no government-to-government negotiation on oil prices since there has been no general swing toward that since the crisis. I think there is a very good reason for that and it is that the artificial prices maintained by the cartel are basically the result of market forces which of course have been artificially rigged by the cartel to produce the result they want. As long as those market forces the artificial shortage of supply— are in force, it is very unlikely that you can change them by substituting the political power of a state for the economic power, now much diminished, of an individual enterprise. In fact, I think there are very good reasons to believe that it might make agreement more difficult by raising questions of prestige and questions of power at each point. If the United States, for example, were negotiating with Kuwait on what the oil price should be, the Kuwaiti Government would find it very difficult to do anything other than to demand and stick with the highest possible price in order to show that it is not being run or overwhelmed by the United States. There is a little flexibility but not much more when you use separate enterprises, whether public or private enterprises, that do not involve the prestige of states. The underlying problem is the market itself and you have to change the market in order to change the balance. Mr. GILMAN. Yet the oil-producing companies come together and establish prices as state entities rather than doing it by way of oil companies; is that correct, Mr. Enders? Mr. ENDERS. Well, the OPEC countries have in fact an agreement on what the price should be. They have a price structure of $10.12. Mr. GILMAN. By sovereignty and not through the oil company itself? Mr. ENDERS. No, no. They establish that by agreement among themselves. Mr. GILMAN. As nations? Mr. ENDERS. As nations. But if we were to go as a nation and negotiate with them wanting, as we do want, very much lower prices, I don't foresee any possibility that we would achieve them in the near term; in fact, I think that it might make it more difficult to get any change in the price structure. Mr. GILMAN. Mr. Chairman, I know my time has run out. Mr. Conant has suggested that Mr. West may have some comments on the effectiveness of an allocation program. With your permission I would like to ask Mr. West to comment. STATEMENT OF JAMES WEST, ASSOCIATE ASSISTANT ADMINISTRATOR FOR INTERNATIONAL ENERGY CONSUMPTION AND RESOURCES, FEDERAL ENERGY ADMINISTRATION Mr. WEST. I might say that we have within the Federal Energy Agency developed and have now much better programs for implementing allocation programs as a result of the experience that we had with the last embargo. At that time we started with a makeshift organization and applied decisions hurriedly to try to cope with an immediate crisis. Since that time we have built a national organization and regional organizations. We are reviewing questions concerning the means of allocation. Before, we simply required all the oil companies to allocate the various products on the basis of a 1972 base period. You have so much, then you have a percentage of that same amount and a reduced allocation. This led to distortions and it created some of the conditions that we saw, with gas lines in the East and no gas lines in the Midwest, because the markets changed under the crisis as to what they would have been under normal circumstances. We also now have, under such agreements as the International Energy Agency's programs, an assurance of supply through supply rights. During the crisis there were no assurances of exact availability of supply. We have those additional assurances. These are all being worked into the contingency plans which are now much, much more fully developed and will allow us to begin any allocation on a much better basis. That is a short answer to your question. Mr. GILMAN. Thank you, Mr. West. Thank you, Mr. Chairman. Mr. FRASER. Let me ask Mr. Enders a question.. I thought the United States and France entered into long-term agreements for the procurement of oil. Mr. ENDERS. Japan, France, and a number of other countries entered into a long-term agreement for industrial goods versus oil at the start of the crisis and the implicit prices in those deals were well above the present market level and they were panic deals basically and have not been pursued. Mr. FRASER. But they represented conditions at that time. Mr. FRASER. You said none had happened. Mr. ENDERS. I should say correctly there has been no trend towards that. The trend has actually been the other way because these few deals that were done in the early days of the crisis have been quietly put aside. Mr. FRASER. Mr. Solarz. Mr. SOLARZ. Thank you, Mr. Chairman. I would like to go back to the question that you raised at the end of your own colloquy which I don't think was answered and which has to do with the alternative mechanism for providing some measure of price protection to those corporations which would undertake_expensive capital efforts to develop alternative sources of energy. If I understood the chairman's question correctly, he was suggesting that in lieu of a minimum price for imported oil we might develop some kind of governmental mechanism to provide some form of financial insurance to such companies in the event the price of oil dropped to somewhere in the vicinity of $4.50 a barrel which, if I understood him correctly, he seemed to feel would be a more equitable approach to the problem. You indicated you thought there were real problems with that and you tossed the ball into Mr. Conant's lap where it has been resting since. I wonder if you could pick it up and run with it. Mr. CONANT. Yes. I might make a couple of preliminary observations on it after listening both to your question and that of Mr. Fraser. In looking at energy policy in the national security sense I try to constantly keep in mind that there are a great many objectives that are going to have to be served more or less through the same general policy. We are faced with increasingly difficult decisions because we have a time factor involved in all of these matters. For example, if our objective is to reduce our vulnerability, there is not very much that can be done about that except through conservation or through voluntary or price mechanisms to limit the amount that we bring in. A basic correction in our vulnerability would require 5 to 10 years. Now if it is to be our objective to increase our conventional energy resources, if it is to be our objective to encourage that this be done by the private sector and not just from the public trough, and then if it is also our objective to encourage farther out kinds of research and development through ERDA or the private company approach, then what is the general mechanism that will insure the investor in energy some degree of confidence? It is very hard for me to think of another approach other than a common minimum price. Now you asked what is the appropriate mechanism country by country for assuring this will be maintained on an international basis. Mr. SOLARZ. No; I asked a somewhat different question. Mr. CONANT. I beg your pardon. Mr. SOLARZ. What is your judgment about an alternative approach to that assurance other than setting the minimum price of oil which was the development of some other kind of mechanism which would, in effect, guarantee a certain return to those who develop these alternative sources of energy in the event there was a precipitous drop in the price of oil? Obviously they are not going to invest the kind of vast capital resources that are necessary if there is a possibility that the rug could be pulled out from under them so the administration has suggested that as a way of providing that assurance we establish a minimum price of oil." Congressman Fraser has suggested that since that would have unfortunate consequences for the economy as a whole in the event that the price of oil dropped below $7 a barrel that perhaps a better way of providing the assurance to the investors would be through the development of some kind of alternative mechanism to guarantee them a return in the event efforts were made to undercut them. I gathered that your feeling was that those alternative approaches would not be effective or would be counterproductive or whatever and I was trying to find out why. Mr. CONANT. I don't know of any other mechanism that would attract the long-term investment into other energy resources than a protection of this sort. I can think in terms of specific industries-say utilities with their capital construction requirements that the Government could pursue a somewhat different course and provide lower interest rates or whatever the device might be. When we are talking about the production of energy itself, I am really baffled to think of another approach. Mr. SOLARZ. I am just throwing out an idea which I gather was something like what the chairman had in mind. Supposing you guaranteed them a fair return to be established in some way by commission or whatever so that whatever the price ultimately came in at the Government would presumably make up the difference between what the market was prepared to pay and what they were entitled to. Mr. ENDERS. That is what I termed a deficiency payment scheme which I think should be distinguished from the chairman's other idea which is that you might cap the wells and keep the standby capacity which is another kind of a problem. I think a much more expensive approach, which perhaps we could separate out from the first one, is to keep your capacity up by making up the difference between the market and Mr. SOLARZ. What is wrong with the deficiency payment scheme? Mr. ENDERS. Well, you get a different mix of results in the two schemes. In the deficiency payment scheme an example I gave, as the chairman pointed out, the economy gets the full benefit of the drop in prices. What it does in reaction to that drop in prices is to increase consumption so you get the higher level of vulnerability that results from it. Of course you need to make up the difference. You have to finance your deficiency payments through the Government so that in effect the public obviously has to pay them one way or the other. I think you get roughly this picture which is that the economy gains overall $20 billion or a little bit more, the figure I think you cited. I have not figured it out. Mr. FRASER. I just multiplied $3 times 20 million barrels a day. Mr. ENDERS. Yes. You have to pay out a swing in your Federal revenue of about $15 billion which makes up most of that difference. You get a higher import vulnerability related to an increase of about 5 million barrels a day imports. This means a very substantially higher vulnerability to the loss of jobs and output. So I think the answer to your question is this. You have a balance of things, that I don't think is an ideological question, as to whether you prefer to have the Government have an oil company or foundation that does it. Obviously there would be big organizational and bureaucratic problems. But putting those aside, assuming they were solved, the question is basically do you regard your invulnerability to embargo as a fundamental goal or not? If it is not a fundamental goal but only a goal that we have when prices are high and it is not a goal we have when the prices are low, then you can adopt the deficiency payment scheme with some benefit-a marginal benefit but some benefit. I think that is right. If it is an important goal and essential to us, then you do it the other way. Mr. SOLARZ. I appreciate that response. Just one or two more brief questions. Do I understand in your testimony that the IEA agreed to a reduction of 1 million barrels of oil a day? Mr. ENDERS. Set a target. Mr. SOLARZ. Is this an undertaking we made to the other member states of the IEA, that we would attempt to do this? Do we have an international obligation at this point? Mr. ENDERS. Not in the legal sense. What we have is a target and we have a program, and it depends explicitly on the availability of legislation to make that program good. Mr. SOLARZ. But if the Congress made a determination that it was not in the interests of the country to reduce our consumption by 1 million barrels a day, that would not constitute an embarrassment toperhaps "embarrassment" is the wrong word. Would that in any way contravene commitments that had been made by our country to other nations around the world? Mr. ENDERS. Yes. They understand the commitments are subject to implementation by Congress. The effect of that would be that the other countries would say, "Why should we conserve energy when the Americans have at least twice the per capita intake of energy that we do and are not doing it?" They would lower their program and the whole impact on the market would be less. Mr. SOLARZ. Do you have any figures on the percentage of the oil which we are importing today from the Arab oil producing nations as a percentage of our total oil imports compared to the percentage we were importing from them as a percentage of our total oil imports prior to the embargo? In other words, has it gone up or remained the same or has it gone down? Mr. CONANT. We have to refer both to crude and product. Product imports from that area by and large passing through the Caribbean refineries supply the U.S. market. My quick figure would be that it is probably in the range of 20 percent to include both the crude and the product. Mr. SOLARZ. Today? Mr. CONANT. Yes. Mr. SOLARZ. Twenty percent of our total imported oil comes from the Arab oil producing countries? Mr. CONANT. Yes; from the gulf. That is not appreciably different from the last figures just before the embargo. Now from sources outside the gulf there have been, just to complete the picture, two significant changes. One, of course, you know is the reduction in the amount we get from Canada and, second, the increase that we are presently getting from Nigeria, so there is a shift presently taking place as a result of the commercial decision largely that emphasizes the importance of Nigeria. Mr. SOLARZ. I saw some speculation in the papers the other day to the effect that we ought to be giving some thought and emphasis in our policy toward encouraging increased oil imports from the nonArab OPEC countries as a way of reducing our political vulnerability in the event of another embargo. My question is this. Is it technically feasible, assuming that the political preconditions could be met, for us to significantly increase our imports from the non-Arab oil producing nations? Do they have the technological capacity, assuming they would be politically willing to sell to us and we wanted to buy from them, to replace the oil we are now importing from the Arab countries? Mr. CONANT. I think this is probably true, but in addition to the qualifications you added to it there are some others as well. One is that the other governments, seeing this taking place, would wish to cooperate. Second, it would be based on an absolute assumption that the Congress would support the President in a very significant reduction of imports over the years to come. Mr. ENDERS. Perhaps I could make some more comments. Mr. SOLARZ. I am not sure I made myself clear. Twenty percent of our oil is coming from the Arab oil producing nations. I don't know what that comes to in barrels per day. Do you have that figure offhand? Mr. CONANT. That would be about three-excuse me; about two. Mr. ENDERS. One and a half. Mr. SOLARZ. What I am asking in effect is if the non-Arab oil producing nations wanted to, could they increase their production by 11⁄2 million barrels a day in order to supply us with the sufficient amount |