Mr. DIGGS. Finally, Mr. Robinson, as you know, back in July, there were a lot of statements being made about use of military force if necessary to seize oilfields. Further interpretations or refinements of that statement ended up by saying that such alternatives are not being ruled out, but that refinement of diplomatic language didn't settle the uneasiness in many quarters. And I wondered if you would care to comment on the implications of that kind of remark? Mr. ROBINSON. Obviously, I am not qualified to comment on what are strictly strategic or political aspects of our relationship with the OPEC countries, other than to say that it has been explained that that was a hypothetical answer to a hypothetical question. If survival was at stake, what steps might we take? I think that it is clear that the implication has been clearly established throughout the OPEC world that this is not a completely unthinkable idea. I am sure that this has been weighed into their considerations as to future strategy. I would be hopeful that further consideration of this idea mightor that the idea itself might-disappear as anything that has any real meaning in the light of the current circumstances, because it was never intended to imply that. Mr. DIGGS. The gentleman from New York, Mr. Solarz. Mr. SOLARZ. Thank you, Mr. Chairman. I am sorry I had to leave a little bit earlier, but we were in the process of some votes on the budget resolutions. And I have a feeling we may have a few more coming up in the next few minutes as well. But in the interlude between votes, which are coming in rapid profusion, I did have a couple of questions I would like to ask. First of all, I wonder if you could let us know-and I hope you will forgive me if the question was asked in my absence-what the basis is for the assumption which has been made by the administration that there is in fact a realistic possibility of bringing about a reduction in the price of oil? I gather that our policy to a very large extent is directed toward the achievement of that objective, and for my own part, I have some real reservations about the extent to which that is at all realistically achievable. So, I wonder if you could give us the basis for this assumption? Mr. ROBINSON. The question of the reduction, of course, relates to base Mr. SOLARZ. Relates to? Mr. ROBINSON. To the base-from what are we reducing, what base. The OPEC nations now take a position that we have had a substantial reduction in the price of oil over the past several months since there has been a stabilized price of oil at a time when the value of the dollar was declining, that, in terms of purchasing power, they have had a significant reduction in their income from their oil sales. From our standpoint, we obviously would prefer to see an actual reduction in that price, and we feel that if the price was set by free market forces today there clearly would be a significant reduction in the price level. We have a production capacity within the OPEC nations today of about 38 million barrels of oil a day. They are now exporting at something in the range of 25 to 26 million barrels a day. So, we have certainly 12 million barrels a day of excess capacity. That condition for any other industry with competition and where price is set by the market would have resulted in a very substantial decrease in price. Now, the fact that the OPEC nations have agreed to reduce their production to hold that price is obviously the result of a political and economic decision on their side. But it represents what we view as collusion and cartelization. There are two ways in which price might be brought down, actually brought down. One is if there is a break in the solidarity of OPEC. I think it would be a mistake to assume that we are going to see that in the near future, but that is a possibility. And certainly, if there is a further decline in production-and the prediction is that the requirement of OPEC oil could be reduced to as low as 23 or 24 million barrels a day-unless we begin to recover from our present global recession, this is going to begin to bring great pressure on the Algerians and the Nigerians and the Libyans, many countries that do not have the surplus that allows them to decrease their production level. But I don't think we should really count on any real break in that area. Hopefully, we can achieve a stabilization of price in the short term, which, in itself, is a worthwhile objective and could be used to justify our conservation and alternative source development programs. The other alternative is to reach an agreement on a long-term stable source of supply and a reduced price with indexation. And a number of the OPEC countries have indicated their willingness to consider this possibility, though not formally. I believe that we should think very carefully before we agree to such an arrangement, if there is another possibility. Mr. SOLARZ. I appreciate the response, and I would like to follow up on what you said. If I understand your argument correctly, you were saying, in effect, that the only realistic possibility for bringing about a reduction in the actual price of oil would lie in some kind of an agreement between the oil-producing and oil-consuming nations for a reduction in the price, together with an indexation of the new price, tied, I assume, to some kind of consumer index for the price of commodities produced by the oil-consuming nations. Would that be a fair summary of your statement? Mr. ROBINSON. In the short term that would be a fair summary. In the longer term, if we proceed with a program that the administration has been supporting for the development of alternative sources and for meaningful conservation efforts, we would be hopeful that over the next 2 or 3 years that there would be a recognition of the longer term imbalance between supply and demand which could bring about a reduction in price through market forces. Mr. SOLARZ. What is the basis for cur assumption that we have the capacity through any kind of action we might take in the short run to prevent an increase in the price of oil? It seems to me that the very same political considerations which led to the present price could very easily led to an increase in the price. What leverage, if any, do we have over the oil-producing nations in our effort to prevent any further increases in the price of oil? Mr. ROBINSON. My point was that, we are undertaking, as a cooperative effort between the consuming nations, to conserve and to develop alternative sources, and we are confident that that is going to have an impact on the price. This ultimately could result in an actual reduction of the price. What I am saying is that, if the present price can be held for 2 or 3 years, partially, at least, as a result of these cooperative efforts, we would have considered that very well worthwhile and would have justified the cooperative effort. Mr. SOLARZ. Well, in what way do our efforts in cooperation with the other consuming countries bring about a situation likely to keep the price at a constant level? That is where I am not sure that I understand the argument, because it seems to me the oil-producing countries, in a certain sense, are immune by virtue of their cartelization of oil production to the normal economic forces that would ordinarily operate here. Mr. ROBINSON. Well, we should not be unaware of the pressures that have been imposed on the individual OPEC countries as a result of the reduction of demand. There has been an absolute reduction in demand for OPEC oil and the rate at which they are exporting oil. This has created great strain between individual countries. We have seen, in terms of the differentials, a quality differential of 40 cents in Abu Dhabi which resulted in a very abrupt drop in the volume of their export. They finally eliminated the differential to bring the volume of their exports back to a level more in line with the other countries. We have seen, in the Mediterranean countries, Algeria and Libya, a substantial reduction in the premium that they had as a result of their geographical location in terms of transportation costs. All of these have brought, in effect, a reduction in the price. There is also increasing pressure to provide credit terms and every 1-month extension in the payment of terms constitutes a price reduction of something on the order of 10 cents. So, we are seeing evidence of price weakness. Now, under those circumstances, it is much less likely that there will be a political decision to raise the price. Mr. SOLARZ. Well, wouldn't one possible response on the part of the producing countries be to reduce supply and increase price as a way of dealing with reduced demand? Mr. ROBINSON. It is always a possibility, and I don't mean to imply that it is not. It am just saying that, under the circumstances, all of the OPEC nations have different problems-Algeria has a $2 to $3 billion anticipated deficit this year; their income is $2 to $3 billion below their anticipated expenditures. Various countries are in different positions, and it is going to be very hard, much more difficult to hold OPEC with a solid front in an effort to raise prices under these circumstances. That doesn't guarantee they won't. I am saying it is less likely as a result of the reduction in demand that has been brought about by a combination of things: cooperative efforts between the consuming countries combined with the recession, combined with a warmer than normal winter, a reduction in inventories and other factors, but it has created a situation in which it is much less likely that price will be arbitrarily increased for political reasons. Mr. SOLARZ. You indicated, in your testimony, that the IEA called for a reduction in oil consumption by 2 million barrels a day by the end of 1975. My understanding was that that agreement also called for a reduction of a million barrels a day by the United States as part of the overall cooperative effort. Mr. ROBINSON. That is correct. Mr. SOLARZ. I think, it seems fairly clear by now, on the basis of the congressional response to the President's proposal, in this regard, that it is exceedingly unlikely that legislation will emerge from the Congress calling for a reduction of 1 million barrels a day; to the extent that there is a conservation program forthcoming from the Congress, I think it is likely to result in a savings of substantially less than that. I would rather doubt more than, say, half a million barrels a day. if that much. Now, in your judgment, what would be the implications of that kind of shortfall, as it were, in the amount we can conserve compared to what the administration pledges us to conserve with the IEA countries, in terms of continuing prospects for cooperation between the consumer countries? In other words, if we fail to conserve a million barrels a day, will this, in effect, disrupt the cooperative effort; because other countries will feel that we haven't been willing to live up to our commitments here; or do you think that it will not have a seriously disruptive effect on the cooperative efforts? Mr. ROBINSON. I have covered that in my testimony, that I feel it. is absolutely essential that we proceed in this country with a program that evidences our intent to reduce our dependency on imported oil and to increase our degree of self-dependency, and that this is essential to the cooperative program that has been undertaken in IEA. Mr. SOLARZ. Well, are you saying that any conservation program designed to conserve less than a million barrels a day would necessarily be taken as a lack of determination on the part of the United States to join in this cooperative effort and to reduce its oil consumption? Mr. ROBINSON. Well, I don't think anyone can talk in precise terms about the amount of savings that will result from any one step, other than import quotas. So that, it is to a certain extent a judgment factor, an estimate in any event. However, unless we are prepared to take meaningful steps in an effort to bring our oil consumption and therefore our requirements of imported oil down, that could have a significant impact on the attitude of our partners in the IEA program. Mr. SOLARZ. Thank you, Mr. Chairman. I hope you will excuse me, if I leave for another vote, but I will be back. Mr. DIGGS. Thank you very much, Mr. Robinson. Mr. ROBINSON. Mr. Chairman, with your approval, if I may depart, I would appreciate it very much. Mr. DIGGS. Yes. I had understood that you had to leave, and we appreciate your contribution and look forward to your response to the questions for the record. Mr. ROBINSON. Thank you very much. Mr. DIGGS. I might also add, Mr. du Pont may have some questions for you, and obviously, he is tied up on the floor, so I think perhaps you might prepare to respond to his questions if he might want to submit them in writing since he is not here.* Our next witness is Hon. Melvin Conant. He is the Assistant Administrator for International Energy Affairs, Federal Energy Administra 4 Mr. du Pont had no questions for the witness. |