Even though the talks adjourned because of disagreement over this basic issue, several other issues were left undecided. The OPEC/LDC representatives sought specific agenda references to maintaining the purchasing power of export earnings and the real value of investments that is, indexation of prices and investments. We argued that we could not accept such references, since they prejudged the outcome of the conference. We said, however, that we were prepared for them to raise these subjects for discussion at the conference under an agenda formulation that was neutrally cast. Since the Prepcon's mandate was only procedural, we did not attempt to engage in substantive debate over indexation.

Spearheaded by Algeria, the OPEC/LDC states also opposed IEA attendance as an observer at the full conference. They maintained that IEA was a confrontational organization whose existence is not recognized by the OPEC nations. They argued that the presence of the IEA would give the conference too much of an energy orientation and that OECD presence at the conference should suffice for IEA representation.

With unanimous support from other IEA members, the United States, European Community, and Japan were prepared to condition their attendance at the conference and acceptance of any agreed agenda on IEA presence as an observer with the right to speak. We believed that to agree on IEA's exclusion would be to accept implicitly the confrontational charge. Furthermore, IEA's exclusion would prevent representation at the conference, via IEA, of many important consuming countries. This issue was not settled before the conference adjourned.

Let me note, parenthetically, that it was clear early in the first week that compromise on these fundamental differences was unlikely. Nevertheless, the participants continued their negotiations for several extra days and nights in order to explore all possibilities for accommodation. The adjournment of the Prepcon was not accompanied by recrimination among the participants.

Mr. Chairman, it is not correct, I think, simply to characterize the Prepcon as a failure. It is true that the main purpose of the meeting was not achieved. On the other hand, all participants gained a much greater appreciation of the others' views, which may have a salutary effect on future bilateral and multilateral relations.

What are the major conclusions we have drawn from the Prepcon? First, the OPEC states have succeeded in linking their interests with those of the LDC's even though high oil prices are seriously damaging the economies of many developing nations. Some LDC nations, unfortunately, find attractive the idea that they can help solve their economic problems by following the OPEC's example, that is, cartelizing and demanding higher prices for all raw materials. We expect the OPEC/LDC bloc under OPEC leadership to be a strong and vocal force in future international fora, at least until developing countries come to recognize that widespread cartelization will be neither practical nor productive.

Second, the industrialized nations demonstrated strong consumer solidarity, proving the tremendous progress that has been made in the IEA over the past 14 months. During the Prepcon, we coordinated our positions closely with other IEA members. The decision to hold firm in insisting on an energy conference and on IEA participation received

unanimous endorsement from the IEA Governing Board, which is composed of representatives from the 18 member countries.

Finally, it appears that the timing is not yet right for a multilateral dialog on key energy issues. The producers at the Prepcon showed little willingness to engage in serious discussion on energy unless the industrialized nations would consider at the same time the broader issues of LDC relations.

EFFECT OF PREPCON ON US. ENERGY POLICY

We regret that the Prepcon did not succeed. We remain willing to participate in a multilateral conference, if one can be arranged that concentrates on energy. But we do not expect our own energy policies to be affected in a major way by the suspension of the Prepcon talks. Our overall energy policy, pursued both in the United States and in coordination with other IEA countries, will continue to be to bring about a basic shift in the supply/demand balance in the world oil market. This will reduce our vulnerability to foreign supply disruptions, reduce the ability of a small group of countries to manipulate world oil prices arbitrarily and enable prices to approach their longterm equilibrium level.

The focus of our international efforts will remain in the IEA. We intend to insure that momentum is maintained as we press ahead to implement the conservation and accelerated development programs.

The Prepcon proved that other IEA members share our belief in the necessity of consumer solidarity. They, too, believe the IEA has a key role to play in dealing with the energy problem. They will, we think, work with us to insure that the IEA's importance and influence will increase in the future.

Given the leading role which the United States has played in the development of the International Energy Agency, it is most important that the United States accede to the agreement on the international energy program without reservation.

The United States is now applying the agreement provisionally pending adoption of the requisite implementing legislation by Congress. Unfortunately, the legislation currently under consideration in the House of Representatives would not permit us to adhere to the international energy program without reservation. Specifically, this legislation does not fully meet vital IEA requirements relating to demand restraint, that is, conservation, the allocation of petroleum in case of another embargo and the establishment of a petroluem reserve. The antitrust provisions of the legislation under consideration. are also deficient. While this subcommittee is not immediately concerned with this legislation, may I take this opportunity to urge you and your colleagues in the House to make every effort to promptly approve legislation which will permit the United States to accede to the agreement on the international energy program.

In the months ahead, we will also seek to intensify our cooperative bilateral relations with producing governments. We have many common interests, which provide important opportunities to work together. For instance, our Joint Commissions with Saudi Arabia and Iran are making significant progress in identifying key areas for cooperation. As we build on and broaden the scope of our activities

with these two producers and with other OPEC states, we will create in time a set of economic and political relationships that should enable us to help them achieve important national goals and to appreciate more fully their responsibility for pursuing oil policies that lend stability to the international economy.

We are convinced, Mr. Chairman, that the oil crisis will not simply go away. Our policies are designed to meet the challenge of that crisis. They will, if properly and vigorously pursued, permit us to achieve our two fundamental objectives: an international price of oil set by free market forces and substantial U.S. self-sufficiency in energy. Thank you very much.

Mr. DIGGS. Thank you, Mr. Robinson.

The President has been quoted as saying that he had many reservations about the call made at the meeting of OPEC leaders for linking oil prices with the cost of manufactured goods that the OPEC countries have to import, and also with the rate of inflation.

Could you tell us what the administration's reservations are regarding these two points and what the rationale is behind it?

Mr. ROBINSON. The oil producers have an understandable concern over preserving the purchasing power of the oil that they sell. We appreciate that and accept that as a valid concern.

The problem is, how to administer and how to establish indexation, which is a mechanical technique for reflecting changes in the purchasing power of the currency.

It also implies that we have a base from which that adjustment or indexation applies, and that base would have to be established by international governmental agreement, presumably. It moves away from the basic concept of prices established by the free play of market forces, which is our primary guiding principle. So, we have the question of a fixed price established by international agreement, which is inherent in the question of indexation. We have the problem of how do you establish an arbitrary or mechanical formula by arbitrary decision, which will reflect changes in purchasing power.

Third, we have the basic concern of how such an agreement would hold up in the face of supply/demand factors that might, if allowed to work their magic, produce a price far different than the price established by this formula.

We see no easy way, perhaps no practical way, to establish a mechanical formula that would be satisfactory for every country. We see it as probably an unworkable concept, and yet, we have not said that we won't discuss it. We have said that we have raised these questions, but we are willing to listen because we feel that that is a part of the process of dialog. The basic objective in our effort to reach a successful conclusion at the preparatory conference was to implement this dialog.

Mr. DIGGS. Well, what about other raw materials, Mr. Robinson? Why should the oil price floor be supported and not a price floor for other raw materials?

Mr. ROBINSON. The question of other raw materials is a very complex one. We do feel that there is a unique set of characteristics with regard to energy. It does require us to look at energy as something separate and distinct.

In terms of oil and gas, it is a finite reserve, and we are going to be out of oil and gas, whether it is 20, 30, or 40 years, as the basic source of our energy. We do have to look at it in those terms, whereas, with capital expenditure and the proper development most other raw materials will be available over a much longer time frame.

Second, when we get into the question of commodities, we get into the difference in interest between specific countries. We get into differences between commodities. Our position at Paris was never one of not being concerned about this problem, never one of being unconcerned about the problem created in the developing world by the very great fluctuation of price in their basic products on which they key their export earnings.

We felt that these are issues that must be addressed. We must look at these problems, but we didn't feel that we could agree to include these very complex issues in addition to oil and energy on one agenda to be dealt with at the ministerial level in a meeting of relatively short duration. In such a meeting, all sides would have engaged in rhetoric, but without any real hope of achieving meaningful results. Mr. DIGGS. Well, of course, that is an old strategy, as you know.

I know there are several issues here in Congress that, were they not tied together, wouldn't get discussed-military aid and humanitarian aid, for example.

Before this committee, we have always tied them together, because separately they just wouldn't get the same kind of attention, so we have to give our friends of the developing world credit enough to know something about strategizing on these matters.

You say, "Sure, we are willing to come back and discuss these matters as a separate agenda," but given the importance to the developed world of the question of oil, is it likely that we would have the same incentive if there wasn't some kind of interchange, some kind of reciprocity of interest?

Mr. ROBINSON. I think that is a very good question. I think, looking at it from the strategic standpoint we should also look at the OPEC role in this. It was our intent to make this a producer/consumer conference, and we viewed the LDC's adversely affected by the increase in oil price as consumers. We even proposed that we consider joint and cooperative efforts between the industrialized nations and the OPEC nations in dealing with the problem of the most seriously affected nations who were bearing a very heavy burden and an even heavier burden as a result of the increase in oil prices. The OPEC nations saw a tactical advantage in alining themselves with the LDC's in order to put all of the blame on the industrialized nations and to avoid our approach, which was, let's share the burden of the most seriously affected nations.

Now, in terms of the real needs of the LDC's, I believe that out of the Prepcon results will come a serious consideration of the problems of other resources and relationships with the LDC's. Studies that explore all facets of that issue are now underway in all of the industrialized nations. And I think that that is a favorable result of Prepcon itself.

How we deal with these problems and in which fora, remains to be seen, but clearly, we are going to face a continued effort on the part of OPEC and LDC's to link energy and other raw materials, because they do see strength in this linkage that you pointed out.

Mr. DIGGS. When we had the joint hearing on March 26,3 your assistant, Thomas Enders, stated-and I am quoting here *** agreement on a minimum safeguarded price (or oil price) *** is designed to resolve the critical dilemma which we face in the development of new energy sources" by "provid (ing) some level of protection to domestic investors against possible competition from very low-cost imported oil."

That statement left a question in our minds about the current high prices, whether or not they aren't ample incentive for the industry to invest in alternative energy sources.

It would raise the question as to why a lower price, provided for in this minimum price arrangement would provide greater incentive. Mr. ROBINSON. The question of a down-side risk protection to encourage the development of alternative sources of energy is in itself a complex question. We have, first, the need to develop within the IEA within the industrialized nations, the recognition that efforts on the part of anyone to develop higher cost energy sources is in the interest of all nations because that would reduce the overall dependency on lower cost Middle East oil. Benefits would thus accrue to all of the participants.

Therefore, there was a psychological and real economic need for establishing the importance of sharing in the responsibility and in the risk that would be involved in developing these alternative energy sources. So that, there is, within the IEA, an important necessity for tying together the 18 participating countries in a common cause.

Over and beyond that, each nation will use its own funds for developing alternative energy sources. The expense involved ranges from relatively reasonable costs for traditional and, near traditional oil/ gas sources, to substantially higher costs than the current market of $10 and $11 per barrel of oil for very exotic sources that would represent.

Certainly, the present price of oil is not the problem. The problem is that a good deal of that oil is produced at 20 or 30 cents à barrel, as low as that. Therefore, if there was an intent to use oil as a political weapon, there is always the possibility that, whether as the result of play of market forces or as a political move, the price could be lowered and create great hardship for those who have made significant capital investments in an effort to create and generate new alternative sources of energy. So, it isn't the price level. It is the certainty of a minimum price which is important in inducing investors to make the investment in the development of alternative sources.

Now, at what price level would that produce results? Obviously, each country is going to have to face different problems for different industries and different forms of alternative energy, and we are going to have to develop some realistic mechanisms and support techniques to encourage the development of the more exotic sources of oil, such as oil shale or liquefaction of coal, or tar sands, perhaps, solar.

These will require different support mechanisms, and we undoubtedly will be thinking in terms of prices above the present price of oil. Mr. DIGGS. Mr. Enders also indicated that further analysis is necessary before this minimum level of price is set, and we would like to know what progress is being made toward that end?

3 See joint hearing of the Subcommittees on International Organizations and on International Resources, Food, and Energy entitled "Legislation on the International Energy Agency."