE. I t h i n k that's an i m p o r t a n t point, because even i f we were to f i n d ourselves i n a situation of h a v i n g b u i l t the facilities and feeling compelled to use i t for these other advantages, j u s t the gain i n terms of recycling dollars i n this country probably would go a long way i n offsetting a n y t h i n g t h a t m i g h t have to do w i t h somebody else, for the t i m e being, getting foreign supply at a lower price. M r . ROHATYN. Senator, to me there is no greater waste t h a n simply paying more money for the same amount of imported crude oil w i t h o u t any increase i n our production or tax receipts or anyt h i n g i n this country. We're j u s t b u r n i n g money. Now, w h e n we have to t r y to solve t h a t by 87 different ways, the cheapest and the best, to the extent we can do it, is conservation. I don't t h i n k t h a t w i l l be enough. So you have to go to other things. I f we had a w a r t i m e and we had a supply i n t e r r u p t i o n , we would be doing other things. Senator RIEGLE. I n terms of the idea of getting other countries to participate, could you elaborate a l i t t l e b i t on w h a t you t h i n k is possible? M r . ROHATYN. I t seems to me you have two countries here, Germany and Japan, w h i c h have big, big dollar surpluses at this point and w h i c h w o u l d both be large beneficiaries of this venture i n terms of m a k i n g more supplies available to them, as we become more and more self-sufficient. I t would be to t h e i r advantage to have this happen. Saudi Arabia, i t seems to me—first of all, there is a t o t a l l y unusable supply of dollars around here. A n d i t has been said t h a t they w o u l d l i k e to support projects w h i c h would lengthen the life of t h e i r own reserves. This clearly would. A t the same time, I t h i n k i t would be a great benefit to us to recycle some of these dollars on a real long-term basis, instead of h a v i n g t h e m on demand. I w o u l d certainly t r y to make a major effort to get t h e m involved, because I t h i n k it's to t h e i r interest to do so. W h e t h e r it's politically feasible for Saudi A r a b i a to do it, I don't k n o w w h a t the answer is. I would assume i f the Germans came i n here, the French and some of the other European countries m i g h t very w e l l w a n t to do it. I was j u s t p i c k i n g those three countries t h a t I t h o u g h t had the most clear and simple financial and operating interest. B u t I w o u l d certainly push very hard, because I t h i n k it's clearly to t h e i r interest. Senator RIEGLE. I gather t h a t the gain for them, other t h a n j u s t being d i m i n i s h i n g our demand for t h a t pool of w o r l d oil t h a t 34 they're also bidding for, is presumably they would get any technological gains that might come out of this. Mr. R O H A T Y N . They could have their share of the output, if they were deciding to do it that way. I think the main gain to them— this is important to them—is to reduce our demand so they're not bidding against us in the Rotterdam spot market and paying $40 or whatever is being paid today for crude oil. PARTNERSHIP BASIS COULD POSE POLITICAL PROBLEMS Senator RIEGLE. It seems to me if they were to come in on a partnership basis, I think that runs into a different kind of political problem. It seems to me if you're going to generate support in the United States that says, look, we want to develop some selfsufficiency and work our way out of that country Mr. R O H A T Y N . I think from the point of view of reducing our impact on world oil demand. Senator RIEGLE. Let me raise the environmental issue in terms of problems we run into with the existing law. I'm not sure what the optimum size of the coal liquefaction plant is, but I've been told it's relatively small, on the order of maybe 50,000 barrels a day. So if we wanted to produce 5 million barrels a day, that would be talking about 100 sites. If you were going to do half or a third of that, we are up in a very large number of individual operating units. I'm wondering what thoughts you have on a series of questions. Let me pose them all, and respond in the aggregate as best you can. And that is: What your thoughts might be as to where we would put these plants and how we're going to get the permits? The case of the Sohio plant line required 2,000 different permits, of which 1,500 had been acquired by the time the company finally had to abandon the project; We also have to consider that each producing unit would have to have, presumably, an environmental impact statement under NEPA. We would probably in most cases, maybe all cases, have to have permits also in the Clean Air Act. I'm wondering, too, with respect to the water side of the issue, if you've considered the permits that would be needed to discharge water under the Federal Water Pollution Control Act? And as I understand it, shale conversion requires a great deal of water, and most of the shale is unfortunately located where water is scarce. So obviously, we'd have to be interested in knowing what thoughts you folks have, again, for overcoming that interest. All of this will take time, 2 years at a minimum, assuming all applications are processed simultaneously. I'm wondering, in view of that, which is today's reality, unless it's changed, how do we make the kind of headway we're talking about here within the time frame that we would need, or would we have to think in terms of a blanket exemption of some sort or some sort of streamlined process, where we would treat this separate and apart from the way we're going to be dealing with other operating decisions that could run into these same environmental problems? Mr. CUTLER. Mr. Chairman, there's no question, of course, that all industrial activity has environmental costs, and certainly the 35 m i n i n g of coal or shale and the b u r n i n g of coal or shale, whatever you do to it, w i l l have significant environmental costs. One reason w h y , or one of the m a n y reasons w h y private indust r y hasn't come f o r w a r d to bet a l l its chips on these new synthetic fuels is j u s t that. They m i g h t spend h a l f of i t and never get t h e i r p l a n t finished. They look at Sohio, 7 years getting a l l of the envir o n m e n t a l permits t h a t i t needed. B u t i f the program is a Government-sponsored program, you would, at the very least, have a concentration and identification w i t h i n this corporation we're t a l k i n g about, of the need to go forward, and an identification of the bottlenecks t h a t had to be broken and some Government energy being applied to the b r e a k i n g of those bottlenecks and the m a k i n g of the necessary decisions. It's a choice, a conflict between two social goals or economic goals, and i t has to be made. There are more effective ways of m a k i n g those choices t h a n how we are m a k i n g t h e m today. Senator Jackson's b i l l , w h i c h Senator P r o x m i r e brought up earlier, suggests such a method. H e proposes t h a t the President be able to identify w h a t is a c r i t i c a l energy project t h a t needs acceleration, and he t h e n provides for the setting of timetables by the President for m a k i n g a l l of the decisions necessary i n a l l of the various agencies. He goes so far as to say t h a t i f any agency fails to make a decision w i t h i n the President's timetable, the President can make t h a t decision, and he provides for one single appeal on a l l of the environmental and other issues t h a t are involved w i t h expedited treatment, a l l the way up to the Supreme Court. I t is certainly a major problem. I t is one of those choices we j u s t have to face i n this country. A n d I don't mean to downgrade the environmental side of the problem at all. There m a y be environm e n t a l costs f r o m a program of this type, p a r t i c u l a r l y as i t expands i n scale, t h a t we w i l l u l t i m a t e l y conclude are not w o r t h i n c u r r i n g or t h a t we must l i m i t the program i n p a r t i c u l a r ways, or perhaps incur e x t r a cost to handle those e n v i r o n m e n t a l problems. B u t at least we would have a process for m a k i n g the decisions at the highest possible level. Senator RIEGLE. I welcome any other comments, b u t is there any indication t h a t the e n v i r o n m e n t a l difficulties here are ones that, short of blanket waiver, would stop us? I n other words, is i t your view t h a t the e n v i r o n m e n t a l items are manageable by the technical people t h a t you're t a l k i n g to w h e n you ask this question? A r e they basically of a m i n d t h a t reasonable people, s i t t i n g down and w o r k i n g on an expedited basis, can surmount t h a t issue? Or is there a feeling t h a t this is a gigantic problem, t h a t it's l i k e l y to stop us before we get very far down the road? ENVIRONMENTAL QUESTIONS M r . IGNATIUS. First, i f by overall waiver the question was intended to mean t h a t — I ' m sure i t w a s n ' t — t h a t you w o u l d simply waive aside any e n v i r o n m e n t a l questions, the answer to t h a t would be no, i n this p r o g r a m or any k i n d of program. We simply can't waive aside e n v i r o n m e n t a l concerns. 36 In terms of this kind of program, there are some difficulties with shale in the West, much less if it's done underground than on the surface. Some of those environmental problems, if not most of them, with western shale do not appear to be present with eastern shale. Wherever you burn coal, there is a concern about the amount of C0 2 that's in the air. And I think there are questions about that. We are not experts here, obviously. We have talked with people who have gone into this more thoroughly than we have had an opportunity to. And I think they recognize there are some questions here that could require some kind of modifications along the lines Mr. Cutler spoke of earlier. In short, my impression is if we go about this sensibly, with due consideration for these issues, identifying them promptly and having what we called in our statement a judicial and conclusive way of handling them so that we can get on with the program, then we'll be able to deal with the problems. It may increase the cost some, but the cost is so high anyway that it would be sensible, in accomplishing an energy objective, not to do undue violence to our environmental resources. Mr. ZUCKERT. I would agree with what's been said, Mr. Chairman, but people I have talked to have said they're mostly concerned about the length of the process. It's an open-ended process. There's no way to get there from here. Senator RIEGLE. Mr. Rohatyn, is it your feeling that the environmental thing would pose the problem that beyond the sides, you think that side is manageable? Mr. R O H A T Y N . I think it's a major problem, and I don't have anything to add to what's been said. And that's exactly what I feel. Senator RIEGLE. Senator Proxmire. Senator P R O X M I R E . Mr. Rohatyn, I am delighted that you suggested one action we should really think about is limiting imports. It makes sense. I think we should push that as one way of achieving a greater conservation. Senator Lugar seemed to feel that conservation was very desirable, but very unachievable. I don't agree. I think if we go at it, we can do it. It will take a lot of leadership. Prices go up. But, as you say, we can't go on living like this. Mr. Rohatyn, your proposal not only includes massive Government borrowing to finance these synfuel plants, but you suggest wage and price controls, multinational government corporations, massive aid to railroads through purchase and lease arrangements and so forth. Mr. R O H A T Y N . I didn't think that I had been all that dramatic, Senator, but I think that I had pointed out some areas that I thought were worth talking about. I think the wage and price Senator P R O X M I R E . D O you think we have to have wage and price controls? Mr. R O H A T Y N . N O , I don't think this will create the need. I think you either have a need for wage and price controls or you don't. Senator P R O X M I R E . Yes, I thought you meant in this particular industry. Mr. R O H A T Y N . I think you have a real opportunity if you embark on a large-scale national program that will involve clearly the 37 Government, i n effect, t a k i n g a large financial risk, asking both the business c o m m u n i t y and labor to exercise very great r e s t r a i n t and statesmanship. Senator PROXMIRE. W h a t makes you t h i n k t h e y ' l l respond? M r . ROHATYN. I t depends, I guess, on other questions. Senator PROXMIRE. T h e y ' l l respond to a w a r t i m e scenario, b u t I doubt they w i l l under present circumstances. Maybe they w i l l . M r . ROHATYN. I would philosophically be inclined to go f a i r l y far along the road of mandatory restraint i n connection w i t h a prog r a m l i k e this. I ' m not at a l l sure t h a t m y colleagues would share m y view. Senator PROXMIRE. We're moving into a s i t u a t i o n where we're really beginning to regiment our economy and our life. We're t a l k i n g about registration i n the d r a f t for a l l 18-year-olds; we're t a l k i n g about mandatory wage-price controls; we're t a l k i n g about rationing. Now, we're proposing here a massive Government program of hundreds of billions of dollars of investment, w h i c h w i l l require a great deal of Government regulation and so forth. Doesn't t h a t concern you? M r . ROHATYN. Of course, Senator, b u t I t h i n k i f the OPEC countries were to cut off our supply tomorrow, the regimentation would be greater. Senator PROXMIRE. YOU say a nice simple l i m i t a t i o n on imports? M r . ROHATYN. YOU can't l i m i t i t to zero, Senator. Senator PROXMIRE. We d i d n ' t propose it. I f you cut i t down to— say, by 1 m i l l i o n barrels a day 1 year, and t h e n maybe a f t e r w a r d 1 m i l l i o n barrels the next, and so forth, so t h a t you did l i m i t the imports and t h e n create a situation w h i c h you have far more incentive i n the marketplace to do m a n y of these things. M r . ROHATYN. I guess, Senator, you're going to have a tough b i t of balance program. I t h i n k t h a t simply l e t t i n g the price go up and having i n f l a t i o n pushed up, w i t h o u t new production, is not the answer, either. I n fact, I would use the l i m i t a t i o n on imports as a discipline and as a push to finance this program. Senator PROXMIRE. Maybe i t would, and i t w o u l d encourage the program off. That's the way the marketplace is supposed to work. M r . ROHATYN. I believe we're facing a f a i r l y serious recession. A n d the extent to w h i c h you w a n t to break the economy, i n l i g h t of this situation, I t h i n k t h a t t h a t requires a f a i r a m o u n t of delicate judgment. I w o u l d take the chance on l i m i t i n g imports to the present amount of dollar volume and t h e n reducing i t gradually. B u t I w o u l d do i t i n connection w i t h a program such as this, Senator. VICE PRESIDENT ROCKFELLER'S PROPOSAL I N 1976 Senator PROXMIRE. M r . Ignatius, i n 1976, Vice President Rockefeller came before us and proposed a $100 b i l l i o n energy program w h i c h we t u r n e d down. A n d I t h o u g h t we were r i g h t to t u r n i t down. Maybe we were wrong. T h a t $100 b i l l i o n program was one i n w h i c h we would start producing very m u c h i n the nuclear area. Do you t h i n k i f we had bought t h a t program, we w o u l d have made a serious mistake of 38 great cost to the Federal taxpayer i n view of what's happened since then? W h a t ' s your response to that? A r e n ' t we l i k e l y to do the same t h i n g here i f we go along w i t h the synthetic fuel program, on the basis of recommendations by people who are not sure of t h e i r ground i n the area and t h e n f i n d we bought a turkey? M r . IGNATIUS. NO, I don't t h i n k so. I went back and looked at some of the New Y o r k Times articles t h a t were w r i t t e n at t h e t i m e the Rockefeller proposals were made. A n d to the extent t h a t i t brought back the memory of them, i t seemed to me t h a t t h e r e is a distinction between w h a t he was t a l k i n g about i n a far-reaching statement t h a t he made, and w h a t we're t a l k i n g about. A n d I t h i n k it's a specificity of our proposal. We're t a l k i n g about one aspect of a n a t i o n a l energy policy, w h i c h we believe represents an o p p o r t u n i t y i n a relatively short period of t i m e , to lessen our dependence on these unstable foreign sources. Senator PROXMIRE. You're proposing twice as m u c h as he was. H e proposed a $100 b i l l i o n operation, and you're t a r g e t i n g i t more precisely. So, i t w o u l d be an even more ambitious and generous c o m m i t m e n t to an area w h i c h m a y not be the way to go. M r . IGNATIUS. Senator, first, we don't k n o w w i t h a n y c e r t a i n t y w h a t the cost would be. B u t w h a t we are quite c e r t a i n about is t h a t i f we do the program the way are t a l k i n g about, the cost to t h e taxpayer would be far, far less t h a n the $100, or t h e $200 b i l l i o n figure t h a t we're t a l k i n g about. Senator PROXMIRE. Let me ask you, M r . Cutler, w h y don't you t h i n k t h a t the a d m i n i s t r a t i o n — a n d maybe you do, is m o v i n g i n your direction and moving the r i g h t way as f a r as you're concerned? There's an article i n the W a l l Street J o u r n a l this m o r n i n g t h a t said: "President Carter, at the Toyko Economic S u m m i t Conference next week, is l i k e l y to propose a new m u l t i n a t i o n a l body to assemble private and government f i n a n c i n g for huge synthetic fuels projects i n the i n d u s t r i a l w o r l d . " I t goes on to say: The W h i t e House doesn't feel t h a t the Congress is going the r i g h t way i n this area. They're concerned t h a t the federal investments or guarantees be made only i n the projects w i t h greatest chance for early success. The A d m i n i s t r a t i o n is w o r k i n g to prepare its own list of project proposals. To begin w i t h , the W h i t e House plans to set a goal for how m u c h imported oil can be supplanted by synthetic fuels, as w e l l as how much can be replaced by solar power, by conservation, and by added U.S. oil and gas production. W i t h t h a t goal i n mind, the A d m i n i s t r a t i o n w i l l propose a set of possible investment approaches to spur synthetic fuels production. The W h i t e House analysis won't be complete for about two weeks, b u t sources say officials are leaning more towards the House approach, w h i c h relies on m i n i m u m federal purchases and loan guarantees, as opposed to the Senate approach w h i c h favors direct spending on huge demonstration projects. Do you t h i n k the administration's r i g h t i n t h a t course? M r . CUTLER. M y sense of w h a t the a d m i n i s t r a t i o n is doing is quite close to t h a t article. I t h i n k i t comes quite close to w h a t we are proposing. I t h i n k I said t h a t earlier, Senator, I believe t h e a d m i n i s t r a t i o n is concluding t h a t a synthetic fuels p r o g r a m now, r u n i n the sort of corporate f o r m t h a t we have i n m i n d , b u i l t on Congressman Moorhead's b i l l , w h i c h does contain some of t h e v e r y 39 powers t h a t we have also been suggesting, is i n order. A n d they also have i n m i n d adding an i n t e r n a t i o n a l element to it. But, as the article suggests, it's p a r t of the program designed to b r i n g down imports by a whole variety of measures, s t a r t i n g w i t h conservation, w h i c h remains the most i m p o r t a n t , b u t doing more on this p a r t i c u l a r element of the supply side, namely the synthetic supply. A n d we have been able to do t h a t by having the government step i n w i t h private i n d u s t r y and get started on the projects w h i c h are technologically feasible and actually being b u i l t i n other parts of the w o r l d today. Senator PROXMIRE. Have you done any more detailed research t h a n you've presented here? Y o u have an excellent statement, b u t they're concise. I understand you may have a more detailed paper t h a t you prepared. M r . CUTLER. We have n o t h i n g more detailed t h a n the piece w h i c h appeared i n the Washington Post. We've assembled a good deal of background m a t e r i a l f r o m some of the engineering and other companies. Senator PROXMIRE. W i l l you provide the committee w i t h whatever you can on that? M r . CUTLER. W e ' l l be glad to. We're also w o r k i n g on a possible series of amendments to M r . Moorhead's bill. COST PER BARREL Senator PROXMIRE. YOU say t h a t you feel i t w o u l d be—you testified i t would be feasible to produce 5 m i l l i o n barrels of synthetic fuel per day by 1990. I n a r r i v i n g at t h a t estimate, w h a t assumptions do you make about the cost per b a r r e l of synthetic fuel i n 1979 dollars? M r . CUTLER. I don't t h i n k I a m qualfied to answer t h a t question, Senator. I do believe t h a t is the prevailing opinion today, inside the a d m i n i s t r a t i o n and elsewhere, t h a t the price of n a t u r a l petroleum over the next 10 to 20 years is l i k e l y to double i n 1979 dollars. Senator PROXMIRE. M y second question was w h a t you assumed would be the cost per b a r r e l of the w o r l d price of crude oil? M r . CUTLER. I ' d l i k e M r . Zuckert to deal w i t h that. Senator PROXMIRE. I f we can get t h a t , we'd have some notion of w h a t the cost m i g h t be to the Federal Government. M r . ZUCKERT. O u r cost assumption is t h a t synthetic fuel could be produced c u r r e n t l y at $25-$30 per b a r r e l i n 1979 dollars. Today's oil cost is $20 a b a r r e l and more. W i t h a continuation of w o r l d conditions and inflation, n a t u r a l imported oil could cost $50 a b a r r e l i n 1990, and we believe t h a t synthetic oil, though affected by inflation, would be clearly competitive at t h a t time. Senator PROXMIRE. $50 a barrel. H o w do you a r r i v e at that? T h a t seems l i k e it's out of the blue. M r . ZUCKERT. S i r S e n a t o r PROXMIRE. HOW do y o u a r r i v e a t t h e $30? M r . ZUCKERT. We've a r r i v e d at t h a t f r o m t a l k i n g w i t h people i n the engineering field who have been involved i n this problem. Senator PROXMIRE. W h y $30? W h y not $100 a b a r r e l or more? 40 M r . ZUCKERT. Because, Senator, there is a basis of experience i n the South A f r i c a n SASOL project. M r . CUTLER. A n d the N a t i o n a l Energy P l a n t h a t was f i l e d by t h e Secretary of E n e r g y — I t h i n k earlier this year—estimated t h e cost of oil f r o m the t a r sands and also f r o m the Venezuelan heavy oil, i n the range of $20 to $25 a barrel. Senator PROXMIRE. We found t h a t the price of coal and the cost projection for o i l shale have risen at t h e same rate as i m p o r t e d o i l prices. We're afraid the same is going to happen M r . CUTLER. I doubt they took a 50 percent j u m p i n t h e last year, w h i c h is w h a t happened to i m p o r t e d o i l prices. Senator PROXMIRE. I t seems to have happened to o i l shale. We t h o u g h t i t w o u l d be feasible at this price only a few years ago. M r . CUTLER. M y answer to t h a t is i f it's always $10 more t h a n the price of imported oil, it's s t i l l a very w o r t h w h i l e insurance policy. Senator PROXMIRE. M r . Rohatyn, t h e Synthetic F u e l Developm e n t Corporation has existing technology to make a product i n great demand whose m a r k e t price is r i s i n g rapidly. F r o m your statement, i t appears you t h i n k synthetic f u e l shows a good potent i a l for solving energy problems. Given t h a t case, w h y should there be any need for Federal f i n a n c i a l aid to produce synthetic f u e l on a commercial basis? Why? There should be p l e n t y of p r i v a t e capital available to do t h a t . M r . ROHATYN. I t h i n k the risks involved today i n c o m m i t i n g to a p l a n t of t h a t size—and you're t a l k i n g about $1 to $1V2 b i l l i o n plants, w i t h m a r k e t uncertainties and e n v i r o n m e n t a l uncertainties; and I don't t h i n k you have the r i s k capital involved here to get those off the ground. I've indicated i n m y testimony: A , I don't believe t h i s is t h e answer to our energy problem. I t h i n k a p a r t of a n energy p l a n t h a t m i g h t b r i n g about a n answer—and I don't believe for a second t h a t it's riskless. I j u s t t h i n k it's less of a r i s k t h a n a l t e r n a t e risks t h a t I see. Senator PROXMIRE. W o u l d you t e l l me, M r . Ignatius, w h a t you t h i n k the budgetary costs w o u l d be of this p r o g r a m over t h e next 5 or 10 years? Have you made any estimate of that? I realize y o u have to guess at it; maybe you w a n t to give us a range. M r . IGNATIUS. I can't give you a precise figure, because we haven't developed one. The budgetary cost w o u l d be considerably less under the concept t h a t we have i n m i n d , because t h i s corporation Senator PROXMIRE. Less t h a n what? M r . IGNATIUS. W o u l d be less t h a n t h e investment cost for t h e plants, these large m u l t i - b i l l i o n dollar figures we're t a l k i n g about. I f the corporation had the power to issue bonds backed by the credit of the U n i t e d States, the budgetary impact of t h a t w o u l d be considerably less. Secondly, to the extent t h a t the plants were b u i l t w i t h p r i v a t e capital under m a r k e t guarantee contracts, w h i c h is one of the ways we've proposed t h a t this be done, there w o u l d be a f a r smaller budgetary impact. B u t I cannot give you a figure here today as to w h a t t h e a n n u a l budgetary cost w o u l d be. 41 Senator PROXMIRE. W o u l d the foreign governments be i n v i t e d in? W o u l d they—as investment partners, w o u l d they have a say i n the operation, and w o u l d they have an o p p o r t u n i t y to b u y the plants? M r . IGNATIUS. W e l l , i t w o u l d depend. There is one project at the m o m e n t t h a t is under discussion, a government-sponsored project at a cost of $700 m i l l i o n ; and the Germans and Japanese have agreed i n principle, as I understand i t , to f u n d h a l f of t h a t $700 m i l l i o n cost. I do not k n o w t h e implications i n t h a t case i n terms of your specific question. However, i f t h e y ' r e paying h a l f the price and t h e y ' r e going to share i n the o u t p u t , t h e y w o u l d have something to say, I w o u l d suppose, about t h e plant. Senator PROXMIRE. I f there were m a r k e t guarantees, M r . Rohat y n , available—just t h a t — w o u l d t h a t be sufficient, i n your judgment, to get t h e p r i v a t e capital? M r . ROHATYN. Oh, yes, Senator, i f the m a r k e t guarantees—I t h i n k the question t h e n is how m u c h of a guarantee, at w h a t price level? Senator PROXMIRE. Can you answer the question? M r . ROHATYN. NO, I c a n n o t . PRIVATE CAPITAL I w o u l d say to you, probably as a general rule, w h i c h is w h y I advocate t h a t , t h a t u n t i l y o u have a experience w i t h a project, you m i g h t f i n d t h a t m a r k e t guarantees to ensure t h e p r i v a t e capital building, the plants. B u t suppose t h e Federal Government has essentially the same a m o u n t of risk, a n d where u l t i m a t e l y the p r i v a t e operator has a l l of the upside, and the Federal Government has a l l of t h e downside. That's w h y I w o u l d l i k e to see a m i x of projects u n t i l t h e economics are more assured. Senator PROXMIRE. L e t me j u s t ask y o u a f i n a l question. I w a n t to ask M r . C u t l e r — t h i s question comes f r o m a n institut i o n w i t h w h i c h Senator Riegle and I had some association, H a r v a r d Business School. M r . ZUCKERT. W e h a d association, too, M r . I g n a t i u s and I. M r . CUTLER. They were b o t h on the faculty. Senator PROXMIRE. L e t me j u s t give you a quotation and ask for a response. " T h i s sector analysis demonstrates the wide flexibility possible for energy use i n the U n i t e d States. Its extent was underlined i n the recent report of a panel on energy futures assembled by the N a t i o n a l Academy of Science, w h i c h looked at four different plausible and carefully constructed scenarios for f u t u r e energy demand i n the U n i t e d States. The results were extraordinary—that i n the year 2010, various similar conditions of transportation and other impetus could be provided i n the U n i t e d States, using twice the energy consumed; or alternatively, using almost 20 percent less t h a n used today. A n d this is w i t h continuing economic and population growth. The fundamental conclusion is there is m u c h more flexibility toward reducing energy demand t h a n has been assumed i n the past. Now, i n view of t h a t conclusion b y the t h o u g h t f u l experts who studied t h i s i n great detail and have a detailed a r t i c l e i n Foreign A f f a i r s on this, I ' d l i k e y o u r response. 42 I realize t h a t you've said, again and again today, t h a t you're for conservation. M r . Rohatyn has indicated this may r i s k the k i n d of conservation t h a t we w o u l d otherwise have. This article, to me, suggests t h a t t h a t should be the major way we should go. We can have the economic growth, we can have the amenities we have now w i t h conservation. T h a t j u s t seems to me to be a far better answer t h a n r i s k i n g hundreds of billions of dollars on something t h a t may not succeed. M r . CUTLER. Senator, it's a l i t t l e b i t l i k e arguing as to w h e t h e r a sea-based nuclear force is a l l we need or whether we ought to have land-based as w e l l as sea-based or whether we ought to have airbased also and have the entire t r i a d and whether we ought to have conventional forces i n addition, and also, whether we should strengthen N A T O . A n d we conclude i t w o u l d probably be better to have t h e m all. There is no single answer to this. I t m a y very w e l l be of t h e three parts of the triad, the submarine is the best part. I t m a y very w e l l be of the various answers to the energy problem, conservation is the best part. B u t we also need the other parts. It's also very i m p o r t a n t to remember t h a t OPEC d i d n ' t i n v e n t this energy problem. I t was there, anyway. They have b r o u g h t i t f o r w a r d some. I f we get our consumption down to the .7 per one point of G N P , w h i c h is the European and Japanese level today—and we're over one to one today—even i f we get i t down to t h a t , we s t i l l have a problem. Those two lines are going to cross. Four-fifths of the w o r l d is o n l y beginning to increase its consumption of energy. Those lines are going to cross w i t h i n the next 10 to 20 years. We have got to do something more on the supply side t h a n simply go out a n d d r i l l for more oil and get more gas. It's going to take 5 to 10 years to get a synthetic program i n t o production. I a m saying: Let's get started. Senator PROXMIRE. P a r t of the free-market approach is t h e conservation, and p a r t of i t , of course, is e l i c i t i n g more production. I have great concern about w h a t is going to happen to t h e L u g a r proposal for a balanced Federal budget. Senator L u g a r is a great advocate of that. I don't k n o w how we can go on spending money and balancing the budget, as Senator L u g a r properly asks us to do, i f we are going to follow y o u r plan. M r . CUTLER. I w o u l d r a t h e r provide jobs this w a y t h a n t h r o u g h the CETA program. That's several b i l l i o n dollars alone. I n a couple of years we may be i n j u s t the k i n d of recession t h a t w o u l d respond very, very w e l l to j u s t this k i n d of program. B u t unless we get i t started now, i t w o n ' t be there. M r . ZUCKERT. Senator, I a m a l i t t l e b i t reminded w h e n we t a l k about OPEC, I a m a l i t t l e b i t reminded about w h a t Senator Sym i n g t o n used to say: There is n o t h i n g worse t h a n a choice of one. A n d I t h i n k that's t h e position we are i n now. The year 2010 is too f a r o f f for me to contemplate. We are late now, as far as i n s u r i n g this country's o i l supply, b u t we have to do something, and that's m y feeling. The OPEC a b i l i t y to do w h a t they can do, to m y m i n d , disrupts our concepts of free m a r k e t s and choices, and we have to have a versatile approach to the problem. 43 Senator RIEGLE. Before yielding to Senator Lugar, let me make j u s t one comment. A n d t h a t is: I n response to the article Senator P r o x m i r e mentioned, i t seems to me t h a t a 31-year t u r n a r o u n d t i m e to 2010, i f that's w h a t we had to w o r k w i t h , I a m sure we could a l l go back to the d r a w i n g boards and come up w i t h ideas we l i k e better. I t h i n k the immediacy of this problem and the strategic aspect of i t financially, economically, m i l i t a r i l y , i n terms of holding the social fabric of the country together, and other things, are underscoring the point t h a t I t h i n k you made earlier, M r . Cutler, and t h a t is: I n terms of w h y the private m a r k e t can't be expected to get this job done i n the t i m e frame we need. The elements of r i s k go beyond j u s t the economic, i t goes beyond the political r i s k assessment or whatever. B u t it's a different k i n d of problem. Therefore, I t h i n k we are pushed i n t o looking for alternatives t h a t are fast ones. The great attractiveness of this is we know how to do it, and t h a t it's essentially an on-the-shelf i t e m t h a t we can make available to ourselves i f we decide there's a need. PEOPLE W I L L ACCEPT SACRIFICES The t h i n g I m i g h t also say t h a t worries me more t h a n a n y t h i n g else is t h a t people w i l l accept sacrifices i n the short r u n i f they have the feeling t h a t something constructive is under way. B u t i f we're not going to move to push this problem back, t h e n I t h i n k we get caught i n a l l the backfire. Who do we blame? Do we blame Schlesinger because he can't r u n the Energy Department? Do we blame the Congress because Carter is too involved w i t h foreign policy, et cetera? A n d t h a t leads to nowhere. That's j u s t not the exercise we can afford to stay in. We have got to be i n the exercise of f i g u r i n g out how we solve the problem, and that's w h y I t h i n k this p a r t i c u l a r notion has a spontaneous support of its own. I was asked by a reporter a m i n u t e ago when I was out of the room, " W h y is i t t h a t suddenly this t h i n g is p e r k i n g here, there, and other places at once?" A n d m y own sense to t h a t is because we have got a lot of serious people who are extremely w o r r i e d about where we are and practical people s t a r t i n g to look for practical solutions to serious problems. There are not a lot of choices. A n d this is one; it's a realistic one, and I t h i n k that's w h y we've got people l i k e yourselves not only interested i n it, b u t w i l l i n g to come and testify w i t h conviction about it—because you know this is something t h a t can be done and w i l l help the situation. Senator Lugar. Senator LUGAR. Senator, I w o n ' t detain you long. I w a n t to followup j u s t b r i e f l y a couple of points t h a t were developed by Senator P r o x m i r e w h e n he was t a l k i n g about the budgetary costs and t h e n he mentioned balancing the budget and its desirability. I t appears to me t h a t one of the reasons w h y the production supply side strategy t h a t you are suggesting is tremendously important is t h a t you t r y to explore a l l of this, i f we r e a l l y explore the other side, t h a t we don't have adequate energy i n the country, then i t becomes i n o r d i n a t e l y expensive. 44 M r . Rohatyn mentioned t h e possibility of a severe recession, and I suspect each of you gentlemen w o u l d likewise concur, i f there is inadequate energy supply and w h a t is already inadequate is already expensive, t h a t f u l l employment i n a p p r o x i m a t i n g t h a t general goal of our economy is going to be very h a r d to come by. I t h i n k , as a m a t t e r of commonsense we a l l see t h a t , a l t h o u g h t h a t has been unstated, and I t h i n k it's tremendously i m p o r t a n t . O n other days i n this committee, we w o u l d a l l be v e r y excited about the implications of a n y t h i n g you were doing w i t h regard to f u l l employment, jobs for Americans. Preventing u n e m p l o y m e n t has been a major facet. As we take a look at this, the failure, i t seems to me, to provide t h i s additional synthetic f u e l means unemployment. Really, u l t i mately, massive unemployment. Is t h i s a misreading or is t h e r e any w a y to get around unemployment unless we have synthetic fuel? M r . ROHATYN. Senator, I t h i n k I indicated at the b e g i n n i n g of m y testimony t h a t I t h o u g h t this was probably the most exciting indust r i a l o p p o r t u n i t y for this country i n a long, long time. A n d I t h i n k that's basically it. I t h i n k t h a t you cannot go on w i t h t h e k i n d of s t r u c t u r a l unemployment t h a t you have today a n d t h a t you're going to be facing i n a recession. A n d you can't r e a l l y compute w h a t your budgetary costs m i g h t be here, unless you factor i n t h e employment t h a t you create, the taxes t h a t you generate, and t h e reduction i n your i n f l a t i o n rate as a result of reduced o i l i m p o r t s at astronomical rates. So, I a m absolutely w i t h L l o y d and his colleagues. I t h i n k there is clearly a r i s k i n i t , b u t I t h i n k i t w i l l t u r n out to be one of t h e greatest investments this country can make i n terms of its security and social structure. Senator LUGAR. I t h i n k that's very i m p o r t a n t testimony because I can see, coming f r o m a hearing such as this, a r e p o r t t h a t "Today, distinguished Americans suggested t h a t the Federal Gove r n m e n t spend $100 billion, maybe $200 b i l l i o n . " T h a t sort of implies the "last of the big-time spenders m o v i n g off i n t o t h e econo„ „ » my. Senator P r o x m i r e says you t h r o w money at problems, we t h r o w money at education, t h r o w money at cities, and w i l l y - n i l l y we are now about to t h r o w i t at energy w i t h maybe about t h e same disastrous result he suggested has occurred i n education and the cities. Leaving aside whether t h a t is a f a i r j u d g m e n t as to w h a t has occurred i n education or the cities, t h a t s t i l l sort of l e f t h a n g i n g around here t h a t we are t h r o w i n g money at energy i n t h i s way, unbalancing the budget. Now, the other side of the coin: I f we were, as I say, i n another h e a r i n g on a different day, the purpose w o u l d be to examine w h a t i t means to have m i l l i o n s of Americans unemployed, gross n a t i o n a l product i n decline, a recession very deep, and at t h a t stage, of course, the costs are enormous. I t is suggested, even i n this coming fiscal year i f we miss the m a r k , as opposed to a budget deficit i n t h e 1930's, i t would be 1940's, 1950's, 1960's. A n d at t h a t point, we say essentially, that's j u s t the w a y the b a l l bounces. There are 45 e n t i t l e m e n t programs out there, trigger mechanisms, a l l of w h i c h come into being. Now, i n this instance, i t seems to me i f you're saying this—and i f you're not, w h y , correct me—that we're going to make a calculated investment as a government and as private industry; the reason we're doing i t i n this f o r m is because there are risks and they are m a r k e t risks, i n part, but, I t h i n k , m u c h more completely the environmental risks or the governmental regulation or foreign risks t h a t we have talked about. I don't k n o w of a r a t i o n a l businessman i n this country t h a t would approach a large energy project facing the gauntlet of gove r n m e n t a l restrictions, and environmental hazards. There simply isn't t h a t m u c h money and t i m e i n the w o r l d to make t h a t k i n d of risk. It's a l l w e l l and good to t a l k about private enterprise, b u t i n the energy area we haven't had t h a t for a long time. I t seems to me, w i t h o u t a program i n w h i c h there is governmental clout to break the bottleneck, to force the President to make decisions, to move on. Whether a s t r i c t l y private sector i n i t i a t i v e was a good idea or not, i t would never get off the ground. DOE PEOPLE ARE REGULATORS, NOT PRODUCERS One good reason for h a v i n g the Government as a p a r t n e r is to t r y to get decisions and even t h a t m i g h t not guarantee results. The f u n d a m e n t a l point you have added to this debate is t h a t i f the Government is needed to do the block and tackle w o r k , private management is needed to get the job done. I t h i n k you are absolutely correct. I f the D e p a r t m e n t of Energy handled this, n o t h i n g would occur; there w o u l d be no f u r t h e r production whatsoever. The DOE people are regulators, not producers, and it's i m p o r t a n t to make a distinction between the two. A n d I simply w a n t to take this o p p o r t u n i t y to t r y at least to frame a p a r t of our hearing record i n a way i n w h i c h i t is clear w h y we are headed i n this direction. It's not a denial of free enterprise or t h a t we are busting the budget or any of these dire consequences, b u t r a t h e r we expect, i n order to have f u l l employment i n the country, to have a growing gross n a t i o n a l product; as a m a t t e r of fact, to have any hope of producing anything, we have to get t h r o u g h the environmental hazards, t h r o u g h the rocks and shoals of t h a t and move onward t o w a r d greater energy production. Senator RIEGLE. W o u l d you j u s t yield at t h a t point? Because I tend to feel m u c h the same way on this matter. I w o u l d l i k e to add j u s t one or two things. I t h i n k we get f r o m this approach w h a t is really i m p o r t a n t to recognize, and also ought to be i n the record, and t h a t is t h a t I t h i n k we're t a l k i n g about a project here and potential gains t h a t are t r u l y i n the broad public interest, and they are gains t h a t would belong to the public and private sector together. I n other words, this k i n d of an over-averaging requirement, I t h i n k needs to be thought of i n those terms. It's not one p a r t of the society and one p a r t of the structure as against the other. This is something t h a t is really, t r u l y a common interest. 46 I think, second, by having a consortium, a team effort where government and the private sector work together intelligently and effectively, under time pressure and with good faith, that you can then attract the managerial talent. To get competent people to run this operation is absolutely key to its success. I thought, myself, in the last few days, I am not sure what luck the administration is going to have, for example, in replacing Barry Bosworth. And I worry about that. I think, by setting this thing up on this novel basis, consortium effort to public-private ownership, you can then get the talent and the managerial wherewithal to actually meet tough deadlines. I think you can deliver and you can program. I think that's an essential part of this thing. I might say that we, Senator Lugar and I, got together the other day in another program area directly relevant to this, and that's in the Economic Development Administration area, where in the cities area we're finding that we g;et more done faster and more cost-effectively if we have got a publicprivate combination, rather than leaving it all to either party. So, we are breaking some new ground in terms of concepts. There are other parallels we can look at. I think that, too, is a critical aspect and a guarantee that the public has, that the situation is on the level, and they have a stake in it. This is something that really belongs to everybody and not just to somebody. Senator L U G A R . I appreciate your comment. And I have no further question, unless you have comments excited by any of this. OVERSIGHT A N D PROPER G O V E R N M E N T ROLE IS NEEDED Mr. I G N A T I U S . Yes. These last points are terribly important, and the concept of this corporation is vital to the success of a program of this kind. We would hope it would be a relatively small staff. We would hope that this could be a relatively small organization. Unless it's done that way, obstacles would be placed in the path of private industry that ultimately has to do this. Rather than that, encouragement, with proper government oversight and the proper government role being played, is needed. We're talking urgent schedules. The United States is very good at meeting urgent schedules. We have done it many times in our history; we can do it again. It's often involved forward looking people in the Government and forward looking concepts. But when we make up our mind to do something on a large scale in this country, our record of doing it is very good. The need for it exists today. The ways we talked about doing it, we think are proven and practical, and the time to get on with it is now. Senator LUGAR. We are very grateful for your testimony. Mr. CUTLER. I would like to add, if I could, in addition to thanking you both for what you have said, that this should not be understood as throwing money at a problem in a sense that perhaps engendered Senator Jackson's bill, throwing money at a project that you never get back. This is essentially a proposal that the Government decides on a goal and create a structure for achieving that goal. The Government will have to take risks to do that. There are financial risks, 47 and there w i l l be other risks. B u t i t may, i n the end, cost the Government no money at all. Money is not the i m p o r t a n t t h i n g here. I t is the t a k i n g of a r i s k and the decision t h a t we are going to do something despite t h a t risk. A n d one of our poorest, one of our worst skills, is m a k i n g up our minds to do something. W h e n you said earlier t h a t the Secretary of Energy can't r u n this program, neither can the 500 of you, w i t h a l l due respect. A l l you can do is point us i n a direction, create a structure, and say, "Go to i t . " Senator RIEGLE. Well, let me say two or three things very briefly, and t h e n we w i l l close. First, there w i l l probably be some followup questions t h a t we would like to ask you to respond to for the record. A n d I t h i n k some of the other committee members may have some they may w a n t to submit on t h a t basis, too. I w a n t to t h a n k you very m u c h for your t i m e and testimony and your thoughtfulness today. B u t more t h a n that, I w a n t to t h a n k you for the strategy and effort t h a t each of you is expressing on a profound public issue t h a t falls outside, probably, i n m a n y respects, the n o r m a l scope of your professional work. I t h i n k your example today, i n terms of the thought and t i m e that's gone into this, and the commitment, the feeling and analysis t h a t you b r i n g to this question, this i m p o r t a n t public question, I t h i n k , is exactly w h a t we need more of i f we are going to break the larger logjam of p u l l i n g the country together, developing a consensus, m a k i n g decisions, and getting things done. So, I t h i n k your personal examples i n coming today and being active leaders on a broad public issue that's bigger t h a n your own professional discipline, is a very i m p o r t a n t i t e m by itself, and free standing. It's one t h a t I appreciate, and I t h i n k everyone else w i l l t h i n k about i t and w i l l also appreciate it. So, t h a n k you again, and we w i l l stay i n touch w i t h you on these matters. The hearing is adjourned. [Whereupon, at 12:40 p.m., the hearing was adjourned.] [Additional m a t e r i a l received for the record follows:] COMPTROLLER G E N E R A L OF T H E U N I T E D STATES W a s h i n g t o n , D . C , J u l y 12, 1979. H o n . W I L L I A M PROXMIRE, C h a i r m a n , C o m m i t t e e on B a n k i n g , H o u s i n g , a n d U r b a n A f f a i r s , U.S. Senate. DEAR MR. CHAIRMAN: As requested by your staff, we are t r a n s m i t t i n g a copy of an analysis by GAO's Energy and Minerals Division of a proposal to produce synthetic fuels. The proposal was developed by Messrs. Paul Ignatius, Eugene Zuckert, and L l o y d Cutler. M r . Ignatius gave me a copy of the paper sometime ago. Because I considered i t an i m p o r t a n t proposal deserving careful consideration, I asked for a staff analysis and forwarded a copy of the analysis to M r . Ignatius i n June 1979. I should point out t h a t this represents i n i t i a l observations w h i c h could change as f u r t h e r study is made of this and s i m i l a r proposals. These constitute i m p o r t a n t proposals to deal w i t h the Nation's energy problem and deserve careful consideration. We hope t h a t the enclosed analysis w i l l be helpful i n assisting the Committee i n its deliberations. Sincerely yours, E L M E R B . STAATS, Comptroller General o f the U n i t e d States. Enclosure 48 C O M M E N T S O N A PROPOSAL BY MESSRS. P A U L I G N A T I U S , E U G E N E Z U C K E R T , A N D L L O Y D C U T L E R T o P R O V I D E U P TO F I V E M I L L I O N B A R R E L S OF F U E L P E R D A Y F R O M S U B S T I T U T E SOURCES SUMMARY The authors' proposal is to create a synthetic fuels industry capable of producing 5 m i l l i o n barrels per day f r o m sources such as shale, t a r sands, heavy oils, coal, and f a r m crops. The purpose of the plan is to counteract the growing U.S. v u l n e r a b i l i t y to OPEC price and supply decisions. Generally, we agree w i t h the authors' perception of the problem. O u r analysis of domestic supply trends has led us to expect a continued decline of domestic o i l a n d gas production. There certain is the possibility t h a t a very serious shortage of l i q u i d fuels w i l l begin i n the next 5 to 6 years as the authors state, and this w o u l d be felt most severely i n the transportation sector where there are v i r t u a l l y no substitutes available. A crash program may be w h a t is necessary, b u t our quick review of this proposal leads us to conclude t h a t i t w o u l d accomplish far less t h a n is expected w i t h i n t h i s timeframe, probably on the order of one or two m i l l i o n barrels per day, and w o u l d cost m u c h more. The cost w o u l d be reflected not only i n dollar terms b u t also i n adverse environmental effects. W h i l e a program s i m i l i a r to the attached m a y very w e l l be the way to go, there are m a n y questions t h a t w o u l d have to be answered and issues discussed before we could endorse this specific proposal. F u r t h e r m o r e , the production of synthetic fuels is not the only way to deal w i t h the energy supply problem. Conservation and renewable energy sources are t w o others w h i c h are not included i n the proposal. A n y crash program probably should also include these measures. For this purpose, we w o u l d define conservation as energy efficiency improvements, and renewables as the technologically ready renewables w h i c h are being kept off the m a r k e t for the same economic reasons as the synthetic fuels are being kept off the market. We also feel t h a t a program w h i c h included conservation and renewables as w e l l as synthetic fuels would have better balance and would be easier to i m p l e m e n t f r o m a public policy viewpoint. There is widespread skepticism by the public and t h e Congress about the energy problem. A n y expensive plan w i l l have a very d i f f i c u l t t i m e i n obtaining approval even i f i t were to have wide agreement and support f r o m t h e energy policy community. There are three m a i n reasons w h y we are doubtful t h a t the synthetic fuels proposal could accomplish the stated objective of five m i l l i o n barrels per day i n the next 5 to 6 years. Firstly, the proposal discusses the means for a c q u i r i n g only the new plants w h i c h would process the synthetic fuels. I t neglects to discuss the i n f r a s t r u c t u r e t h a t would have to be expanded to provide the necessary feedstock to the plants f r o m coal, shale, etc. This is not a small undertaking. For example, coal w o u l d probably require the least amount of effort since i t is a more concentrated fuel source t h a n shale or other options. B u t even i f the feedstocks were to come entirely f r o m coal, i t would require more t h a n a doubling of our present coal i n d u s t r y to support synthetic fuels production of five m i l l i o n barrels per day. I t is doubtful t h a t this could be accomplished i n j u s t a few years. Secondly, there are potential problems i n water availability. M a n y of the feedstocks are located i n a r i d or semi-arid areas. W h e t h e r these areas could ever support a large synthetic fuels industry is open to question. This is a question t h a t has been frequently raised but has yet to be solved or even attacked directly. For the present i t is considered to be "tomorrow's problem" since we are s t i l l developing the technology to operate the plants themselves, b u t i t m a y t u r n out t h a t expensive measures w i l l have to be t a k e n to transport either water f r o m other parts of the c o u n t r y to locations where the feedstocks are, or transport the feedstocks to where the w a t e r is. Obviously, the expense of either of these measures w i l l be high. F i n a l l y , we are not as sanguine as the authors about the readiness of the technology for synthetic fuels. W h i l e some of the technologies are undoubtedly ready, there are areas of uncertainty. For example, we have heard t h a t synthetic o i l made f r o m coal or shale could not be processed i n existing refineries; and since i t has never been done before, no one is quite sure whether we k n o w how to modify refineries for this purpose, or whether i t could even be possible, considering the different chemical composition of coal and oil. The issue of cost is, of course, h i g h l y conjectural at such a n early stage of any proposal and the authors recognize this. They have suggested a rough estimate of $50 b i l l i o n to produce five m i l l i o n barrels per day. We have also done some rough calculations. Our calculations indicate t h a t five m i l l i o n barrels per day w o u l d require over 100 synthetic fuel plants w h i c h would cost more on the order of $90 billion. These estimates do not include costs associated w i t h providing the feedstocks 49 for the plants such as doubling the coal industry. This raises the related question of how much of a free hand would we, as a society, be w i l l i n g to give to the management of the proposed Petroleum Corporation. During World War II, we may have given a great degree of fiscal latitude to those who were developing synthetic rubber and making aluminium. Are we w i l l i n g to do the same w i t h energy i n this time of greater concern w i t h government spending and inflation, as well as the widespread mistrust of government and business? I n addition to the issue of fiscal latitude, there is also the parallel concern w i t h environmental issues. Are we w i l l i n g to pay the cost of environmental degradation to develop synthetic fuels on a crash basis or w i l l we require that such a program be attempted w i t h i n strict environmental regulations? The environmental question is another reason why we support the concept of a more balanced approach which would include conservation and renewable measures. Most of these measures are more environmentally benign than the production of synthetic fuels. The implementation on a crash basis of energy efficiency improvements, through means such as a 100% tax credit for insulation, and similar measures for the technologically ready renewables, such as some solar options, might produce the equivalent of a significant amount of synthetic fuels at lower costs. This would have to be studied further. Finally, on the question of financing a crash program, the authors refer to the possibility of securing funds from the proposed windfall profits tax. We agree w i t h this and note that there are additional possibilities i f the windfall profits tax is not sufficient. One is a direct tax on current energy use, under the concept that i t is reasonable to expect to pay for the development of tomorrow's energy through today's use. Two others would be a reprogramming of funds from current programs i n the Department of Energy and the Department of Defense—the Department of Energy because such a crash program would probably overlap and make obsolete or unnecessary a number of existing programs being undertaken w i t h lower priority, and the DOD because one of the main reasons for undertaking the crash program is to protect our National security, so that i t may not be unreasonable to expect the national security budget to share i n the cost of this undertaking. Apropos of this national security theme we would note the overwhelming (39-1) passage i n early May by the f u l l House Banking Committee of H.R. 3930. This b i l l would authorize the President to let contracts for the construction or modification of plants to make synthetic fuels or feedstocks for the armed forces, or for the purchase of such products, up to a l i m i t of 500,000 barrels/day of oil equivalent, a l i m i t set i n relation to our total m i l i t a r y fuel requirements. THE PROBLEM Our analysis of domestic supply trends has led us to expect a continued decline of domestic oil and gas output, which would worsen the major concerns we already have regarding dependence on oil imports: The dollar drain, w i t h its damaging effects on our international financial position and resultant exportation of employment, The vulnerability of major parts of our society to disruptions arising from arbitrary actions by petroleum exporters, The constraints on our international actions which might be applied by countries upon which we are dependent for oil imports. We would note, however, that there is widespread public doubt about the reality of the current energy problem, and even greater skepticism, i n the public and Congress, about the frequent statements pointing to a more severe global crisis arising from the peaking-out and decline of world oil output projected to begin i n the 1985 to 1995 time window. Therefore, this plan, or any other large-scale program to improve U.S. fuel supplies i n the next five to ten years, w i l l have a very difficult time obtaining approval, even i f i t were to have wide agreement and support from the energy policy community. T H E N E E D FOR A CRASH PROGRAM I n our analysis of the Administration's 1977 energy plan, we projected that U.S. oil imports would continue to increase to a level of 12 or 13 m i l l i o n barrels per day i n 1985. I f i t is agreed that such a future level of imports is intolerable, (and, for that matter, that the present level of about 8 million barrels per day is also unacceptable dangerous) then i t is correct that major actions are called for. However, we question the approach of this plan, which relies entirely upon stimulation of supplies of substitute fuels. We t h i n k that a program which included incentives to 50 deployment of solar and conservation technologies, as w e l l as synthetic l i q u i d fuels, could l i k e l y produce the same i m p o r t reduction at least overall cost. Furthermore, we have serious doubts about the feasibility of the plan. We w i l l address this issue first, t h e n t u r n to a discussion of a more balanced program a n d its financing. There are three issues w h i c h must be clarified to put the p l a n i n proper perspective. These are: Physical and technological limitations, w h i c h we believe w i l l constrain such a n approach to substantially smaller levels t h a n the 5 m i l l i o n barrels per day by 1985 w h i c h i t speaks of Cost estimates, w h i c h are substantially higher t h a n those mentioned i n the p l a n Problems w h i c h would have to be resolved, and social and e n v i r o n m e n t a l impacts w h i c h would have to be accepted, to accomplish even a major p a r t of the plan. PHYSICAL LIMITATIONS Feedstocks and infrastructure The authors' plan treats the processing plants w h i c h w o u l d be needed to make substitute fuels, but does not take i n t o account the task of e x t r a c t i n g a n d m o v i n g massive amounts of m a t e r i a l for these processes. T a k i n g a favorable example, i t would require about 840 m i l l i o n tons of coal per year to provide feedstock for plants to produce 5 m i l l i o n barrels per day of o i l equivalent i n synthetic fuels. O i l shale and t a r sands have only a fraction of the energy content of coal on a weight basis, so the feed requirements for such plants would be several times greater t h a n for those fueled w i t h coal. For a comparison, the U.S. coal industry is now extracting about 700 m i l l i o n tons per year, and so would have to more t h a n double i n six years to meet t h i s demand. Y e t a just-released O T A estimate is t h a t our coal industry i n the year 2000 is l i k e l y to reach a capacity of between 1,500 and 2,100 m i l l i o n tons, i.e., only doubling or t r i p l i n g i n two decades. We are not prepared now to make a firm estimate of the feed-handling capacity t h a t could be attained by 1985, b u t we feel t h a t the availabili t y of m i n i n g and h a n d l i n g equipment and skilled workers w o u l d set l i m i t s significantly below the levels required for the authors' plan. A n d i t w o u l d be l i t t l e value to have processing plants available w i t h o u t sources of feedstock. Water availability Another physical l i m i t , l i k e l y to constrain a synfuels p r o g r a m to a magnitude smaller t h a n t h a t mentioned i n the authors' plan, is t h a t most of the proposed synfuel technologies require substantial amounts of process water, yet they w o u l d take place i n the water-short semi-arid Western states. I t is t r u e t h a t o i l shale located i n the Southeastern or Midwestern states w o u l d not encounter t h i s l i m i t , but i t is our understanding t h a t the reason for the focus on Rocky M o u n t a i n shale i n previous studies is t h a t i t has a higher energy content t h a n other shales, and so would involve smaller volumes of m a t e r i a l to be processed. We have already noted t h a t even the best grades of shale have substantially lower energy content t h a n coal. Readiness of technology The plan would, i t is argued, be based on today's technology. We are not as optimistic about the c u r r e n t state of technology as the authors. For example, we have been t o l d t h a t synthetic crude o i l made f r o m coal or shale could not be processed i n existing refineries, and t h a t r e f i n e r y modification to accomodate those feedstocks is not a m a t t e r of using off-the-shelf technology as, for instance, can be done to modify current refineries for greater outputs of unleaded gasoline. Rather, an extensive R & D program w o u l d be needed before shale o i l feedstocks could be used, and syncrude f r o m coal is l i k e l y to be incompatible w i t h c u r r e n t refineries because of the profoundly different proportions of hydrogen and carbon i n coal, as contrasted to petroleum. The SASOL process, now i n use and beginning expansion i n South A f r i c a , as we understand i t , does not feed its product to regular refineries, b u t makes a gasoline substitute directly. However, the existing p l a n has a n o u t p u t of only about 6,000 barrels per day and the cost for its product, w h i l e not w e l l known, is estimated i n the range of $30 per b a r r e l or more. W i t h regard to substitute fuels f r o m biomass w h i c h w o u l d not compete for l a n d w i t h food crops, there are some promising alternatives w o r t h exploring. These include plants w h i c h have a hydrocarbon sap t h a t could be extracted a n d possibly processed to yield l i q u i d fuel, and w h i c h can grow on semi-arid l a n d not now used for food crops. However, extensive research w o r k w o u l d be required t o breed new varieties of these plants w i t h a yield h i g h enough to make such a process give useful 51 quantities of fuel. Thus, such a potential resource can be seen as a w o r t h w h i l e research gamble, as suggested by Resources of the Future's President, Charles H i t c h , not as a technology w h i c h is anywhere near readiness for deployment. Synthetic fuel technologies w h i c h do seem ready for major deployment are prim a r i l y ones for m a k i n g gaseous, not l i q u i d fuels. These include a h i g h B T U substit u t e for pipeline q u a l i t y n a t u r a l gas, or a m e d i u m B T U gas w h i c h could be used as a boiler fuel and for some i n d u s t r i a l uses, both made f r o m coal. The l i q u i d fuel sources f r o m coal and shale have been discussed above. W h i l e alcohol production f r o m crops is an available technology, i t would be l i m i t e d by the competition w i t h food requirements and has also been challenged as r e q u i r i n g more fuel to cultivate the crops, using existing f a r m i n g technology, t h a n could be obtained f r o m them. We would note, however, t h a t alcohol f r o m crops could be used to enhance the octane ratings of gasoline, where its value would be greater t h a n its energy content. I n addition to the question of whether these technologies are actually ready for deployment, we would question the technical feasibility of b u i l d i n g such plants w i t h i n the t i m e called for i n the authors' plan. T a k i n g a plant size chosen i n a recent survey of cost estimates, one producing fuel w i t h an energy content of 250 b i l l i o n BTUs per day, or the equivalent of 43,100 barrels of oil per day, the production of five m i l l i o n barrels per day of fuel would require 116 plants. Whether b u i l t as large single units or i n smaller modules, the manufacture of major components such as pressure vessels for these plants would severely s t r a i n the capacity of U.S. equipment manufacturers, and could encounter the k i n d of backlogs t h a t forced the Canadian t a r sands p l a n t to have to order its pressure vessel f r o m Europe, and s t i l l w a i t several years to obtain it. I f these components were to be obtained by assigning w a r t i m e first p r i o r i t y to t h e i r manufacture, we would have to ask w h a t other projects would be delayed to allow the fuel plants to be rushed to completion. COST ESTIMATES The plan makes a rough estimate of $50 b i l l i o n for capital costs for a program to deliver 5 m i l l i o n barrels per day of substitute fuels. O t h e r cost e s t i m a t e s A comparison has j u s t been published 1 of the various estimates w h i c h have been made recently for the capital cost of plants to produce alternate fuels. I n this comparison, i t is noted t h a t some of the cost estimates may be low because they may exclude certain components of capital cost, such as land costs, interest d u r i n g construction, and t r e a t i n g of products, also t h a t older estimates are lower t h a n current ones even after adjustment for w h a t we assume is inflation. W i t h these caveats noted, however, we can compute the average costs estimated for different types of plants as shown i n Table 1. TABLE 1 Estimated cost for Type of Product Heavy fuel or syncrude Medium and low BTU gas Gasoline or light fuel liquids High BTU gas Average 1 Single plant [millions] 116 Plants 2 [billions] $557 587 913 975 $64.5 68.1 106 113 758 87.9 1 Output of 250 billion BTU per day, equivalent to 43,100 barrels per day of oil ( b / d ) . Number of plants to produce 5 million b/d. Source: Survey of publications between 1973 and 1978 summarized in OH and Gas Journal, Apr. 1 6 , 1 9 7 9 , page 91. 2 The overall cost for a 5 m i l l i o n b a r r e l / d a y program, t a k i n g an average of the four types of plants considered, is $88 billion. Our experience i n viewing cost estimates for new types of facilities leads us to regard this as a lower l i m i t . There is a long and distinguished record showing t h a t first ventures i n t o a l l sorts of large new engineering projects end up costing sub1 Oil and Gas Journal, Apr. 16, 1979, page 91. 52 stantially more t h a n is estimated at s t a r t i n g time, (and also t a k i n g longer t h a n anticipated to complete). Costs i n a d d i t i o n to processing plants The plan does not include cost estimates for facilities t h a t w o u l d be required i n addition to the processing plants. Leading among these, i n our view, w o u l d be the extraction operations, either coal, shale or t a r sand mines, or farms. We have noted t h a t the plan w o u l d require extracting about 840 m i l l i o n tons per year of coal, or several times larger amounts of shale or t a r sand. E s t i m a t i n g t h e capital costs for setting up operations of this scale can be done f a i r l y accurately for coal. As of 1975, investment requirements for 5 m i l l i o n tons a year of coal capacity were estimated at $42.3 m i l l i o n for an underground mine, and $36.7 m i l l i o n for a surface mine, i n one study w h i c h we reviewed. More recent w o r k , cited by O T A i n a newly released report, gives estimates several times higher, b u t includes some cleaning operations t h a t would not be needed for synfuel operations. U s i n g the more conservative number and i n f l a t i n g to 1979 dollars, we get an estimate of $50.9 m i l l i o n for five m i l l i o n tons per year, or $8.6 b i l l i o n for the entire program. Capital costs for establishing m u c h larger extraction industries for shale or t a r sands are l i k e l y to be greater. Combining the estimate for average processing plant capital cost w i t h the estimates for coal mine capital cost leads us to a l o w e r l i m i t cost estimate for the 5 m i l l i o n b a r r e l per day program of about $96.5 billion, approximately twice t h a t mentioned i n the plan. PROBLEMS A N D IMPACTS Public acceptability We have already noted the problem w h i c h w o u l d come f i r s t i n a t t e m p t i n g to carry out such a plan—the doubt by m a n y t h a t i t is necessary. I n a b r i e f i n g we gave recently to the senior energy staff member for a leading Senator, we were told t h a t they f u l l y expect w o r l d o i l supply to continue to increase w e l l beyond the l i m i t s c u r r e n t l y being discussed. I t is t h e i r view t h a t U.S. f i n a n c i a l participation i n oil and gas exploration and development i n non-OPEC countries could provide us secure imports d u r i n g and beyond the five to t e n year span at w h i c h the plan is aimed. Reasoned views of this k i n d , no m a t t e r w h e t h e r they have wide political support or only a few i n f l u e n t i a l backers, w h e n combined w i t h wide distrust of the energy industries, p a r t i c u l a r l y of the o i l companies and u t i l i t i e s a n d t h e i r related construction firms, combine to make such plans extremely d i f f i c u l t to launch. We are reminded here of the response to the late Vice President Rockefeller's $100 b i l l i o n "Enerjpr Independence A u t h o r i t y " proposal, w h i c h d i d not reach the point of serious consideration i n the Congress. Environmental regulations There is major opposition to most energy supply projects f r o m local interests w h i c h would be harmed by t h e m and by both local and n a t i o n a l e n v i r o n m e n t a l i s t groups. Recent set-asides of A l a s k a n lands for nondevelopment uses such as wilderness and w i l d l i f e preserves, regarded as a victory by e n v i r o n m e n t a l groups, m a y conflict w i t h the f u t u r e expansion of A l a s k a n o i l and gas output. Coal development and use have to meet more stringent standards for land reclamation f r o m m i n i n g and a i r q u a l i t y degradation f r o m b u r n i n g t h a n prevailed before the 1970s. These and s i m i l a r standards are certain to present problems and delays to a n accelerated development approach such as t h a t proposed i n the plan. A c t u a l operation of the plants and t h e i r associated extraction industries w i l l have e n v i r o n m e n t a l impacts which, i n most cases, could be quite substantial at this time. The Assistant Secretary for E n v i r o n m e n t of the Department of Energy has j u s t released a report, " E n v i r o n m e n t a l Readiness of Emerging Energy Technologies," w h i c h summarizes her Office's assessments of 24 technologies, grouping t h e m i n t o three classes w i t h increasing probability, at t h i s time, of adverse e n v i r o n m e n t a l impacts. Of the technologies under discussion i n the plan three, coal liquefaction and gasification and i n situ o i l shale recovery, are classed as h a v i n g r e l a t i v e l y h i g h probability of adverse e n v i r o n m e n t a l impacts, and two others, fuels f r o m biomass and surface r e t o r t i n g of o i l shale, are classed as h a v i n g low-to-medium probability of serious d e t r i m e n t a l environmental impacts. None of the substitute fuel technologies are placed i n the report's least problematic class, w h i c h is characterized as l i k e l y to produce net environmental benefits w h e n substituted for older technologies. The i m p l i c a t i o n w h i c h we see i n this classification is t h a t a crash program launched immediately, to b r i n g 5 m i l l i o n barrels per day of capacity i n t o operation, offers a good chance to realize the prediction made i n f o r m a l l y by an energy analyst f r o m 53 one futures research organization, t h a t "Sooner or later we w i l l have to sacrifice a few counties of the Rocky Mountains for energy." A d d i t i o n a l problems of a n i n s t i t u t i o n a l rather t h a n environmental n a t u r e would include the socio-economic issues raised by accelerated g r o w t h of energy "boom towns", and competitive struggles typified by the battle between railroads and coal s l u r r y pipeline developers over pipelines seeking routes crossing railroad rights-ofway. DISCUSSION We have explained w h y we doubt t h a t this plan could meet its target, and given a rough sense of w h a t we t h i n k its costs and impacts w o u l d be, i n addition to the reasons w h y i t would be u n l i k e l y to get the support necessary to launch it. This has not been meant, however, as an expression of opposition i n principle. A more realistic target, of possibly one or two m i l l i o n barrels of o i l per day, could more l i k e l y be achievable and should certainly m e r i t serious consideration. A balanced program However, we do regard the plan as unbalanced, i n the same way t h a t we viewed the 1976 synfuels commercialization program. A crash program i n v o l v i n g major governmental support for deployment of technically ready renewable resource and conservation (in the sense of increased efficiency) technologies, as w e l l as the substit u t e l i q u i d fuel supply technologies, would appear to be a more balanced approach. The dismissal of conservation measures outlined i n the President's A p r i l 5, 1979, program, w h i c h was a short list t h a t most conservation and solar advocates fround seriously wanting. The plan would have the government support the deployment of substitute fuel supply technologies w h i c h w i l l yield product more expensive t h a n present w o r l d o i l prices, and even subsidize the difference between t h e i r cost and f u t u r e w o r l d oil prices. On the same basis, surely the government should also consider subsidizing the deployment of conservation and solar technologies, at least to the extent t h a t they can displace, and thereby reduce imports of, h i g h grade fuels at costs equal to the f u t u r e w o r l d price of oil. We would add here t h a t , i n contrast to the supply technologies, m a n y efficiencyi m p r o v i n g conservation initiatives and solar technologies are classed, by the DOE E n v i r o n m e n t a l Readiness report, as l i k e l y to result i n net e n v i r o n m e n t a l benefits, and most of the others are classed as having only low-to-medium probability of serious d e t r i m e n t a l environmental impacts. Also, m a n y of the conservation and solar initiatives would come i n relatively small scale units and be widely distributed, w h i c h would involve m a n y more of our citizens i n the psychological l i f t of "doing something" w h i c h is cited as a desirable result of the plan. I n our view, this wide participation could also contribute i m p o r t a n t l y to a l l a y i n g the popular distrust of major energy companies and t h e i r apparent dominant role i n most of our energy system. Financing the p r o g r a m The plan notes t h a t the proposed w i n d f a l l p r o f i t tax accompanying o i l price deregulation could logically be recycled to finance the government's costs i n a substitute fuel supply program. The same can, of course, be said for financing a conservation and solar subsidy program. A d d i t i o n a l financing could come f r o m direct t a x a t i o n of c u r r e n t energy use, based on the concept t h a t present energy users should contribute to guaranteeing the r e l i a b i l i t y of t h e i r f u t u r e supplies. This is the logic behind the extremely h i g h taxes on motor fuels i n most other developed countries, w h i c h make gasoline prices there on the order of $2 per gallon, double the $1 per gallong toward w h i c h our gasoline prices are only now rising. Parts of the Department of Energy budget are now devoted to systematic research and development work, and some demonstration projects, on the technologies discussed i n this program. I f accelerated deployment efforts were to be undertaken, the R, D and D spending w o u l d probably appropriately be diverted to provide a share of the Government's f u n d i n g of the program. A n o t h e r major f u n d i n g source w h i c h we believe merits consideration w o u l d be reprogramming of a significant fraction of our national security budget. We suggest t h a t this approach should be taken j u s t as seriously as we take the contention t h a t our present and anticipated oil i m p o r t dependence represents a risk to our security. 54 U . S . SENATE, COMMITTEE ON B A N K I N G , HOUSING, AND U R B A N AFFAIRS, W a s h i n g t o n , B . C . , J u l y 11, 1 9 7 9 . M r . P A U L R. IGNATIUS President, A i r Transport Association Washington, D.C. DEAR MR. IGNATIUS: T h a n k you for your appearance at the recent Economic Stabilization Subcommittee hearings on synthetic fuels production. The discussion was most interesting, and I believe t h a t a useful record was developed. Enclosed is a list of several additional questions to be included i n the record of these hearings. I would appreciate i t i f y o u could provide w r i t t e n answers to these questions no later t h a n J u l y 25. Again, t h a n k you for your very interesting testimony. Sincerely, W I L L I A M PROXMIRE, Chairman. Enclosure. H E A R I N G ON SYNTHETIC F U E L PRODUCTION A D D I T I O N A L QUESTIONS FOR T H E RECORD 1. Y o u r proposal contemplates the possibility t h a t a U.S. synfuel p r o g r a m could moderate OPEC price increases or actually lead to a price reduction. Given the enormous leadtime before synfuel production rates w o u l d be significant, t h e compart i v e l y m i n o r contribution even a f u l l y developed synfuels i n d u s t r y w o u l d m a k e t o U.S. energy needs, and the likelihood t h a t synfuels production w o u l d c a r r y a higher cost t h a n oil imports, isn't i t as l i k e l y t h a t OPEC w o u l d raise t h e i r prices to the synfuel price level? 2. Given t h a t a significant a m o u n t of the u n c o m m i t t e d coal resources, a l l of the h i g h - B T U oil shale, and most of the U.S. t a r sands are located i n the a r i d portions of the West, how practical is i t to p l a n for significant synfuel development given t h e c u r r e n t lack of an i n d u s t r i a l i n f r a s t r u c t u r e (roadways, railroads, workforce, etc.), and the l i m i t e d water resources? Do you contemplate t h a t state a n d local governments w i l l have a say i n synfuel p l a n t development a n d s i t i n g decisions? 3. I n l i g h t of the fact t h a t synthetic fuels production w i l l be m i n i m a l over t h e short t e r m regardless of the resources devoted to synfuel development, could y o u discuss the desirability of a crash program as compared to a more deliberate commercialization strategy. I n this answer, please consider any relevant factors, including the following: A b i l i t y of construction, m i n i n g , and r a i l r o a d industries to accommodate simultaneous development of numerous synfuels plants and associated facilities; Effect on economy of the diversion of manpower and supplies required for construction of plants and associated facilities; Increased costs due to lack of " l e a r n i n g c u r v e " on p l a n t construction a n d operati n g techniques. 4. Please provide for the record the background m a t e r i a l on y o u r proposal discussed on page 85 of the hearings transcript. WASHINGTON, D . C . , J u l y 2 k , 1979. H o n . W I L L I A M PROXMIRE, C h a i r m a n , E c o n o m i c S t a b i l i z a t i o n S u b c o m m i t t e e , C o m m i t t e e on B a n k i n g , H o u s i n g , a n d U r b a n A f f a i r s U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: I n your letter to me of J u l y 11, 1979, you listed several additional questions to w h i c h you w o u l d l i k e to have responses to be included i n the record of your hearings on synthetic fuels production. I a m enclosing responses to y o u r questions on behalf of m y associates, L l o y d N . Cutler and Eugene M . Zuckert, and myself. For reference purposes, I a m also enclosing your list of the additional questions. We very m u c h appreciate the o p p o r t u n i t y to testify before the Economic Stabilizat i o n Subcommittee, and hope t h a t our testimony as w e l l as the enclosed a d d i t i o n a l responses w i l l be h e l p f u l to you and the other committee members i n y o u r deliberations on this i m p o r t a n t matter. Sincerely, P A U L R. IGNATIUS. Attachments—2. 55 H E A R I N G ON SYNTHETIC F U E L PRODUCTION RESPONSES TO A D D I T I O N A L QUESTIONS FOR T H E RECORD Q u e s t i o n 1. W o r l d o i l prices w i l l r e m a i n sensitive to the supply-demand ratio. As we saw after I r a n , a 5 percent drop i n supply (from a previous supply-demand balance) has resulted i n price increases of 50 percent. The synfuel program would increase w o r l d supply by 1.6 percent for each m i l l i o n barrels per pay of synfuel. This is bound to have a dampening effect on w h a t w o r l d prices would otherwise be. As for the h i g h cost of synfuel, even i f i t t u r n s out above the w o r l d price at the time, the difference between cost and w o r l d price could be covered by a subsidy, so t h a t OPEC would have no room to raise w o r l d prices to synfuel's cost. This would be far cheaper t h a n paying a higher price on a l l 60 m i l l i o n B P D of current w o r l d output. Bernard D. Nossiter's W a s h i n g t o n Post article of J u l y 22, 1979, explaining w h y a synfuels program provides leverage against ever-increasing OPEC oil prices, is attached for information. Q u e s t i o n 2. O n l y a p a r t of a synfuel program would rely on western shale and coal. There are large coal deposits and significant shale deposits i n Appalachia and the M i d d l e West, where water is p l e n t i f u l and the infrastructure is already i n place. State and local governments would, of course, have a f u l l say i n siting and licensing decisions, b u t some bottleneck-breaking mechanism at a l l levels of government would be required. The President's program and the Jackson and Domenici bills include such a mechanism. Q u e s t i o n 3. The reasons w h y we should not w a i t for n o r m a l commercialization are twofold: (a) Since the lead times are so long, i f we did w a i t u n t i l the commercial m a r k e t attracted such projects, we w o u l d lose another 5 to 10 years before the new product i o n would be available. (b) Unless a bottleneck-breaking mechanism is i n place, the commercial v i a b i l i t y of any project w i l l be threatened by the t i m e delays needed to obtain the required permits and licenses and defend t h e m i n litigation. Only the Government can resolve these problems, j u s t as i t d i d i n W o r l d W a r I I and i n the Korean War. As for the coal m i n i n g transport and learning curve problems, these w i l l exist whenever the program is launched and whether the i n i t i a t i v e is t a k e n first by government or by private i n d u s t r y or by a j o i n t venture of the two. The sooner we tackle them, the sooner they are l i k e l y to be solved. Question 4I n response to your questions about costs of the synthetic fuels program, we did not make detailed cost estimates nor have t h e m prepared for us. Our own estimate of $25 to $40 a barrel was based upon the range of published estimates supplemented by confirmation f r o m sources we believe reliable. For example, i n connection w i t h one of the early drafts of our program, we consulted Dr. J o h n S. Foster, Jr., f o r m e r l y Director of Defense Research and Engineering, now of TRW, Inc. and i n charge of t h e i r energy programs. As a result of our conversations w i t h D r . Foster, we felt satisfied w i t h our estimates of capital cost and cost per barrel. As a m a t t e r of interest, Dr. Foster later publicly proposed a 7.5 m i l l i o n b a r r e l per day program by the year 2000 i n w h i c h he used cost estimates at the low range or below ours. I n addition, we consulted D r . H e r m a n Gamson, a chemical engineer w i t h extensive petroleum experience, now Vice President of M a r t i n M a r i e t t a A l u m i n u m . Dr. Gamson confirmed our range of cost figures. We have had substantially s i m i l a r estimates f r o m ' D r . Chalmer K i r k b r i d e , a chemical engineer w i t h vast i n d u s t r i a l and teaching experience; Dr. K i r k b r i d e served as technical adviser to Dr. Robert C. Seamans, J r . when the l a t t e r was head of the Energy Research and Development Agency (ERDA). Dr. K i r k b r i d e has testified before the House Education and Labor Committee on the subject of a synthetic fuel program. The wide range of costs we suggested ($25 to $40 a barrel) was chosen i n the interest of conservatism and our recognition of the fact there are technological uncertainties i n developing plants of commercial scale. We believe t h a t the South A f r i c a n experience gives reassurance t h a t the costs are w i t h i n a reasonable range i n relation to the price of imported fuel. Y o u w i l l recall t h a t the South Africans b u i l t t h e i r first SASOL p l a n t i n 1955. I n 1975 they decided to b u i l d an addition to the plant, doubling t h e i r capacity. I n 1979 they contracted for two additional units 56 which i n 1982 w i l l give them a capacity of about 130,000 barrels a day, an impressive investment for a country w i t h a population 12% of ours. There is an important incidental attribute of the SASOL plants. According to the U.S. engineers who are constructing the plants and U.S. observers who have visited the plants, greatest care has been taken to achieve environmental acceptability t h a t would meet U.S. standards. Returning to the subject of our cost estimates, we believe i t is not material that our projected costs do not seem competitive w i t h the present posted price of oil. We believe that a synthetic fuel program must be undertaken as an insurance against oil price increases or interruption of supply. As far as price is concerned, the posted price is often mythical: there are reports of recent purchases i n the spot market at $40 a barrel which gives credence to M r . Zuckert's statement at the hearing t h a t there could be a $50 per barrel price i n 1990. Additionally, as M r . Rohatyn testified, the present and projected balance of trade drains resulting from imported oil constitute a real threat to the solvency of our nation and its financial institutions. Under these circumstances, competitive disadvantage for synthetic fuels, i f one does exist i n 1990, is warranted as an insurance premium against perils of important magnitude. [From the Washington Post, July 22, 1979] THE NEW SYNFUEL OFFENSIVE C A N W I N CARTER'S E N E R G Y WAR (By Bernard D. Nossiter) In the swirl of controversy surrounding President Carter's new energy plan, Bernard Nossiter, an experienced economics reporter, argues that Carter's crash program promises fundamental leverage for the United States against a future of ever-rising OPEC prices. A good rule of thumb i n judging economic policy holds that when the corporate heirs and assigns of John D. Rockefeller oppose any position, i t is likely to benefit the public interest. So for the uninstructed, a useful gauge of President Carter's oil program is the response of the great oil companies. Happily, their message is as clear and concerted as their pricing and output policies. A t the biggest of the big, chairman Clifton C. Garvin of Exxon (nee Jersey Standard) deplored "unjustified attacks" on his concern and its fellows. By no mean coincidence, chairman John E. Swearingen of Indiana Standard complained of " M r . Carter's continued berating of the oil companies." Public relations men no doubt dissuaded them from a more frontal assault. The better instructed w i l l have observed that the new program—for a l l the obscurity i n its presentation—appears to m a r k a serious and important shift i n the president's approach. His emphasis has now turned smartly f r o m curbing demand— t u r n i n g off lights, t u r n i n g down air conditioners and the like—to expanding supply outside the reach of the OPEC cartel and its oil comnpany agents. This t u r n to noncartelized supply—to the capture of the vast amounts of oil i n shale rock, tar sands, heavy oil and other superabundant resources—represents a measure of economic and political wisdom that has been remarkably absent heretofore. Not for the first time, most of the press missed the point and seized on the proposed barriers to imported crude as the centerpiece of Carter's plan. I n fact, this is a tired piece of sociological lag. The industry persuaded Eisenhower to do this sort of t h i n g more than 20 years ago i n the name of national defense. The quotas, of course, simply protected and raised the price of domestic oil, much like those now i n force for textiles and as other politically persuasive industries do. By themselves, oil quotas w i l l simply encourage Arab nations w i t h few people and much oil to reduce further their own production, confident that the value of oil can enjoy only a one-way ride—up. When an oil " g l u t " threatened to crack the OPEC price i n 1977-78, i t was Saudi Arabia and its neighbors t h a t painlessly cut back output to shore up price. I t was this slash and not the fortuitous events i n I r a n t h a t triggered the latest round of increases and the attendant gas lines. The heart of the problem, then, is how to encourage the Saudis, their neighbors, and the collaborating companies who receive the bulk of the output to believe t h a t oil under the sand is not foreordained to rise forever, that i t might be worthwhile to bring i t up sooner rather than later. 57 W H I L E T H E G E T T I N G IS GOOD The answer, buried i n Carter's l a u n d r y list, is to convince t h e m t h a t a serious program has been launched to enlarge supply outside t h e i r j o i n t control. Carter's scheme—giving $88 b i l l i o n to a government Energy Corporation to tap t h e vast shale and t a r sands resources—appears to f i t the prescription. Even i n an age of i n f l a t i o n , $88 b i l l i o n over 10 years is not a t r i f l i n g sum. Sheik Y a m a n i , who after all, went to the H a r v a r d Business School and so can t a l k on equal terms w i t h C h a i r m a n G a r v i n and the other three companies i n the menage a quatre enjoying Saudi oil w i l l get the point. They must now consider t h a t a program of this magnitude outside t h e i r reach—if i t is seriously pursued—will not only produce more o i l b u t at prices below the level they hope to see i t rise to. (Nobody really knows the costs of these projects because they have not yet been attempted on a big enough scale by disinterested parties. The fact t h a t the potential cost of shale oil is always quoted at a few dollars a b a r r e l above the existing price of crude—regardless of where t h a t price lies—is ground for suspicion at least.) The t h r e a t of even a relatively modest amount of new, non-cartelized o i l w i l l spur thought i n Riyadh and Rockefeller Plaza. As everybody knows, demand for o i l is price-inelastic over a wide range. T h a t is, the price can rise five times b u t demand w i l l barely fall. The comforting feature i n this is t h a t inelasticity works two ways: A small increase i n supply can force a substantial cut i n price. I t was j u s t this t h a t worried OPEC i n 1977, and so the nations not i n need of huge cash returns f r o m oil adjusted supply accordingly—downward. The deliberations of Y a m a n i and Aramco, the corporate name for the menage, could alter t h e i r valuation, of oil i n the ground. Years before a b a r r e l of shale is extracted, production and even price policies of OPEC m i g h t change drastically. Fears of an increased, uncontrolled supply f r o m resources t h a t d w a r f even the fabled crude of A r a b y could t u r n the price curve down and the supply curve up. The boys m i g h t decide i t is better to get i t w h i l e the getting is good. To be sure, m u c h could happen before the Carter program is realized. The oil companies do not lack for friends on Capitol H i l l , as the weakened w i n d f a l l profits b i l l demonstrates. The Energy Security Corporation could w e l l become t h e i r creature, an Energy Department instead of a T V A . The companies, especially Indiana Standard, have already demonstrated t h e i r conspicuous lack of success i n extracti n g shale oil. They have l i t t l e or no interest i n expanding supply outside t h e i r reach. Indeed, they own some portion of non-traditional o i l sources, and have been pecul i a r l y unsuccessful i n exploiting them. There is no special magic i n e n t r u s t i n g a government w i t h the exploitation of oil. The Norwegians do i t well, the B r i t i s h less so and the Mexicans very w e l l i n d e e d surviving an attempt by the great companies to t h r o t t l e t h e m i n the '30s by nationalizing t h e i r fields. B u t at least to begin w i t h , the Energy Security Corporat i o n w i l l not have a vested interest i n failure, and t h a t is something. I t must be watched closely, however, lest—like the Mexicans, Norwegians and B r i t i s h — i t develops an oil company m e n t a l i t y over t i m e and comes to believe t h a t the best price is a higher price. Despite these caveats, i t is clear t h a t a n i m p o r t a n t t u r n i n t h i n k i n g has been made i n the W h i t e House. The economics of scarcity is m a k i n g room for the economics of abundance, at least i n speeches. This is an event t h a t only shareholders i n the great companies need regret. U . S . SENATE, COMMITTEE ON B A N K I N G , HOUSING, AND U R B A N AFFAIRS, W a s h i n g t o n , D C . , J u l y 11, 1979. M r . FELIX G. ROHATYN, S e n i o r P a r t n e r , L a z a r d F r e r e s & Co., N e w York, N.Y. DEAR M R . ROHATYN: T h a n k you for your appearance at the recent Economic Stabilization Subcommittee hearings on synthetic fuels production. The discussion was most interesting, and I believe t h a t a useful record was developed. Enclosed is a list of several additional questions to be included i n the record of these hearings. I would appreciate i t i f you could provide w r i t t e n answers to these questions no later t h a n J u l y 25. Again, t h a n k you for your very interesting testimony. Sincerely, W I L L I A M PROXMIRE, Chairman. 58 Enclosure. H E A R I N G ON SYNTHETIC F U E L PRODUCTION A D D I T I O N A L QUESTIONS FOR T H E RECORD 1. I n your statement, you stress how the cost of your program to Americans and the effect on the domestic capital markets could be minimized by marketing bonds to foreign governments. However, you neglect to point out t h a t this financial device would also involve costs. Would the 1.5 m i l l i o n barrel per day production not be reduced by an amount equal to the percentage of bonds owned by foreign governments? Would the foreign owners be permitted to participate i n policymaking? Would they be expected to participate i n any necessary production subsidies over and above the i n i t i a l investment? What benefit would there be to the U.S. i n creation of up to 750,000 barrels per day i n synfuel capacity, w i t h the accompanying environmental consequences, i f this production were to be diverted overseas? 2. You propose a program i n which the government builds synthetic fuels plants and then sells these plants to private contractors. I f the cost of producing synthetic fuels remains above the price of OPEC oil, how would this program work? Would the plants be sold below cost? A n d would the government have to pay price subsidies to guarantee production? (If yes, how would the government finance these subsidies? I f no, why would private contractors purchase and operate these plants.). 3. You suggest that $55 billion i n capital could fund $100 billion i n construction over 10 years through the sale of the first-generation plants and the reinvestment of the receipts. Given the number of years needed to bring a synthetic fuels plant on line, is 10 years a realistic time frame to design, build, test, operate, and sell the first-generation plants and also obligate funds for a second generation? 4. Isn't i t possible t h a t Federal government subsidies to the synthetic fuels indust r y would encourage OPEC to raise their price since such subsidies demonstrate a willingness to pay more for oil? 5. Would your proposed program provide any meaningful protection against OPEC actions, since, at today's rate of oil consumption, i t would only provide 3i75 percent to 7.5 percent of our needs (depending on the percentage diverted to other partners)? Is i t not likely that this program, like the N o r t h Slope production i n Alaska, would simply compensate for the depletion of other domestic sources and leave our dependence on imported oil unchanged? 6. You l i m i t inroads into capital markets to $10 billion. But this is only one of many energy alternatives all of which would take enormous capital investment. Should we, i n essence, be putting all our energy eggs i n the synfuel basket? Or otherwise, are we really talking about a far larger market burden from energy financing? 7. You state that a government-owned synfuels corporation would be more "visibly accountable" than a government agency. I n what way would this be true? W h a t models of U.S. government-owned corporations do you rely on as examples of efficiency and accountability? o
