The first element of this system-agreement on a minimum safeguarded price— is designed to resolve the critical dilemma which we face in the development of new energy sources. As I mentioned previously, the IEA countries have substantial new energy sources which can be developed. However, most of these such as Outer Continental Shelf oil, Alaskan oil, coal, etc. are relatively high cost. Moreover, their development will require enormous capital investments. The OPEC cartel, with production costs averaging some 25¢ per barrel, would clearly have the capability to undercut the development of these alternative sources at will. Thus, unless we provide some level of protection to domestic investors against possible competition from very low-cost imported oil we risk a shortfall in the investment needed to meet our reduced dependence objectives. Further analysis will be required before this minimum level of price is set. It would be substantially below current world oil prices, although higher than prices prevailing before October 1973.

It is equally important to underline what this minimum imported price agreement will not provide. It will not be a price guarantee for OPEC; rather it would be a guarantee of minimum protection for domestic investors in IEA countries. Also, it will not provide a floor price for all energy sold domestically; it would apply only to imported oil.

Why is this proposed commitment to a common minimum price for imported oil in the U.S. interest? First, as I have explained, it will help to assure that we get the investment needed in new energy to bring about over the medium-term a sharp shift in the world supply and demand balance for oil. Only by making an unequivocal commitment to the accelerated development of alternative sources can we gain sufficient power in the market place to assure that OPEC will not be able to arbitrarily manipulate oil prices in the future.

At the same time, it will help to equalize energy costs among the industrialized countries. Without an agreement of this type, the U.S., which will make a major commitment to the development of relatively expensive energy, would find itself at a competitive disadvantage when the world oil price breaks and the other industrialized countries have the opportunity to import very low cost oil.

This system of a minimum import price has several advantages over possible alternative schemes to encourage and protect investment in conventional energy sources such as a deficiency payments mechanism. A deficiency payment system would impose a massive financial burden on the taxpayer when world oil prices dropped and, by allowing lower prices, would stimulate consumption and imports. In contrast, the minimum safeguarded price mechanism would not only provide protection for new investment, and a check on consumption, but would also generate additional tax revenues when the world oil price declined.

At this point, we are not inclined to try to dictate the policy mechanism which IEA countries might use to fulfill this commitment. We would propose that countries be left free to use a variable levy, import quotas, or other appropriate mechanisms.

The second basic element of the accelerated development system would promote, on a project-by-project basis, joint undertakings in higher cost energy projects. The development of synthetic fuels and other major energy projects, perhaps including some of a conventional nature, would be fostered under this program. This measure would deal with projects involving large capital and developmental expenditures and would provide IEA countries with the opportunity to participate in each other's programs under agreed rules covering investment, access to technology, and access to production.

The third tier of the system is designed to encourage cooperative projects in research and development on energy. The IEA would assist in identifying and establishing joint R&D projects on which countries would pool national efforts. By definition, projects in this third tier would involve expenditures which are not likely to yield immediate returns, but which offer significant potential for long-run cost savings or energy break-throughs. Under this approach we can avoid duplication of effort and rationalize our spending.

Mr. Chairman, the coordinated system for accelerated development should be viewed in its entirety. It is designed to provide a balance of advantage between those countries with huge potential to develop indigenous energy supplies and those which will continue to have to rely on imported oil to meet a substantial position of their energy requirements.

All consuming countries stand to benefit directly from the development of new energy in other consuming countries. These new energy supplies will impact directly on world supply and demand for OPEC oil and will contribute to the

eventual decline in world oil prices. Thus, we all have much to gain from cooperation which stimulates the development of new energy.

We will continue to consult closely with the Congress over the coming months on the elaboration of this preliminary understanding. Its implementation would, of course, require legislative authority in each country. The administration has already requested legislation under title IX of the Energy Independence Act of 1975 which would provide such implementing authority. We will seek further consultations with the Congress on the manner in which such authority could be granted and used.

Mr. Chairman, we have had many opportunities for false comfort since the oil crisis began: a surplus of oil in the international market last summer because of seasonal factors and price resistance, some signs of undercover price cutting, and pronouncements that the oil cartel was about to break.

But Mr. Chairman, the oil crisis will not simply go away. We must act to defuse it, by bringing our own consumption of oil under control, by developing our own energy supplies, and encouraging other consuming countries to do likewise. Only in this way can we achieve our two essential objectives: a significant decrease in the international price of oil, and substantial U.S. self-sufficiency in energy.

Mr. FRASER. Our next witness is Mr. Conant who is the Assistant Administrator for International Energy Affairs of the Federal Energy Administration.

STATEMENT OF HON. MELVIN CONANT, ASSISTANT ADMINISTRATOR FOR INTERNATIONAL ENERGY AFFAIRS, FEDERAL ENERGY ADMINISTRATION

Mr. CONANT. Mr. Chairman, could I begin by introducing two colleagues I brought with me to assist in your inquiry. Mr. Goodwin on my right is Deputy Assistant and General Counsel for International Programs and a great help to us in formulating the legislative and the legal aspects; and behind me Jim West who is an Associate Assistant Administrator in my office. I introduced him to you the first time we met. He is highly expert in the technical implementation of the emergency program and the question of stocks.

Mr. FRASER. We are delighted to have both Mr. Goodwin and Mr. West with us today. I hope they will join in the discussion period when you think it is appropriate.

Mr. CONANT. Thank you.

Mr. Chairman and members of the committee, in my last appearance before you in joint session with the Subcommittee on Foreign Economic Policy on December 18, I discussed a number of issues related to the international energy program and Agency, including emergency stocks, international allocation of oil and legislative needs. I would like today to discuss further the IEA in light of the President's proposed Energy Independence Act submitted to the Congress on January 15. I will focus particularly on title XIII of that bill as it relates to the implementation of the international energy program and the IEA.

As I mentioned in December, Mr. Chairman, the United States has thus far committed itself to be bound by the IEP agreement only to the extent that this is consistent with existing law, and Mr. Enders has elaborated on that statement. Title XIII of the Energy Independence Act is intended to provide the legislative authority to enable the United States to implement fully the obligations contained in the agreement on an international energy program as well as to provide a general standby authority for severe energy emergencies.

You may recall, Mr. Chairman, that in our meeting in December I referred to that this is the first agreement in peacetime that the United States has entered into with regard to emergency supply and that both my earlier background and the work that I have done since joining the Government, the urgent necessity of such a commitment has become self-evident. We can no longer continue to rely on stopgap measures which would come up from time to time.

The IEA is moving forward on a number of fronts, but the main focus of IEA in the area of title XIII's provisions is the deterrent against future supply cutoffs and, if they should occur, the measure of protection it affords all participating countries.

Let me emphasize here that it is both a deterrent and a program to go into effect if something specific should take place. Under the terms of the agreement if the IEA anticipates a crisis in supply, it may take action. This is an important and added plus.

By using various emergency authorities presently existing in each of the 18 countries, including the United States, the emergency system would function. I would like to discuss, however, why the United States, like the governments allied with us in the IEA, needs more comprehensive and focused legislative authority than is now presently available. I will first need to summarize relevant portions of the agreement establishing the International Energy Agency and then relate these to individual parts of the Energy Independence Act, especially to title XIII.

The agreement seeks a common emergency self-sufficiency in oil supplies among the participating countries. Each country agrees to maintain emergency reserves sufficient to sustain consumption for specified times without net imports of oil. Emergency reserves are considered to be either oil stocks, a fuel-switching capability, or a standby oil production reserve. Each country is free to decide the particular mixture of these three in meeting its commitment.

At the same time, each participating country agrees to have ready a package of contingent measures for restraining oil demand during an emergency. With this system in being, if an embargo exceeds the thresholds outlined in the IEA agreement, each country is linked to the IEA's international allocation system. The allocation rights or obligations of each country are determined by a formula which assumes a certain level of emergency reserves and imposition of demandrestraint measures.

With respect to title XIII objectives and provisions, we believe that if the IEA is to represent a credible deterrent to the producer countries, it must have the capability to work effectively during an embargo. For this, the President's authority must be clear.

Initially, I should note that before exercising any of the emergency authorities contained in title XIII, the President would be required to transmit to the Congress findings that

Because of interruption in the supply of imported petroleum or as a result of acts of God or sabotage national energy shortage conditions exist or are impending which threaten U.S. national security so as to require the exercise of the standby energy authorities provided for in this title, or * **that their exercise is required to fulfill obligations of the United States under an international agreement.

This delicately drawn triggering mechanism balances the ability to act with the requirement that this ability be limited to circumstances absolutely necessitating such action.

I would like now to discuss three specific areas of title XIII that pertain to the implementation of the emergency provisions of the IEA agreement.

1. CONTROL OVER STOCKS

The IEP requires that each participating country maintain reserves equal to 60 days of imports, later to be increased to 90 days. Because of the broad definition of stocks in the IEP, the United States presently has sufficient inventories to meet this obligation. However, only a small percentage of our current stocks could actually be drawn down during an emergency situation without seriously impairing our refinery and distribution system. Since the IEP itself establishes a framework for reevaluation of the definition of the stocks constituting reserves, and since we must be assured that such minimum levels can be maintained in the future, some positive governmental action to maintain the needed levels may be necessary. Thus, section 1304 of the administration's bill gives the President authority to require the maintenance of inventories at certain levels as required by the IEP.

It should be noted that title II of the omnibus energy bill includes a strategic storage program of up to 1 billion barrels and title I authorizes a military reserve of 300 million barrels. Once such strategic reserves are available, the authority contained in title XIII to require certain minimum levels of inventories would not be required for IEP purposes, although it would still be required as an ancillary authority to any allocation program which might have to be implemented during an emergency.

Note, please, with respect to the strategic reserves proposed in title II the principal anticipated use of such reserves would be to meet domestic requirements during an embargo. The reserves program authorized in title II will be financed in most part from the production of National Petroleum Reserve No. 1 in Elk Hills, Calif.

Title II would authorize both Government-owned reserves and governmentally mandated industrial set-asides for a strategic reserve. If the Government-owned approach is adopted, the administration would expand emergency inventories in a way that will meet both our national priorities and our international undertakings.

The administration will make additional specific recommendations regarding the creation and ownership of these emergency inventories as further planning and engineering studies are completed. For fiscal year 1976, we have included $110 million in the budget for site acquisition and preparations. It is the administration's objective that significant capacity to store petroleum be brought into being as quickly as possible without reducing our flexibilty as to the source of product or the timing of filling that storage capacity. By so doing, we can properly phase the building of our strategic reserve with the attainment of other energy program objectives.

Under the administration's proposals a storage program would not become fully operational until the 1980's. Until then it will provide some protection as inventories are gradually accumulated.

Strategic reserves provide the flexibility needed by the United States in a crisis. Under the IEA there is a high degree of freedom in most types of emergency measures taken by each country. While the IEA agreement stipulates a common cut in consumption depending

on the severity of an embargo, each country is permitted to substitute other measures to meet its goal. One of these measures could be an increase in the rate of drawdown of emergency reserves, for example, rather than a cut in oil consumption which might be undesirable because of other factors.

2. INTERNATIONAL ALLOCATION

Another requirement of the IEP addressed in this bill is the international allocation obligation. Under the IEP, participating countries are required to insure that, if a supply disruption occurs, each participating country receives its fair share as provided by the agreement. În all but the most extreme situations, this obligation would not entail actual exports of U.S. oil to other IEA members. However, it is essential that the President have the authority to require that oil companies subject to our laws do carry out the terms of the IEP oilsharing agreement.

In order to insure that the United States can carry out these obligations, title XIII of the administration bill contains two specific authorities. First, section 1312 of the bill authorizes the formulation of voluntary agreements to carry out the international allocation pro visions of the IEP. A limited antitrust immunity would be available for actions taken pursuant to such a voluntary agreement.

As you may know, we have already completed consultations with oil companies with respect to the formulation of such a voluntary agreement under the authority of section 708 of the Defense Production Act. Section 1312 of the bill is similar to section 708, and both provisions require final Justice Department approval of any voluntary agreement. Since our IEP obligations are for a 10-year period, however, and the Defense Production Act expires this year, new authority is

necessary.

The second authority in the bill dealing with international allocation of oil is section 1311, authorizing the President to require companies subject to U.S. jurisdiction to allocate oil to other countries in accordance with the IEP. Although we anticipate that the IEP's international allocation obligations can be accomplished through voluntary cooperation of the international oil companies, we nevertheless need the statutory authority to require such action should the voluntary approach prove inadequate.

The IEP also contains provisions for the collection of data both for planning and implementing emergency measures, as well as providing current information on the situation in the international oil market.

Under section 1315 of the administration's bill, the Administrator of FEA could provide to the Secretary of State for transmittal to the International Energy Agency the data required to be submitted by the agreement. Several important safeguards are included to maintain competition and protect proprietary information. First, data which the President determines would prejudice competition or be inconsistent with U.S. national security interests can be withheld.

Second, any agency which collects proprietary data protected from disclosure by statute could, in the first instance, refuse to allow the transmittal of such data to the International Energy Agency. How

51-727 O-75-3