There must be positive incentives to build new independent refining capacity in this country and all of the independent marketing and refining groups will, I am sure, be happy to work with you and your staff and with other political leaders in Congress to help frame out the kind of incentive program that is vitally needed. Gentlemen, we are at a crossroads of such importance that it cannot be overstated at this point in our national economic life. We are going to opt either for a permanent high energy cost economy which will exacerbate our recession and our inflation, or we are going to embark on a conscious policy of more moderately priced energy designed to keep our economic structure competitive in the world market. I would like to recommend that the Congress look at the establishment of a moderate energy cost program. The administration wants to take the 85 percent of our energy that we produce domestically and hook it to the price of the 15 percent of our energy which we import letting the tail wag the dog. This does not insulate us from OPEC. Rather, it ties pricing for our whole energy structure directly to OPEC's prices-plus, of course, $2 a barrel. In a very real sense our entire energy production is put under the pricing control of the OPEC countries. There are those in the oil and gas industry-and. indeed, within the administration-who argue that price controls should be lifted on all domestic oil and gas so that they can raise the "free market" price. But there is no "free market" price in the world today. OPEC's prices are political, not economic. To illustrate: it costs 16 cents to produce one barrel of Saudi Arabia crude oil today; yet, today's selling price is $10.46 per barrel. If we really wish to insulate our economy from OPEC pricing, the only logical way to do it is break away from their politically established prices by establishing prices of our own for the energy which we produce ourselves. We are uniquely able to do just that since we import only 15 percent of our energy needs. I would recommend that the Congress take the two different prices which currently apply to domestic crude oil-the old crude oil price which is controlled at $5.25 per barrel and the new crude oil price which fluctuates at about the level of the landed cost of OPEC crude or, say, about $11.50 per barrel-and average these two prices, thereby creating a new single price on all domestic oil. It could be set slightly lower than the weighted average of the two prices today. With a small rollback of domestic crude oil prices there would be a deflationary effect on the economy-rather than the wildly inflationary effect of the administration's plan. Such a weighted average price might be set at, say, $7 per barrela reduction of perhaps 20 to 35 cents per barrel from today's weighted average price. U.S. refineries under the Mandatory Allocation Act would continue to receive their prorata share of total domestic oil at the new fixed price. This would promote more refining capacity, including more independent refining capacity, since refiners would be able to count on lower weighted average crude oil costs than their foreign competitors. Once the new lower domestic oil price has been established, new natural gas prices could then be deregulated without fear of a precipitous jump in natural gas prices, since only a small volume would qual ify for deregulation in the first year and since a price ceiling would be set by the new lower domestic oil price. In short, new natural gas prices would only rise to the value of the alternative energy source, i.e. oil prices. The weighted average crude cost to U.S. refiners would be about $8.50-70 percent at $7 and 30 percent at $12. Under the administration's proposal, of course, deregulated natural gas prices would rice to the equivalent of $14 per barrel of crude oil. Similarly, the new lower domestic crude oil price would put a ceiling on price raises for coal. Yet, even with a moderate increase in natural gas prices resulting from this approach, conservation of natural gas would be increased just as conservation of heating oil during the past year has responded to higher heating oil prices. Even at a new $7 price for all domestic crude oil, there would still be adequate incentive to drill and develop additional oil supplies. And with new natural gas prices deregulated, there would be an equal incentive, now missing, to drill for and develop additional natural gas supplies. If an additional demand depressant is needed, and I am not sure it is, then plans such as those suggested by IOMA and NEFI could be put in place in order to moderately cut consumption of gasoline. Such a low energy cost alternative to the administration's plan would achieve the following: Slightly reduce, rather than sharply raise, oil prices to consumers for all petroleum products except possibly gasoline. Slightly raise gasoline prices, if other steps fail to curb gasoline use. Go hand in hand with other long-term conservation measures, such as Federal taxes on high horsepower or heavy automobiles, new tougher insulation standards and tax incentives to insulate both commercial and residential building. Provide sufficient incentive to continue drilling for new oil and increase incentive for drilling to discover and develop new natural gas supplies. Increase incentives for the addition of new refining capacity, including new independent refining capacity, thereby reducing our dependency on foreign product imports. Pinpoint conservation when it is likely to do the most good, that is, natural gas and gasoline. Continue the modest price reductions now flowing to the East Coast on imports of refined products by continuing the existing price equalization program. Allow the tax rebate and tax reduction and reform measures to really do their job of stimulating the economy without an economic drag offsetting them from the energy sector. Put a system into operation with the minimum of operational and administrative difficulty since allocation and price equalization regulations are already in place and functioning. Eliminate the need for rationing, new tariffs, or protective quotas. Fit perfectly with an emergency strategic storage program designed to lessen our vulnerability to disruptions of foreign oil supplies. Insulate our economy from OPEC price decisions whatever course they take. Strengthen our competitive export position by providing lower energy costs to industry and agriculture than the energy costs now prevailing in other industrial countries. Improve our balance-of-payments position as a result of our more competitive position in world markets. In short, this alternative program is not inconsistent with the administration's objectives. It does virtually everything the administration wants to do. But it does so in a way that strengthens rather than weakens our economy in both the short and long term. I would like to pause now at the conclusion of my remarks to try to gain perspective at this critical juncture by reflecting on a short poem. by Robert Frost-a poet we like to call our own New England sage even though he was born in California. Sometimes a poet like Frost can illustrate a truth in the language of nature in a way that makes us all understand the truth a little more fully. "Two roads diverged in a yellow wood, "Then took the other, as just as fair, "And both that morning equally lay "I shall be telling this with a sight Senators, as you may know, the title of the poem is "The Road Not Taken." I would hope that when the Congress gets through fully analyzing the President's energy program that it will become "the road not taken." I thank you very much for inviting me here today. The President has certainly handed you a challenge, but it is also an enormous opportunity because you are now in a position, and this committee is a key one, to come up with the Nation's first energy program. I think it can be done and done in a positive way that reduces our vulnerability by cutting waste, and it can also be done without a massive new dose of inflation and without dragging our economy further down the drain. Thank you very much. Senator JOHNSTON. Thank you very much, indeed, for a most excellent statement. Not only is it good in objective terms, but I happen to agree with about 95 percent of it. So that makes it very, very good. [The article from the New York Times referred to on p. 178 follows:] [From the New York Times, Jan. 31, 1975] SIMON LOWERS FORECAST ON OPEC CASH BUILD-UP (By Edwin L. Dale, Jr.) WASHINGTON, Jan. 30-Secretary of the Treasury William E. Simon, citing a detailed new Treasury analysis, told Congress today that the buildup of petrodollars in the oil-exporting countries would be much less in the years ahead than had been estimated last year after the sharp increase in the price of oil. Mr. Simon said that new estimates by economic forecasters "support the view that the intemational financial aspects of the oil situation are manageable." The Treasury's analysis, made public later in the day, estimates a peak "financial accumulation" of the producing countries of $200-billion to $250-billion by 1980 and then a leveling out followed by a decline starting about 1985. This contrasts with estimates of the World Bank last July, for example, that the accumulation would reach $653-billion in 1980 and $1.2-trillion in 1985. The analysis also concluded that "there is no reason that the accumulation of substantial debt by oil-importing nations to oil exporters need undermine either the solvency or the liquidity of oil importers as a group." The study was made by Thomas D. Willet, Deputy Assistant Secretary of the Treasury for Research. He referred to it at a conference here earlier this week but did not publish it until late today. Mr. Simon, testifying before a Senate Finance subcommittee, said, “There is a growing consensus among economic forecasters that the financial accumulations of the oil producers will not reach some of the huge figures predicted last year." Citing a figure in the range of $200-billion to $300-billion, Mr, Simon said the new studies suggest that by the late nineteen-seventies or early nineteen-eighties the process of accumulation will have been substantially completed, and that the oil exporters collectively will begin to run a current account deficit [in their balance of payments with the rest of the world]. MORGAN PROJECTION NOTED He noted, without mentioning it by name, the recent projection by the Morgan Guaranty Trust Company that the peak accumulation would come as early as 1978 at about $250-billion. Three things have happened to alter the once-alarmist view of the financial situation: The members of the Organization of Petroleum Exporting Countries have proved able to import much more in goods and services from the rest of the world than had been thought likely. New Commerce Department figures show; for example, that United States exports to OPEC nations rose 80 percent last year to $8.1-billion. World supply and demand for oil have reacted to the higher prices, with the result that over the years ahead the OPEC countries will export less oil than had once been thought, though they will still export large amounts. Historical and related analysis, emphasized in Mr. Willett's paper, has shown that, for individual importing countries, the magnitudes of the. actual and prospective debt and financial flows are not abnormally large. Put another way, problems of this magnitude have been handled without great difficulty before. "There is no logical need for large accumulations of financial assets by the oil producers to lead to international financial collapse or to insurmountable problems of debt service." Mr. Willett said. "For the group of oil-importing nations as a whole, the conditions which will require that accumulated debt be paid off [that is, an OPEC current account deficit] also provide the means for paying off the debt. "The aggregate magnitude of the oil transfers is unprecedented in terms of the size of the world economy. On a per-country basis, however, the capital inflows implied for the typical oil-importing country are well within the range of historical experience." At present oil is "paid for" by a flow of deposits and investments by the OPEC countries in the consuming countries, mainly the industrial countries. This is the "capital inflow" referred to by Mr. Willett. SEPARATE PROBLEM SEEN Both Mr. Simon and Mr. Willett said that, while the financial problem was "manageable," there was a separate "real economic" problem. In brief, this is the current and future transfer of real goods and services from the rest of the world, through exports, to the OPEC countries. Such a large transfer, while paying off the "debt," involves some reduction of the standard of living in the oil-importing countries from what it otherwise would be. Mr. Willett emphasized, as did Mr. Simon in different words in his testimony, that the fact that "continued oil deficits need not cause a financial collapse of the western world should not be taken as a rationale for the view that the oil price increases are of little consequence." "Short of war," he said, "the oil price increases, if maintained for any number of years, will probably cause the greatest misallocation of economic resources the world has ever seen." Earlier this week, Henry C. Wallich, a member of the Federal Reserve Board, struck a similar, though more cautious note on the petrodollar problem. Addressing a banking conference in Singapore, Mr. Wallich said: "In recent months a feeling has gained ground, I believe, that under present conditions the problem may turn out to be manageable in a broad sense. Nobody, I believe, can be completely sure of this either way." Senator JOHNSTON. Mr. Embersits, since your statement is not as general as Mr. Owens' and Mr. Buckley's, with your concerns, we will go ahead and question Mr. Owens and Mr. Buckley as a panel and then we will come to your statement a little later on. Mr. Buckley, you also criticized the two-tier pricing system. You said if you brought the price of crude down to $7 a barrel that that would cure our problem. In effect, that would be reducing the price of newly found oil and the price of stripper oil from $10 or $11 à barrel down to $7. The independent petroleum people no later than yesterday told me that this kind of pricing system would virtually put them out of business; that the cost of drilling new wells is so high that they need all of that money to take the risk out of finding new oil and gas. Is that true? Mr. BUCKLEY. I do not think you lose much at $7 or $7.50 a barrel. I think there will be some marginal geologic areas that do not get looked at but they probably do not deserve to be looked at. Under the present program, any barrels that you find you can sell for $10.50 a barrel. Second, you get a barrel of old crude, so, in effect, for every new barrel you find you can get $17 a barrel. That is just way too much incentive, so you have a superheated, overheated scramble to drill anything that might look attractive, and I don't think that is economic. I do not think that you have to give that much for exploration and development. With a reduction in some of the more marginal areas, you might see some of those prices and some of those leadtimes on pipe and other equipment lessening, and I think most of the economically attractive oil and gas would still be looked for. At the $7 equivalent decontrolled gas price, you would have more gas to look for. This is an area where you need more research. I would not buy a position that say we need $11.50 per barrel. If we need that, then we are certainly in a far different posture than we were just 18 months ago because, at that time, when the National Petroleum Council finished their study of what was needed to cut our imports over the rest of this century, they had four cases, and their low-energy case |