Or do you favor keeping the two-tier system as it is, or would you favor changing it and averaging out the price? Or would you favor rolling the price back if there is any other alternative, other than that? Dr. SAWHILL. I oppose the administration's approach because that in effect amounts to a rollback of the price. You are decontrolling the price, imposing a windfall profits tax, which in effect rolls back the price to $6.50. It seems to me the two-tier system has given us the benefit of stimulation for bringing on new supplies. I am surprised the administration has proposed this kind of rollback.

But frankly, what I would favor would be a gradual decontrol of the old oil price.

Senator BARTLETT. Two years? Three years? One year?

Dr. SAWHILL. I really don't know how long it would take. Perhaps 50 cents a year. So it would probably go over a period of 4 years or so. Then, I would take a careful look at what Mr. Lichtblau has talked about, and that is freeing up certainly tertiary recovery and some kinds of secondary recovery immediately.

Senator BARTLETT. Tertiary recovery, as you know, amounts to next to nothing.

Dr. SAWHILL. I know.

Senator BARTLETT. Mr. Lichtblau.

Mr. LICHTBLAU. I would agree that tertiary recovery is a small factor but secondary recovery is not. I think there is at this time the question of how much more oil we can get if we do free secondary recovery. We will get some more oil immediately and over a longer period of time it could be a substantial amount.

This is one area where we can assume a benefit from the additional costs within a given time. I don't think we need to increase new oil prices from the $11 level. That is enough of an incentive for anyone to go into new oil.

Old oil which has been produced before 1973, was already profitable before the $5.25 level. However, we have to consider the old oil price of $5.25 is now 15 months old and we have had inflation during that time so $5.25 in mid-1975 is a lot less than it was in late 1973.

I think the minimum we have to do is adjust old oil prices to reflect partly, not fully, the inflation increase and also remove price control from any secondary recovery which would maintain production or increase production.

This would increase production, and while it would have an upward effect on the overall cost of oil it would be far less than the proposal by the administration. And it would have an immediate, or relatively short-term, positive impact on additional supplies.

Senator BARTLETT. You favor deregulating new natural gas, Mr. Lichtblau, Dr. Sawhill?

Dr. SAWHILL. Yes. Reregulation which may not completely free up the price but would persist it to go higher.

Senator BARTLETT. And the other gentlemen?

Mr. HERR. I would favor the old oil to supply, but gradually recognizing the macroeconomic implications on the economy.

Dr. JANEWAY. I am glad the question of natural gas was also raised because the debate over natural gas price controls has been very distorted by a kind of all or nothing approach. I think a number of members of this committee have taken the lead in suggesting that

there is room for compromise on the subject of decontrolling new gas, at least partially-in order specifically, in a way that is understandable to the public, to encourage an increased supply. And for the same reason I agree with other members of the panel with respect to secondary recovery, and in fact, any increase that can be directly justified and legitimated in terms of increasing production domestically. Senator BARTLETT. Does the gentleman in the middle also support deregulating new gas?

Mr. HERR. Yes.

Dr. COOPER. I oppose the deregulation of old oil. I think the stimulation to supply would be negligible in the short run and I think in the long run we will get ample energy at a price well below the current price of $11 per barrel.

What is needed at the present time is not simple deregulation of existing oil prices-I distinguish that from gas which has a different and much longer history-which in effect permits the OPEC countries to determine oil prices in this country.

As was pointed out by Dr. Janeway, it is not a free market price, it is a controlled price. What we need, rather, is a stable energy supply program which in effect through one device or another gives investors an assurance that over the next decade, for example, they can reap a gross return, in terms of oil equivalent, of something like $6 or $7 a barrel.

I believe for most kinds of energy that we can get in the next decade, that is an ample price to bring forward new supplies. Because of the gestation period in investments there are severe limits as to how fast you can bring those on.

I would like to say one thing about tertiary recovery. That, it seems to me, is the great underemphasized resource in this country. As you say, it is practically nothing now, but the potential there, if I understand it correctly, is very great.

I would encourage whatever R. & D. needs to be done, and again, to repeat, I think we need some stability in our energy program, not a very high price.

I would, however, deregulate new natural gas. That is a different. matter.

Senator BARTLETT. You favor rolling back the price on old oilDr. COOPER. On new oil.

Senator BARTLETT. On any oil.

Dr. COOPER. I would not roll back the price of old oil. New oil prices, I think, will fall in the course of time, in the course of the next 6 or 7 years.

Senator BARTLETT. Thank you.

The CHAIRMAN. Senator Johnston.

Senator JOHNSTON. Thank you, Mr. Chairman. I think the only good thing that could be said about the President's tax program on energy is that he has caught our attention.

I see this panel shares my enthusiasm.

The one thing that I thought was curious and I think is notable about this whole debate and about our conversation today, is the little amount of time and thought and discussion given to the place of Arab petrol dollars investment in the American economy.

It seems to me that has to be one of the most important centerpieces in the whole economic equation. My thesis is that long-term investment as opposed to the hot money, but long-term investment in petrol dollars in our economy is the only real solution for keeping the value of the dollar up, solving or at least ameliorating the balance of payments problem.

Yet we have no policy at all on the investment of Arab petrol dollars. Nothing is prohibited specifically. Yet by the same token, nothing is permitted.

I think there is a great deal of fear and trepidation on the part of the Arabs-namely, we don't tell them they can't buy the Alamo and when they try to, we get upset.

I guess the same thing would be true of Pan Am or other investments.

Now, my question is this. Three questions. But first, is investment, long-term investment of Arab petrol dollars in our economy, is that the balance of payments asset which I think it is?

That is, is a dollar invested herein long-term investments almost as the dollar on the plus side of the balance of payments?

Second, what are the dangers?

Third, why haven't the Arabs invested in long-term investments in this country?

Dr. Lichtblau uses the figure of $11 billion, I think all of that is short term. What Bill Simon calls hot money.

So my first question is, will it cure the balance of payments problem on an almost dollar per dollar basis.

Dr. COPPER. As it happens, Senator Johnston, I have written an article on this subject which, with your permission, I would like to submit for the record.

The CHAIRMAN. Without objection, it will be included. [The article referred to by Dr. Cooper follows:]

[From the Saturday Review, Jan. 25, 1975]

1975 INTERNATIONAL BUSINESS REVIEW-WILL ARABY BANKRUPT THE WORLD? The New Year finds the world economy reeling. The quadrupling of oil prices by the Arab nations has produced a domino effect of unprecedented impact upon the citizens of the world community. This latest international cartel now holds its cold hand upon the growth and progress of both industrial and undeveloped nations. All suffer, and the dizzy spiral of inflation and financial insecurity races unchecked.

What are the Arabs seeking? What are their real goals and ambitions? The following special section explores the promise and peril posed by the Arab petrodollar and offers a prescription for U.S. energy self-sufficiency.

THE INVASION OF THE PETROL DOLLAR

ARAB OIL DOLLARS ARE LIKE BAYONETS: YOU CAN DO EVERYTHING WITH THEM BUT SIT ON THEM. NOW THE WEST BRACES ITSELF AGAINST A BOMBARDMENT OF PETROL DOLLARS.

(By Richard N. Cooper)

Few world happenings in living memory have stirred up such a storm as has the recent petrodollar invasion of the West. But just how much of a threat to Western institutions is this tidal wave of Arab money?

Despite all the scare headlines, the prospects are perhaps more reassuring than they are frightening. Indeed, there seems an excellent chance that this second great Arab irruption into Western history will, in the end, leave both the West and Middle East more sound and secure than ever before.

But in the short run, huge Arab petrol dollar earnings can be alarming. The problem began during the Yom Kippur war, when the Arab states placed an embargo on oil sales to the Netherlands and the United States. This embargo was momentous. Above all, its success prove to the 12 members of the Organization of Petroleum-Exporting Countries (OPEC)—which includes such non-Arab states as Iran, Nigeria, and Venezuela-that by acting together to restrict oil supplies, they had the oil-consuming countries over a barrel. Now it was evident that dependence of the major industrial countries on imported oil was so great that, at least in the short run, they would stand still for paying very much higher oil prices. Emboldened, OPEC instituted the now-notorious fourfold increase in crude-oil prices on January 1 of last year. At one stroke, this price leap gave a further fillip to worldwide inflationary pressures and reduced real incomes in all oil-consuming nations. For ths reason, it introduced a strongly contractive force into the world economy-contributing to, if not causing, the current world recession. Ironically, while consuming nations worry about how to pay for their oil, producing countries are left with the pleasant task of worrying about how best to use their vastly increased earnings. Both concerns are the opposite sides of the same coin-because the world financial system is a closed process, the higher oil payments cannot leave it but must somehow be channeled and recirculated within it. As OPEC receipts flow back to the financial centers of the world, they are re-labeled "petrodollars." But petrodollars differ from other dollars only in that they owned by OPEC countries. Moreover, while most of world oil trade goes on in dollars, a significant amount also takes place in British pounds. So we have petro-sterling as well as petrodollars.

How many petrodollars are there, and where do they go? Ordinarily small problems can be handled by modest measures. But the magnitudes in this case are not small. Current estimates suggest that oil receipts of the OPEC countries were about $30 billion in the final quarter of 1974, up from less than $10 billion in the third quarter of 1973, before the Yom Kippur war. On an annual basis, this increase represents about $80 billion. Even if the OPEC countries sharply increase their spending on goods and services, a very substantial surplus is likely to remain, now running over $60 billion a year. By comparison, the level of total world trade is running at about $750 billion a year, and the U.S. Treasury bill market, the largest single financial market and one into which many petrodollars will undobtedly flow, barely exceeds $100 billion in size. The increase in oil payments probably represents the biggest proportionate switch in payments flows that the world economy has ever seen in such a short time, not excluding major wars.1 This vast rearrangement of international-payments flows raises several important problems, some short-run, some long-run:

(1) While the oil funds will sooner or later come back to the major financial markets of the world, will they get channeled to those countries that need them in order to pay for their oil? (This is known as the recyling problem.)

(2) By shifting their large holdings of funds from place to place, can the OPEC countries play havoc with the world's financial and foreign-exchange markets, either willfully or inadvertently?

(3) As payments surpluses pile up year after year, will the OPEC countries own a substantial fraction of the world's assets by the end of the decade?

(4) By spending their vast new earnings, how much mischief (intended or otherwise) can the OPEC countries do to the rest of the world and to each other?

Let's look at these problems in order:

1 Actual payments in 1974 were somewhat lower than these figures would suggest, because of substantial lags in tax and royalty payments to the producing countries; actual payments during the second half of the year were nearly twice what they were during the first half, perhaps explaining why the impact was not so sharp as many consuming countries had at first feared.

All the payments must return to financial markets in one way or another. According to the U.S. Treasury Department, during the first eight months of 1974, roughly one-quarter of the total OPEC surpluses were lodged directly in the United States, and half were placed in the Euro-currency market, mostly in the form of relatively short-term dollar-denominated bank deposits. The remaining quarter was divided among sterling deposits in Britain, loans to the International Monetary Fund (I.M.F.) and the World Bank, direct loans to oilimporting countries, and small amounts of miscellaneous investments. These investments are of course made with funds from all oil consumers, but especially from Japan and Western Europe, which together have to pay about $50 billion a year more for their oil than they did before 1974; the increase in the American oil-import bill is roughly $17 billion. So there is considerable discrepancy between the source of funds and the immediate destination of investments.

What about the recycling problem? OPEC funds rechanneled to financial markets will be available for borrowing, and indeed during 1974 a substantial amount of borrowing took place in order to finance oil deficits, especially by such countries as Britain, France, and Italy. But as the funds flowed in, mostly at short term, the major banks found their capital ratios increasingly strained. Banking operates on the principle of the law of large numbers. Banks like to spread the risk around. They worry about having large deposits concentrated in relatively few hands, and they worry about making large loans to relatively few borrowers. On both grounds, by the end of last year banks were turning away OPEC money. Formerly credit-worthy borrowers were having increasing difficulty raising enough money to pay for their oil bills, and the poorest of the less-developed countries never did have access to private channels of finance.

It became apparent, therefore, that some form of governmental action would be necessary to facilitate the recycling. In November Secretaries Kissinger and Simon offered a solution: to create a new facility associated with the Organization for Economic Cooperation and Development (O.E.C.D.), which includes most of Europe, the United States, Canada, Japan, and Australia. The new agency would link credits to energy-conservation measures taken by the borrowing countries. This proposal has the weakness that, as envisioned, it is too small (roughly $12 billion of effective credits). Further, it does not deal with the problem of oil-consuming countries that are not members of the O.E.C.D. Finally, it would relieve the OPEC countries of some credit risk, although less so than another proposal-that principal reliance for the recycling be placed on the I.M.F.-because of the lower risk involved with the O.E.C.D. countries.

There is the fear, expressed especially in Germany and in some congressional quarters here, that any new recycling facility would relieve other countries of necessary balance-of-payments "discipline." This fear is, however, misplaced in the present emergency: Credit can be related directly to increased oil bills to limit the amounts available, although this approach is not a feature of the Kissinger-Simon proposal. But it is better now to help finance these oil payments than to force foreign economies into deep depression or to adopt extensive controls on their trade with non-OPEC countries because of their inability to pay for the oil on which they have become so heavily dependent. In the long run, we must reduce dependence on imported oil; but in the near future we must see these countries through the difficulty. The funds for borrowing are available from the OPEC countries themselves. We simply have to find a way to get the funds to the countries that need them.

A problem of great seriousness, though fortunately not of great magnitude compared with the total, is how to pay for the oil necessary for the poorest oilconsuming nations of the world. Of these, India is the largest, but there are also about 40 other Asian and African countries. Deepening world recession would worsen the plight of these countries by reducing demand for their export products. OPEC countries have pledged direct loans to a number of these countries-but not enough so far. If future defaults are to be avoided, some form of subsidy to these countries is necessary. Parliaments in the industrial countries will balk at having to pay higher oil prices twice over, directly and by additional assistance to the poor countries. An ideal source of additional aid, which would not strain the budgets of industrial countries, would be the annual sale of modest amounts of the I.M.F.'s large gold holdings, valued at $6.5 billion at official gold prices and worth about four times that at market prices. Sales of about $250 million a year (at official prices) would depress market prices somewhat but would still leave capital gains sufficient for providing substantial interest-rate subsidies or reserve funds for loans to the poorest countries. Now is an especially opportune time for such sales, because Americans have just been allowed to buy gold freely for the first time in more than 40 years.

What about possible market disruption by OPEC? By suddenly withdrawing their funds from any particular market, the OPEC countries will certainly be able to disrupt financial or foreign-exchange markets. But the major financial countries can keep such disruptions from getting out of hand if they are willing to work together to do so. They must be prepared to recycle funds back to the market from which they were withdrawn, so as to smooth out the effect of the withdrawal. In the case of commercial banks, this means providing adequate rediscount facilities at central banks; in the case of short-term securities, it may require central-bank purchase of the securities sold off by the OPEC countries;