ever, if the President were to decide that the provision of such data were necessary in order to fulfill U.S. international obligations, he could direct such agency head to provide it. 3. ENERGY CONSERVATION The IEP agreement covers two general types of conservation programs. First, there are the ongoing cooperative efforts, of which Mr. Enders spoke, including IEA programs to exchange information on ways to reduce energy consumption. Second, there are the specific provisions of the agreement dealing with emergencies. With respect to this second category, the IEP's provisions state that each participating county "shall at all times have ready a program of contingent oil demand restraint measures ***." These measures are designed to reduce the rates of consumption in the event of an embargo-actual or impending. If the country that is targeted in an embargo, or if the group as a whole, faces a cut in supplies of 7 percent or 12 percent, then that country or the group is committed to so-called demand restraint measures of 7 percent and 10 percent, respectively. I mentioned earlier that substitution of other measures such as emergency reserves drawdown is permissible if, during an emergency, a country wished to moderate its consumption restraint. But each country is nevertheless expected to have a contingent program ready. Section 1307 of title XIII authorizes the President to promulgate energy conservation plans for meeting the emergency requirements of the IEA. This authority must be sufficiently flexible so that conservation plans can be tailored to the different situations which might arise. In addition, if an emergency should occur, title XIII contains provisions authorizing both allocation and rationing. With respect to the more general IEA cooperative programs, in one of the IEA Governing Board's first major decisions after its initiation, as Mr. Enders mentioned, a goal was approved for cutting back imports by 2 million barrels per day by the end of 1975. There is a strong realization in the 18 countries that voluntary action in accordance with this goal will help decrease our vulnerability to supply interruptions. 4. LONGER RANGE INTERNATIONAL COOPERATION Title XIII is thus not exclusively focused on emergency measures. In section 1314, several objectives spelled out in the IEA agreement are outlined very briefly which are of longer range importance, though of course their attainment would greatly help reduce any further embargo threat. Here I refer to the R. & D. projects as well as the accelerated development of alternative sources of energy and longer term cooperation which Mr. Enders discussed with you. In conclusion, Mr. Chairman, the Standby Energy Authorities Act of 1975, or title XIII of the Energy Independence Act of 1975, in the words of Administrator Frank Zarb: ** to deal Builds upon the Congress and the administration's past efforts * with energy emergencies and to carry out our international obligations. In addition, it is an integral component of the administration's total energy program as reflected in the Energy Independence Act. The relationship of title XIII to the IEA reflects the very important efforts toward energy interdependence by major oil consuming nations. Mr. Chairman, that concludes my prepared statement. I will be happy to answer any questions which you or your colleagues may have. Mr. FRASER. Thank you very much, Mr. Conant. That is a very useful statement to target us on the specific problems which we are interested in. Let me ask a couple of general questions if I may first. I think Mr. Enders referred to the fact that our other partners in the IEA have already moved to reduce consumption at a higher rate than we have. I think the figure that was used was from 5 to 14 percent whereas the United States has attained only a 3-percent reduction. How did the other countries achieve their reduction? Mr. ENDERS. Basically by two ways, Mr. Chairman. One is that all of them-I believe I can say all of them-pass through the higher prices that have resulted from the cartel action to their final consumers, industrial or individual, and this of course has had a deterrent effect on demand. The second way is that all of the major countries have in fact put on new taxes on petroleum or petroleum products since the crisis occurred. Mr. FRASER. Where do they put the taxes? Mr. ENDERS. It is varied. Some of them have been on motor fuel. This is marked in the case of Italy, for example. In the case of Japan on home heating oil. In the case of Britain across the board on fuel uses but with a particular emphasis on motor fuel and so forth. Mr. FRASER. Is it a fair generalization that the other countries have emphasized the higher taxes on motor fuel? Mr. ENDERS. That has been the most powerful measure taken in the tax field but it is not the only one. Mr. FRASER. No, but if one looks at the spectrum of new taxes adopted by the other countries, the emphasis does fall on higher taxes on motor fuel as against petroleum used for other purposes. Mr. ENDERS. It is a mixed bag. As I say, I think in the case of Japan the prime target has been heating fuel. Mr. FRASER. I understand they don't use much by Japanese custom. Mr. ENDERS. Yes. It is hard to generalize but I think motor fuel has been an important target in a number of countries. I will be glad to submit a table of such measures if you wish. Mr. FRASER. We had a table that I think we secured from the European community showing the taxes and it appears that their principal tax burden has fallen on motor fuels. Mr. ENDERS. That is true in their standing tax structure, it may be somewhat less true in terms of the additional taxes where adopted since the crisis. You are quite right; for example, in Italy where a gallon of gasoline costs almost $2. Mr. FRASER. I ask this because I have always been curious as to why in the United States we want to raise the price of all oil products rather than just motor fuel. Mr. CONANT. Mr. Chairman, could I just emphasize one aspect of this discussion and that is that this has been historically true. You realize that in the European and the Japanese scene the very substantial tax is on gasoline but I think that we have in the case of France, as possibly a constructive example, how a government can move beyond that in attacking the energy problem. They have used a combination of prices across the board and volumes both with regard to heating oil and industrial uses of fuel and attempted to place this within an annual framework allocation program with cutback. Mr. ENDERS. One word on that also with regard to the United States. Most of these countries are fortunate in having public transportation systems which are superior to ours. No country, with the exception of Canada, relies on the automobile to the extent we do or has the spaces that require it. Clearly gasoline consumption means something very different in this country than it does in Japan. Mr. FRASER. My understanding is, for example, West Germany uses roughly half of the energy that we use. Mr. ENDERS. Yes. Mr. FRASER. So it turns out that it is not essential for a high GNP to use as much energy as is used in the United States. Mr. ENDERS. That is also correct. Mr. FRASER. So that decreased consumption does not necessarily have to affect economic growth. Mr. ENDERS. No, there are transitional problems. The statistics show a long-term decline over the past 10 years of the amount of energy consumed per incremental unit of GNP. With the change in the prices, the expectation is that that decline would be in fact somewhat accelerated. Mr. FRASER. Let me go to a different question. Through the sixties it was argued that we needed to restrict the import of oil for national security reasons and so we did. We kept out the cheap foreign oil and increased the rate at which we used up domestic supplies. Now suddenly we are in a crisis and now we have found a new rationale for restricting imports, particularly if the imports threaten to be cheap which would then in effect replicate the problems of the sixties; namely, that our consumers would suddenly get the advantage of lower prices. In a way you are using the same kind of argument that was used in the sixties, perhaps with more justification this time, I don't know. That is what I want to find out. One becomes very suspicious of that argument because it seems to me on the record it is very clear it was phony and fictitious in the sixties and actually adversely affected the U.S. security position. This was the position passed on by the oil industry. Now we find that we are back to the same argument again. Do you want to protect American domestic industry from foreign competition if the foreign competition should become cheaper? Mr. ENDERS. Beyond a certain level. Mr. FRASER. At $7 you are still double where it was 2 years ago, right? Mr. ENDERS. Mr. Chairman, I would only ask you to reflect on the balance of the market when we were at $3. At that time the U.S. dependence on foreign oil had grown from zero in 1950 to 16 percent in 1960, to 35 percent at the time the embargo broke. The reason that we were vulnerable to the embargo was that our dependence had grown. You cannot have two things at once, both very low prices of fuel and an acceptably low level of dependence. If you want to have very low prices, then you can have periods. perhaps like the sixties in which you have very low prices and very high dependence but they will then be followed by periods in which you can be exploited the way the OPEC is exploiting us now. In fact, I think there is some real question as to whether, if we didn't protect American industry and give them some assurance, we would ever get back to the situation where the price would fall to $7 internationally. Let me say in this regard that we had some very interesting statistical work done by the FEA which calculated what would happen if the price were, say, at $4. Mr. FRASER. You saw those projections. Mr. ENDERS. What our consumption would be and what our production would be. The production falls down to about 5 or 6 million barrels a day and the consumption goes up to close to 30 million barrels a day and you have a catastrophic level of dependency so that the purpose is to find some balance, a balance that will give the consumer the benefit of protected jobs so he cannot be manipulated by an embargo and give the consumer the benefit of the drop in prices from the intolerably high prices but on the other hand which will give us enough market power through our own domestic energy industry. That is not only oil and gas, it is the impetus that will be given over time to such fuels as nuclear and coal also that give us enough market power so that the market can't be rigged against us. Mr. FRASER. Part of the problem as I understand it is the capital investment requirements and the need to have assurance. Mr. ENDERS. Yes. Mr. FRASER. I have heard several energy experts suggest that rather than imposing a higher level of prices on the whole American economy it would be far wiser to have the Government itself become a partner in the capital investment; that is, in terms of cost. It would be far cheaper to have the Government in effect become the risk bearer on the particular capital investments required than to impose literally billions of dollars of indirect taxes through artificially high prices. What would be your response to that? Mr. ENDERS. I think we are going to have to do that for the very high-cost energy and we are doing it for fuels as shale oil and the synthetics. That is absolutely essential because if our view of the market is right, and it is the objective of all of our efforts to make it right, the oil price is not going to be $10 or $15, 5 to 10 years from now, it is going to drop. We have got to make it drop for a whole lot of reasons. Let me give you some figures, again based on the Project Independence blueprint, which describe the kind of situation you get. I would be glad to submit the example afterward if it is useful to you. It compares a deficiency payment system of the kind that I think you are referring to, Mr. Chairman; that is to say that individual subsidies would be paid to the enterprises if they became nonefficient or were unable to compete as the price fell. Mr. FRASER. As to subsidies, there is the example in World War II in which the Federal Government actually financed or undertook some kind of a governmental corporation and became the principal investor. Mr. ENDERS. Well, one way or the other, whether it is a deficiency payment paid out of tax revenue or whether it is the net loss of a Government corporation that is maintaining the production, I am thinking only in economic terms rather than about mode by which it would be done. Here is an example. Assume that the oil price drops from say $7.50 to $4.50 a barrel and then compare two systems, one in which there is a common protected price at $7.50 and the other in which the price domestically is allowed to fall but you have your Government corporation or some other means to make up the difference for all the energy enterprises in that range. Let me just note in passing that that would mean all of the Alaska, all of the Outer Continental Shelf and a great deal of domestic production as well, including a good deal of the nuclear utilities. Mr. FRASER. Let's pursue that for a moment. What you are saying is, if we began to get external oil at $4.50 a barrel Mr. ENDERS. Yes, as an example. Mr. FRASER [continuing]. And thus meet our energy consumption requirements, that at that point it would not be profitable to continue to exploit part of the North Slope. Mr. ENDERS. A very large range of our energy opportunities. Mr. FRASER. In other words, what would happen is that the United States would then be in the position of beginning to preserve a domestic source rather than expending it and at the same time the consumers of the United States would be getting energy below our cost. Are you arguing that that would be a bad outcome? Mr. ENDERS. What I am arguing is that in order to be not dependent on the foreign sources you would have to maintain your productive capacity. Mr. FRASER. Well, for example, slow down or limit production from the North Slope? Mr. ENDERS. You would have to maintain it, though. Mr. FRASER. You keep it operating. Mr. ENDERS. Have to maintain it. Mr. FRASER. Then you would have acquired an enormous reserveas a matter of fact, a strategic reserve-that would give you considerable protection against embargoes that you would lose if you continue to product from it and thereby depress it. Mr. ENDERS. The operating costs of doing that are such that we might want to perhaps I could go through an example. I would like to come back to this point because we have been looking at the question in regard to Naval Petroleum Reserve No. 4, for example, and Naval Petroleum Reserve No. 1. Does it make more sense to produce them and then store the oil or does it make more sense to keep them in productive shape and then cap them as you suggest? Maybe you can come back to that in the economics of it. Let me give you this example and then come back to your question; I think it puts it in perspective. The two cases again are one in which the protected price is $7.50 and the other one in which the domestic price is allowed to fall to $4.50 and the difference is made up to keep those enterprises functioning. The total energy consumption is different. In the first case with the protected price it is 50 million barrels a day and in the second case it is 59 million barrels a day. The oil consumption in the first case is 22.5 million barrels a day and in the second it is 27.2 million barrels a day. It is a higher oil consumption at a lower price, of course. Domestic oil production is assumed to be the same in both cases for reasons indicated. |