of oil so that we would not be dependent on any further imports from the Arab oil producing nations? Mr. ENDERS. Could I step back a moment and then come back to that question. There are two kinds of imports, two kinds of embargoes that you can suffer and we suffered both last time. One is the direct embargo in which the exporting country says no oil to the Netherlands and no oil to the United States. The other one is the one that is much more effective in which the exporting country simply turns down the production. Now let's assume for a moment there was a situation in which the United States was importing no Arab oil at all but only oil from countries that would not impose an embargo on us. Let's say that for example but then say that the Arab countries were to decide that they would cut production in half, they would create a scarcity throughout the world such that all the other countries would have to compete for all the available oil. The price would be up enormously, the quantities available to everybody would drop and the result would be an embargo on the United States just as surely as if we had been importing directly from the Arab world and were dependent upon those sources. The underlying situation is such that the world oil market is one oil market. The other situation is such that dealing with Canada and Venezuela they will not for political reasons, we believe, embargo us. You have got the basic problem. Now the second question on that is to what degree can you encourage production? There is an advantage, of course, in having your sources mainly the sources of countries that will not take political action against you. Even within this political framework it is a little better but not much better. Canada's position is deteriorating and we think they will no longer be an exporter, they will be becoming a net importer within the course of the decade. So that does not solve that problem. Venezuela is in a conservation program and is gradually decreasing its level of production. They are not able to produce substantially more than they now are. Indonesia and Nigeria have important reserves and could produce a great deal more. Iran does not have important reserves and could not produce very much more. I think I have covered the main non-Arab countries. Mr. SOLARZ. Mr. Chairman, I think I have more than exceeded my time. My distinguished colleague from New York is waiting in the wings and I will yield to him. Mr. FRASER. All right. I am delighted to yield to Chairman Bingham. Mr. BINGHAM. Thank you very much. I appreciate that. I do have to leave shortly. I meant to suggest that there would be a great deal of difference in the consumption between your proposed price floor of $7, say, and the international price of $4.50. Do you think there would be? Is there that much flexibility in the demand for oil products in this country at that level? Mr. CONANT. Probably, ves. Mr. Bingham, and certainly in the longer run. The considerably lower price would keep us where we have been where the availability of energy is left undisciplined, and 51-727 - 75-5 there has been an almost unlimited-certainly unrestrained-growth. Mr. FRASER. Would the gentleman yield. The chairman's $7 and $4.50 a barrel was looked at as motor fuel, the 6 cents a gallon. I heard an awful lot of arguments about 6 cents a gallon on motor gasoline is not going to have much influence on the motorists of the United States. I am just curious when it is translated to those terms why the different set of opinions. Mr. CONANT. Well, first of all it is an educated guess that it would result in that amount on gas but of course we are talking, I thought, about energy generally as it is used throughout our economy. Mr. BINGHAM. Where would the flexibility be? Certainly not in home heating oil. Mr. CONANT. I would believe, Mr. Bingham, that the availability of cheaper energy in this country would not be countered by conservation programs. Lower prices would discourage the investment into other forms of energy and we would be back where we were. Mr. BINGHAM. That is a different argument. Mr. CONANT. That is part of it. Mr. BINGHAM. That argument I am familiar with and am trying to be sympathetic to it. Mr. ENDERS. Congressman, perhaps I could answer this. Mr. BINGHAM. You are arguing that we have an additional reason for holding the price at $7 and that would be not encouraging a lot of additional consumption. Mr. ENDERS. It deals with both sides of the equation. All of the studies that have been done in the Government and I think the great majority that have been done outside the Government show long-term elasticities are very substantial, Congressman. When people are dealing with only a small change in gas prices in the short run, they don't go out and buy a new car that has a lower fuel usage, but over the long term they do. They don't go out and buy home insulation because heating oil has gone up by 13 or 14 percent in the short term, but over time they do. You have seen it this year for the first time in a long time. People are upset about utility bills that are not overpowering in terms of their overall income but they say they are going to do something about insulation. I think that in almost every field you find that in the long term people respond to this kind of difference, particularly when you get to very low levels; that is to say, if gasoline is at $3 a barrel. I don't think the difference actually translates, Mr. Chairman, into a difference of 6 cents a gallon because you have in effect a case here where you are at almost one-half the level. Mr. FRASER. Well, the difference between $7 and $4.50 per barrel would be 6 cents per gallon. Mr. ENDERS. Cutting it down by 40 percent. Mr. FRASER. Well, it is 6 cents a gallon, isn't it? Mr. ENDERS. That suggests that a gallon of gasoline is almost all processing whereas the largest part of it is crude oil. In other words, gasoline in your example starts out by costing, let's say, 55 cents. Are you only chopping 6 cents off of it even though you are chopping 40 cents off the crude oil? Mr. FRASER. Forty cents off the crude oil? Mr. FRASER. I am just dealing with that price increment. The difference between $4.50 and $7 per barrel oil if you carry the per gallon increment is 6 cents per gallon. I am aware there are markups and all of that. Mr. ENDERS. What I am suggesting is that the difference is more likely to be a difference between 55 cents a gallon and 35 or 40 cents a gallon for gasoline. Mr. FRASER. How could that be with only 6 cents? Mr. ENDERS. Because you drop it by 40 percent. Mr. FRASER. Well, the cost of crude oil in a gallon of gas, at $11 per barrel, is only 22 cents. Mr. ENDERS. That I can't verify. Can you verify this? Mr. FRASER. You divide $11 by 42. All you need is a little pocket calculator. Mr. ENDERS. I will give you the point, Mr. Chairman. Mr. BINGHAM. I would like to get to the other side of the floor price and how do you visualize or how do you expect that the import price can be brought down to something like $7 ? Mr. ENDERS. Well, it will be brought down when there is enough market balance to give it that; that is to say, when you have enough production in the consuming countries of all types of energy-including conventional, nuclear and coal-so that the importability of the foreign oil will be reduced to such a level that finally the OPEC collapses. The OPEC now is producing about 26 million barrels a day and unfortunately it seems to be in quite good health; that is, it is able quite effectively to maintain prices. Nobody knows really how far you have to reduce that total market from the 26 million barrels a day presently to the point at which internal forces would cause the OPEC to collapse as a price rigging cartel. Mr. BINGHAM. Isn't there some way of developing competition that would break the cartel? Mr. ENDERS. Among the members of the cartel? Mr. BINGHAM. Right. Mr. ENDERS. Well, the most effective way that we know is to push down the overall market for OPEC oil. It is now 26 million barrels a day. If we could get it down to 15 million barrels a day, then given the fact that each of those countries has development programs, has big spending prospects and import demands, all of that will create a pressure underneath the OPEC as the market comes down so people will want to cheat in order to get a bigger market share. The only way to create that is to bring their overall market down. Mr. BINGHAM. What about the difference between the possibility of bargaining more effectively through, let us say, a purchasing agency of the Government as against leaving the buying to oil companies that really have no incentive to bring the price down? Mr. ENDERS. The oil companies sell oil in a volume for what they can get for it. They are also governed by the market. If you had an overall U.S. oil company that were doing the bargaining with all of these countries, what would the result be? Well, suppose that our oil company went around to Indonesia and said, "Look, I will not buy your oil at $10.12 a barrel, I will buy it at $9." The Indonesians say no. Then what we have to do is we have to develop an alternative source somewhere to make that threat good because we don't want to buy from them. Where is it? What have we done? Then we say: "Look, we will give you a bigger volume. We will give you a bigger volume and an assured volume over time if you will go to $9." Then they say maybe, "Fine, but at the present time the price is to my advantage so I can sell all I want. I am actually accumulating a lot of security that I don't particularly want, all these excess functions. I am not too pressed to sell. I don't need to have this long-term consideration you gave me." I don't know really, Mr. Bingham, how it changes the balance very much when we have the present situation which all these countries with the exception of Algeria are in fact earning more than they are spending. That is the basic problem. When we get the overall market down to a level where not only Algeria but a lot of other countries are spending more than they are earning, then you have some prospects but that depends on the overall market. You can maybe exploit them if you had a U.S. oil company but that is a tremendous effort for a rather small gain to establish a whole new bureaucracy in order to get this bargaining advantage. You could do that perfectly well by using the Trading With the Enemy Act that you now have in which you gave instructions to American firms as to where they should lift their oil. You could do that perfectly well by a quota system in the United States where you get oil from one place rather than another. There are lots of other means that you could use for that still rather marginal bargaining game. Mr. BINGHAM. Thank you, Mr. Chairman. Mr. FRASER. Let me apologize. It is 16 cents. My calculator was not working. Mr. ENDERS. Congratulations. Mr. FRASER. Just one or two questions. My impressions is that the French Government purchases all oil imported into France. Mr. ENDERS. No. Mr. CONANT. No, that is not true. CFP is the principal French marketing company in which the Government has about a 35-percent interest, but CFP is by no means the largest importer into France and there is no direct Government involvement in the purchasing. Mr. FRASER. Well, I don't want to prolong this. This one issue is not clear in the bill (H.R. 2650). How would the President implement a minimum floor price? What would be the mechanics? Mr. ENDERS. Well, I think there are two things to be said about this. One is that the President now has authority to impose import fees, quotas and other import obstructions when required for the national security. Title IX of the bill would not only authorize him to do so but in effect would require him to do so when the national security or the goals of independence were at risk. So it in effect codifies authority that already exists. In the case of the United States or of any other country that was a party to such an agreement, there would be the following options. One is to make up the difference between the world-market level and the agreed common protected price by a variable levy. Another would be to restrict imports by quotas so that the effective price of those imports would increase. You could do this by selling the tickets in a quota auction, for example. A third would be coming back to your example to have an international purchasing agency which purchased the oil at one price and sold it at another one. There are at least three main opportunities or options and there may be others. Mr. FRASER. There are two different considerations that argue for a minimum floor price: One is the encouragement of investment, the other is the pattern of consumption. Mr. ENDERS. And the third is the relationship between the consuming countries. Mr. FRASER. The competitive situation. Mr. ENDERS. The competitive situation. Mr. FRASER. Supposing that the U.S. Government were to add a tax on to the cost of oil to the consumer. How would that work? I am not talking about it as it is imported, but a tax that went on all petroleum products. Mr. ENDERS. Well, the simplest case would be a tax on an across-theboard basis but it could weigh more heavily on one product than another. If the effect of that was to offset the decline in the international price, that would also be a means of implementing it and it could also be true certainly within the terms of the concept that we have been developing with the other consuming countries that provided that the overall effect were such as to offset the decline in the international price by putting it more heavily on gasoline, for example, than on another fuel. That also would have the same effect. Mr. FRASER. What is the portion that we use now in the motor cars? Is it about 40 percent? Mr. CONANT. Forty-five percent. Mr. FRASER. Hopefully that pattern will shift but, just for the moment, if there were a change in price from $7 to $4.50 and you put, say, a 13- or 14-cent tax on gasoline, presumably if you then average it out you would have covered the difference between $4.50 and $7 per barrel. Mr. ENDERS. It seems to me that would be well within the terms of this contract. Mr. FRASER. Then the oil used for industrial purposes would flow through at the lower level and you would have presumably a competitive advantage as against another industrial nation. Mr. ENDERS. I think it would depend very much on what could be negotiated with them but at this point nobody has any final notions as to what should be ruled on and this kind of notion would not be ruled out. Mr. FRASER. The value of that is we reserve the competitive aspects, whereas if you create an artificial price structure in the United States you not only rule out competition, you also encourage all kinds of profit-taking and even beyond that you encourage the exhaustion of domestic supplies. Mr. ENDERS. Let me answer that particular point because I think that is an important point. Let's say for a moment that, in the example that I gave you, instead of applying deficiency payments to offset a decrease in prices that you cap all that stuff but kept it in working order. Then let me just give you some sort of off-the-head numbers. |