If you want them more precisely, you want us to do a paper on this, maybe we can do it a little more closely. What we would be talking about then very probably is shutting in some 10 million barrels a day of production-a lot of Alaska, certainly the Outer Continental Shelf, maybe a lot of nuclear plants, all kinds of things. Who knows how much? Ten million barrels a day is about the equivalent of our current oil production in this country. The investment which is represented by that is very large. I have no idea. I don't know whether the Project Independence blueprint would give you an idea of how large that investment is but it is very large. To pay in effect the carrying costs of the investment we are sure that there was some ordinary return on it. While it was shut in and not active and to keep it in operating order, it means that almost all of the ordinary working costs, variable costs, would have to be covered and would represent an absolutely gigantic expenditure. Mr. FRASER. When you include the 10 million barrels a day, are you talking about the North Slope production? Mr. ENDERS. I am talking about the new North Slope certainly depending on the old North Slope where it is. Mr. FRASER. The new North Slope is already being developed, isn't it? Mr. ENDERS. You mean petroleum reserve No. 4? Mr. FRASER. Yes. Mr. ENDERS. Petroleum reserve No. 4 has not actually started development, no. We think it is going to come in fairly expensively, somewhere in the range of $7 a barrel. Mr. FRASER. Is the process of development underway? Mr. ENDERS. Do you want to answer that? Mr. CONANT. No, sir. Not yet on any scale, no. Mr. FRASER. Where does it stand? Mr. CONANT. The exploratory wells have been drilled. We have high expectation that major sources will be developed. The decision is yet to be reached on the way in which this is to be developed under some Government aegis or Government service contract to a private company. It has not yet been determined. Mr. ENDERS. Mr. Chairman, the only comment I want to makeand I will be glad to have the study commission give you more detail if you think it is useful-is that both the operating costs and charges to keep this kind of inactive capacity in being are apt to be gigantic. On the other hand, vou can attain the same thing much more economically by storage. To the degree that you want to keep standby capacity, it always pays to look for a storage option first. Mr. FRASER. Well, I was going to come to that because it seems to me that would be one of the options-you would contract for the building of reserves on the Government-owned development or from some high cost facility so that you would have a minimal guarantee market. Mr. ENDERS. Well, it is again much better than any oil that you can economically produce if you want to buy up oil and store it. One way to obtain an element of independence is certainly by a big storage program. Now we have built into Project Independence proposals for the storage program you mentioned yourself earlier of 1.4 billion barrels enough to cover civilian requirements of more than 3 million barrels a day for a year. Now that, it seems to us, would enable us to run an import level of 4 million to 5 million barrels a day with immunity because we could draw on the 3 million barrels a day to cover most of an import interruption and then cut back consumption 1 million to 2 million barrels a day by conservation measures. So we could have immunity with that kind of a program. As you yourself indicated, to go much beyond 1.4 billion in the storage program becomes very difficult and I don't know whether it actually is feasible in a 10-year period. Mr. CONANT. Very doubtful. Mr. FRASER. You mean just for lack of storage space? Mr. ENDERS. And the infrastructure system that has to be created. Mr. FRASER. I think the underlying problem here is perhaps the skepticism some of us have about Project Independence. It is one thing to protect ourselves against an embargo; it is another thing to suggest that somehow we are going to take leave of the rest of the world and try to create a degree of independence with respect to oil that we don't enjoy with respect to a lot of other things. Whether we like it or not, we will be a part of the world economy for a long time to come, and trying to create an artificial degree of independence is going to be enormously expensive and will slow down economic growth in the United States. We must move through our own internal choices, as I hope we will on the automobile. I have never understood why the administration did not go that route. Mr. Ford made some public statement prematurely that he was opposed to it and Mr. ENDERS. There seems to be quite a lot of sentiment in the Congress against it, too. Mr. FRASER. It all stems from the same thing. Congress will not raise taxes if it is given any other choice. That is one of the reasons why the industrial world is in a depression. The Congress must face up to the other half of the theory, but I think the President is guilty the same as Congress-it won't do something that is unpopular. What is so striking about the European countries is that they do it so easily because their political systems are strong enough to make these decisions. We need a little leadership out of the executive branch rather than what I regard as a confused program on domestic conservation. In any event, just by going to a horsepower, or weight, or mileage tax down the road, we could encourage considerably smaller cars. Mr. ENDERS. It is very slow acting though, isn't it? Mr. FRASER. To build up a reserve is the thing we most need, and we should begin doing that a little more rapidly. It seems to me strategic reserves is the most critical thing for achieving a resilience in the face of embargoes to create artificial markets. To go into Project Independence raises very great policy questions and I think this is probably what underlies the skepticism that one sees in looking at the whole energy approach to the administration. Mr. ENDERS. Could I comment on that? Mr. FRASER. Sure. Mr. ENDERS. I think you are right to emphasize storage and I hope you will emphasize storage in your talks with other Congressmen because there has been a lot of skepticism about that part of the energy program, too. Unfortunately some of the proposals that have been coming out of the Congress have been for much smaller storage programs, and I would hope they would be increased. If the analysis confirms, and we think it will, that a billion barrels of storage in the next 10 years is a big program already and a big bite to take even if you are able to double that, you still have a fairly basic problem. That is that the storage program would cover at best only the decrease or the deterioration in our import situation that we predict will occur during that 10-year period and probably could not cover that. In other words, we are going to get an increase in imports of more than 3 million barrels a day and maybe even more than 6 million barrels a day if we don't adopt the energy program. Project Independence does not mean going to zero imports, it means keeping the import level where it is now and preventing things from getting worse. We are talking about 4 million to 5 million barrels a day as a target for 1985. We are presently at 6.2. We are trying to keep things from getting worse really in effect and to be able to cover more or less what we have now. A shift in our overall position would result in continued increases in the old price. If we do not decrease our dependence, then the cartel will be able to increase oil prices in the future quite impressively. It is interesting in this regard, Mr. Chairman, to know what the Algerians and Iranians think about our energy program. They say that they don't believe it. They say that the United States will never explore the Outer Continental Shelf because we have so many States rights problems. They say we are not going to change the auto standards. Americans like their cars; they live in them almost as much as in houses. They say you do not bring on Alaska because you have all sorts of internal bureaucratic fights. You do not pass legislation because there is an objection against every proposal that has been made in the Congress or out of the Congress. They say don't kid yourselves, prices are going to go up, not down. Imagine what is going to happen in this country if real energy prices keep going up indefinitely. Mr. FRASER. I think we ought to be investing in new technology. Mr. ENDERS. Nobody doubts that. Mr. FRASER. It just bothers me that there is a $20 billion arbitrary tax on American consumers to finance private investment return. There has to be a better way of doing it. We need to have better flexibility. These things are bound to change. The ultimate problem of the external world does not bother me provided we deal with the problems of interruption. Mr. ENDERS. It does not bother us, either. Mr. FRASER. Plus the basic research and development that ought to be going on. I am sorry. Mr. SOLARZ. No. Mr. FRASER. Go. ahead. Mr. SOLARZ. I have a few more questions and then I wanted, if I might, to go back to some of the ground that was covered previously. I think, Mr. Conant, you indicated in your testimony that in the event of another embargo if we meet a shortfall through a drawdown on our reserves that that would impair both our refinery and distribu tion systems. I wonder if you could indicate precisely how such problems would be created and why that would be so difficult to do. Mr. CONANT. This is an area which has now been gone into in very considerable depth. The question of what constitutes a stock has been the subject of definitions in the OECD, the IEP and various groups within this country. The basic problem as I understand it originates from the fact that commercial inventories, by and large, do not exist beyond those that the market itself requires. So when you are faced with an embargo and absent the strategic reserve we were talking about, you are drawing down upon an immediately required volume of crude oil product for the daily operation of the industry. There is a certain amount of crude which cannot be extracted from a tank. There is a certain amount in pipelines which it cannot go below and similarly throughout the supply system there are minimum levels which we now know as a result of our experience last winter, sharply limit the amount of the commercial inventory that can be moved in an emergency. Now in the IEA a rough figure of 10 percent has been agreed upon while the member governments study their situations with greater care. In terms of what is our situation outside of the IEP agreement, parts of FEA-including my own shop-are now working on this question of what is the actual availability of stocks. We think is is probably quite low. We are not sure exactly how low, but we are absolutely sure that it requires a major effort of the kind of this 1 million barrels of strategic reserve. In the testimony, I allude to the fact that you can't simply draw out of the system presently any readily available reserve which is surplus to the commercial inventories of the companies, and they have been designed over the years to meet their commercial requirements. They fluctuate somewhat with seasonal variations but in terms of volumes and national security requirements these do not meet our needs. We are now trying to define what these are and then, through the legislation that has been introduced, see to it that we have more than the system presently makes available. Mr. SOLARZ. What current contingency plan does the administration have under the terms of this agreement in the event of another embargo? I gather there is an understanding that each nation would agree to reduce its consumption by a proportion equivalent to its share of the total output and that Mr. ENDERS. Total consumption. Mr. SOLARZ. Total consumption, right, and that we would have to undertake then to impose immediately a conservation scheme designed to make sure that we reduced our consumption by the obligated amount. What plans, if any, do we have to accomplish that should the situation arise? Mr. CONANT. These have not been finalized within the executive branch. This is a crash program now underway within FEA largely and the legislation that has been asked for is to give us the standby authority to implement these when and if. Mr. SOLARZ. But you have not developed the plans yet? 51-727 O-75-6 Mr. CONANT. No final plans, no. In common with many governments. We try to understand what happened last winter to be sure that improvements are put in place. Mr. SOLARZ. I would suggest that given the collapse of Secretary Kissinger's mission in the Middle East you might expedite the consideration of these alternatives. Mr. ENDERS. This is a matter of significance, I would think. Mr. SOLARZ. It would be unfortunate if we were caught unprepared. How much more time do you think you need? Mr. CONANT. My guess-not just a guess but in the next 45 days we will have completed this. Mr. SOLARZ. I think you have that much time; at least that. Mr. CONANT. I am not sure but the effort has very high priority. Mr. ENDER. That depends a little bit when we get the new authority, too, because it is much harder to do with the existing authority. Mr. SOLARZ. I want to come back to the question of our vulnerability in the event of another embargo. I had suggested the possibility of our encouraging greater production on the part of the non-Arab oil-producing nations as a way of replacing the amount of petroleum which we now import from the Arab oil-producing nations. If I understood your reply correctly, you said that while that might eliminate our vulnerability to a specific embargo on the shipment of oil to our country it would not reduce our vulnerability to a general cutback in production which would then force the other countries dependent upon Arab oil to compete for the oil that we were importing, thereby creating a shortage anyway. Is that a fair statement? Mr. ENDERS. Yes, sir. Mr. SOLARZ. Then you could say, I think, that if we were able to shift our import pattern away from the Arab oil-producing countries to these other nations at the very least it would have accomplished the objective of making ourselves individually invulnerable at least to the embargo. We might not be invulnerable politically to a cutback in production but they would not be able to single us out and say, "We are not going to ship any oil to you." Mr. ENDERS. That is why we have this agreement though because they are not able to single us out under the terms of this agreement because all the others come to our assistance, so we have got this already without holding ourselves hostage to the foreign countries you mentioned—all of which we have excellent relations with but there is always the problem of saying, "We depend on you and you fellows are going to help us in an emergency, aren't you?" Mr. SOLARZ. So in other words you are suggesting that we have that vulnerability anyway by virtue of this agreement? Mr. ENDERS. Yes; specifically the embargo. Mr. SOLARZ. But even if we were not importing any oil from them, so long as we were dependent on the importation of foreign oil in general then any significant cutback in production by the Arab oilproducing nations would inevitably create a situation where there would be significant shortages which would have adverse consequences for the economy and would put us back where we were in terms of the 1973 embargo. |