We saw no reason to assume that such mechanisms would be ineffective if the President's energy package were enacted. One has only to recall the most recent round of energy price adjustments to recognize the interdependence within the U.S. economy in general and the impact of energy prices in particular.

Hence, we allowed these relations to fully interact in our macroeconomic simulations.

Though differing in some specifics, the assumptions underlying our analysis are broadly consistent with the President's energy package. Using Data Resources, Inc. estimates of domestic petroleum imports, the tax and price adjustments assumed generate $30 billion in increased Federal revenues and costs to the economy. In our macroeconomic model, it is this $30 billion figure that is essential, a figure that matches the administration's estimates of the energy package's costs. Recognizing this, our analysis indicates that were the President's energy program enacted, the GNP deflator would be 3 percent higher at the end of 1975 than if no energy package were passed.

There would be further spillover effects in 1976, bringing the total price level effect of the energy package to 4 percent by the end of that year. These price level comparisons imply that the rate of inflation of the GNP deflator would be higher by 2.2 percentage points in 1975 and 1.7 percentage points in 1976.

If the Federal Reserve accommodates the President's package, real economic activity would not be hurt significantly by the higher energy costs. The unemployment rate would rise by 0.2 percent in mid-1975 and would maintain that differential through 1976. Real GNP would fall by $5.2 billion by 1975:4, and by $5.3 billion in 1976.

Part of the loss of real economic activity is the desired reduction in oil use, but there are also indirect negative effects.

Assuming that inflationary expectations partially adjust to higher energy costs, long-term bond rates would be 25 basis points higher in 1976 and would dampen business-fixed investment.

The higher prices would reduce consumers' real wealth and hence real consumption expenditures. And the higher price of U.S. products would increase the relative attractiveness of foreign vis-a-vis U.S. goods, influencing our net export position. However, the model simulation shows that if the Federal Reserve is accommodating it is possible to arrange tax rebates in such a manner that the impact of the energy program on real economic activity would be quite small.

TABLE 1.-THE ENERGY-NO ENERGY COMPARISON WITH ACCOMMODATING MONETARY POLICY

Real GNP..

Difference in rate:

Unemployment rate..

A fully accommodating monetary policy, however, would require the Federal Reserve to raise the money supply by nearly 13 percent over the next year: the inflation without the energy package is likely to exceed 6 percent, economic recovery would require a rate of real growth in excess of 4 percent, and the energy package would add an extra 3 percent to inflation, implying that nominal GNP would have to advance at a 13-percent rate or more. If such an advance in total demand is to be accomplished without a renewed burst of high interest rates, the money supply would have to fully accommodate these demands. It takes little imagination, however, to foresee that the Federal Reserve would lack enthusiasm for such rapid expansion of the money stock.

Assuming that the Federal Reserve does not fully accommodate the President's program, but rather increases the money supply at only a 6-percent to 8-percent annual rate, the damage to the economy would be substantial. Short-term interest rates would rise later this year, though not to historic peaks.

Housing starts would be cut by 280,000 units in 1976. Other categories of consumer spending would also be hurt by financial conditions. And the increased cost of capital would drive business fixed investment down by $2 billion in 1976. As a result, real GNP would be lower by $8.8 billion in 1975:4 and by $20.5 billion by the end of 1976.

The unemployment rate would be raised by 0.3 percentage points by the end of this year and by 0.7 percentage points in 1976, increasing unemployment in the year by 660,000 persons. Even the possible price benefits of weaker demands are partially offset by productivity losses associated with lower real output that generate significantly higher unit labor costs than if monetary policy were fully accommodating.

TABLE 2. THE ENERGY-NO ENERGY COMPARISON WITH NONACCOMMODATING MONETARY POLICY

It is true that the goal of energy independence will impose macroeconomic costs on the U.S. economy whenever it is applied. However, the energy tax and price package is simply too big a bite for the economy to swallow in a year of deep recession and high inflation. Given our other inflationary problems, the enactment of the President's energy program would likely make 1975 another year of double

We have already seen that the economy cannot prosper under that condition, that consumer confidence is destroyed, and that ultimately business suffers acutely. The Federal Reserve is not likely to accommodate double-digit inflation, and consequently will not provide the financial conditions that make recovery possible. In other words, the extra inflation that a quick implementation of the President's energy package would imply could well deepen the recession and keep the economy on the road to depression.

The conflict between our long-term energy goals and the short-term needs of recovery cannot be reconciled, but it can be compromised.

The energy package could be reduced in size, stretched out over several years, or delayed. The decontrol of old oil prices could be deferred or done in steps. Perhaps it would be possible to find a reasonably effective blend of higher prices and of more powerful direct controls to encourage conservation. In the long run, the reliance on market adjustments that lie at the heart of the President's energy program seems the most desirable path to energy independence.

In the near term, the vigor of the President's proposal, the honesty of his presentation, and the quality of congressional debate will serve us well in the hard policy choices ahead.

The choices are real. At stake are our energy independence and our prospects for macroeconomic recovery.

The CHAIRMAN. Thank you, Mr. Herr. We appreciate another fine

statement.

We are happy to welcome back to the committee Mr. John Lichtblau, who is executive director of the Petroleum Industry Research Foundation, New York.

STATEMENT OF JOHN A. LICHTBLAU, EXECUTIVE DIRECTOR, PETROLEUM INDUSTRY RESEARCH FOUNDATION, NEW YORK,

N.Y.

Mr. LICHTBLAU. Mr. Chairman and members of the committee, the fundamentals of the President's energy program are to minimize our dependency on foreign energy, maximize the development of all forms of domestic energy, and institute a massive program of national energy conservation.

The program is intended to make us invulnerable to foreign oil supply interruptions by 1985, reduce our annual growth rate in oil demand to 1.5 percent, compared to a 5 percent annual increase in the 10-year period ending in 1973, and reverse the decline in our domestic oil and gas production, including the development of commercial synthetic oil and gas manufacture.

All of these are highly desirable goals, economically. politically, and socially. In principle, they are realistically achievable or at least approachable.

There is, of course, a considerable and justifiable divergence of opinions about the energy mix proposed by the President as well as his actual end year numbers..

But all of these must be viewed as no more than approximations at this stage, designed to charter a course in a given direction and start moving toward it. I think there is much agreement that, broadly

However, there is a world of difference between the President's long-term aims and his short-term target, that is his energy program for the year 1975.

There are no approximations here. The President has spelled out exactly how far he wants to go and how he proposes to get there.

In my opinion his short-term target is as wrong as his long-term direction is right. I am referring, of course, to his proposal to reduce U.S. oil imports by one million barrels per day this year through the imposition of fees on imported oil and excise taxes on domestic crude oil.

According to the official background memorandum accompanying the President's state of the Union message, the million barrels per day import reduction is to be applied to the level of U.S. oil imports which would prevail in the last quarter of 1975 in the absence of any new governmental action to reduce demand or stimulate domestic production.

The memorandum shows this amount to be 6.5 million barrels per day, or approximately the same volume as was imported in the last quarter of 1974. Assuming a minimum increase of 1 percent in oil demand and a decline in domestic production of 250.000 barrels per day in 1975, the targeted decline in imports to 5.5 million barrels per day would require a reduction in demand of 1.3 to 1.4 million barrels per day.

Of this decline, the President would substitute 100,000 barrels per day through conversion from oil to coal and 200,000 barrels per day by opening up the Elk Hills Naval Reserve.

Leaving aside for the moment the wisdom and political feasibility of opening up Elk Hills for commercial production, the proposal, as the President has outlined it, would cause a net reduction in oil demand of 5.6 percent from the expected normal demand in the last quarter of 1975.

This demand, in turn, would be only fractionally above the embargoimpacted demand in the last quarter of 1973.

In other words, there are clear indications that consumers have already responded substantially to the rise in oil prices since October 1973 by maintaining demand at nearly unchanged levels for the past. 2 years. The same is expected to occur in 1975.

To reduce demand by at least 5.6 percent from this already reduced level could not help but have a significant negative effect on the economy, in terms of both unemployment and inflation. The administration has been frank to admit this in principle, although there has been a tendency to understate and belittle the negative impact.

At a time when we have the highest inflation rate and the highest unemployment rate of the last 25 years, the question whether we need or, indeed, should curtail oil consumption by the proposed volume becomes of central importance.

Initially, some of the critics of the President's short-term energy program focused on his method of achieving the reduction and suggested alternate means of arriving at the same result, such as rationing, allocations, import quotas, et cetera.

All of these are choices between the lesser of several evils. The real issue is this: Do the benefits of a million barrels per day imports reduction in the hyper-recession year 1975 justify the cost of the pro