Senator ABOUREZK. You're not going to do it that way? Mr. ZARB. No, sir. Senator ABOUREZK. Well, if you don't intend to do it that way, why then didn't you lay on tax at the retail level anyhow rather than doing it on the producer's level like is done here on crude oil? Mr. ZARB. I think the question that you're asking is whether or not we should have had a gasoline tax instead of our current scheme, is that Senator ABOUREZK. Yes, why did you pick the current scheme instead of the old scheme? Mr. ZARB. The old-under the old scheme to make any meaningful savings in gasoline and make any meaningful savings in oil through gasoline the gasoline tax would have to be very, very substantial. If we are going to save a million barrels of gasoline alone we wouldn't have to do it that way but, if we were, we'd probably have to raise gasoline taxes somewhere between 30 and 40 cents per gallon. Now, it could be lesser than that and then we'd have to do something with those other products out of the gasoline barrel and I'll try to clarify that. When you put the crude barrel into the refinery you get about 40 percent gasoline or light ends; the rest in the middle distillates and the heavy ends. If you save 600,000 barrels or 400,000 barrels of gasoline using this tax and you still want to save a million barrels a day at some point in time, you've got to do something else with the rest of those products that come out of there or you're not going to save your million barrels. If you go for just a million barrels of gasoline and you're willing to say that you don't care about saving a million barrels of crude of imported oil, just gasoline, then you go to a 30- or 40-cent tax and some have said higher, 50 cents I just heard. When you look at what your part of the country does in the way of driving, Senator, as compared to New York City or Boston, or some other areas of the country, you'll find that folks out your way drive substantially more than they do anywhere else in those areas. When you get to Wyoming and, as I recall, Nevada, they drive even more than everybody else, so the reasonable inequities would be pretty substantial. Senator ABOUREZK. How about Florida and Ohio? Mr. ZARB. Florida and Ohio are on the high side of the scale as compared to some of the lowest in the Northeast. Senator GLENN. This is inconsistent, to my way of thinking, to what we were talking about a while ago in this area of elasticity because you're talking about to get the savings we want we'd have to go up to 40 cents a gallon or whatever figure it was you used just a moment ago. We were talking a little while ago about a 15-cent-agallon rise not doing the job we wanted to do here. You're talking about other products here. I realize that, did I miss something? Mr. ZARB. Well, maybe not. Maybe I wasn't clear enough, Senator. Senator GLENN. If you took it all out of gas, I'd agree you'd have to go higher. Mr. ZARB. You're talking about a million barrels of gasoline savings alone you'd have to go up that high and that's where the difference is. Senator GLENN. But even with cutting that in half, it still wouldn't fit. You're talking about 40 percent going into gasoline, not in petro Mr. ZAUSNER. Senator, the numbers you'll get later today, when you look at the total million barrel saving and take all the other adjustments we talked about, the savings for gasoline are roughly about 250,000 barrels a day which is what we're assuming we're going to get. In fact it is precisely what a 10-cent-a-gallon increase would get you as opposed to the 40 cents. Senator GLENN. I don't want to take this off in a whole different direction but the figures you gave are consistent with the elasticity. Mr. ZARB. Absolutely. Besides the regional inequities, the individual inequities are even greater when you look at some folks who have to drive a long way to work. When you go up that high, you just magnify the individual and regional inequities. The fact that it didn't get us a million barrels of import savings. that it had tremendous regional inequities, and tremendous individual inequities, discouraged us from pursuing that path to get the job done. Senator ABOUREZK. So, in essence then, this really is rationing but it's price rationing. It's a different kind of rationing than coupon rationing, say. Mr. ZARB. It's a saving method but it still leaves some freedom of choice to the American consumer. Senator ABOUREZK. Thank you. [The article from the Washington Post referred to by Senator Abourezk follows:] [From the Washington Post, Jan. 19, 1975] AUTOS AND FUEL: POSTPONING THE INEVITABLE (By Robert J. Samuelson, a free lance writer specializing in economic affairs) The last week has provided eloquent testimony to the national reluctance to come to terms with the enormous energy appetite of the automobile. Contrary to the widespread public impression, President Ford's major energy proposal-his complicated tax and tariff on crude oil, which will raise gasoline prices an estimated 10 cents a gallon-is soft on both the auto industry and the average American driver. Other fuel prices will rise much more in percentage terms. Rejecting a stiff (probably 30- to 40-cent) increase in the gasoline tax may have been the President's most fateful energy decision. It relieved pressure on the auto industry to break radically with its past: to produce a basic, simple, fuelefficient car. Shorn of many of today's common accessories, that car would givegood fuel mileage but less power and comfort than current automobiles. It would be intended primarily for transportation, not ego gratification, sex appeal, or even driving pleasure. Like it or not, such a car is probably inevitable, and it is a good bet that a big increase in the gasoline tax-coupled with stiff increases mandated for later years-would have forced the public and the auto industry to accept the inevitable. Postponing it only risks crippling the nation's energy policy. Any program that fails to quench the fuel thirst of American cars-automobiles consume more than one-third of U.S. oil-invites ultimate failure. That this simple logic has no political appeal is obvious, but, unfortunately, there is a more fundamental problem handcuffing the White House and Congress, Because the auto industry's collapse lies at the heart of the current recession, the more the government makes fuel efficiency an obsession the more it risks driving the consumer away from today's big cars-in short, prolonging the industry's stagnation and high unemployment. A genuine dilemma exists here. The President's response (and Congress', too) is to try to solve both the energy and economic problems simultaneously, but the sad irony is that attempting this feat A MODEST GOAL It is easy to see what has been sacrificed on energy. The administration, tugged between its desire to stimulate economic recovery and its long-term objective of reducing fuel consumption, the administration attempted to reconcile the twin goals by negotiating directly with the auto manufacturers. The White House's target of improving gasoline consumption of new cars 40 percent by 1980 sounds impressive, but there is less to it than meets the eye. First, the auto manufacturers gave no ironclad guarantee that they would actually achieve that goal, and even if they do, it would still mean an average of only 18.7 miles a gallon for the Big Three manufacturers. That's not light years ahead of 1950's average of 15 miles a gallon and it's well below what many other auto makers achieve today. Indeed, the other manufacturers (American Motors and importers) pledged to raise fuel consumption to an average of 24 to 25 miles a gallon, resulting in an overall 1980 target of 19.6 miles a gallon. Part of the reason for the modest increase is the way the Big Three apparently plan to achieve their improvement. According to Raymont E. Goodson, chief scientist of the Department of Transportation, who has seen Detroit's tentative ideas to meet the 1980 target, the Big Three anticipate no dramatic shift to smaller cars; they hope to achieve much of the gain in fuel efficiency by internal engine changes and reductions in the weight of current cars. Goodson says that there might be a 5 per cent to 7 per cent shift to smaller cars, but that basically the manufacturers forsee a sales mix "not too much different from 1974.” The consequences for overall oil consumption in delaying a shift to smaller cars would be felt primarily in the late 1970s and early 1980s. Because there are already more than 100 million cars on the road-and more drivers and cars every year-even a dramatic improvement in new-car fuel efficiency only gradually cuts into total gasoline consumption. The longer the government hesitates in inducing this maximum improvement, the more difficult it makes the future job of managing fuel shortages. The extent of such shortages, of course, is a matter of conjecture, but the instability of the Mideast, the high price of oil and the current economie slowdown-if the economy picks up, so will the demand for fuel— would make a betting man wary of being too optimistic. All this is understandable, but what is more murky is how an effort to protect the auto industry (by avoiding a huge increase in the gasoline tax) could actually end up hurting it. With thousands of unsold large cars sitting in parking lots, a large rise in the gasoline tax seems nothing more than an act of economic madness, making the bigger cars still more unattractive. On the other hand, the relatively mild treatment of gasoline prices in the energy package, combined with the proposed tax cut, seems a straightforward and understandable strategy to revive the auto industry from its disastrous slumber. Perhaps the strategy will work, but if it does, the cure may turn out to be only temporary, simply foreshadowing another downturn in car sales later. The reason is the peculiar nature of the current slump, which was unpredicted by auto executives and most economists alike. THE UNCERTAIN BUYERS It isn't difficult to sympathize with the auto executives' current confusion and agony. Most standard cars aren't selling well, which isn't surprising, but-contrary to what many of the industry's critics predicted-the smaller cars aren't booming either. The industry's conventional explanations for this (inflation, recession, and federally mandated safety and pollution costs) really don't fully account for the severity of the downturn. The added element is simple uncertainty. Many buyers obviously can't quite resign themselves to paying the higher prices on smaller cars and getting less power, less comfort and less status. But neither are they willing to pay still higher prices for bigger cars without assurances that the cheap gasoline demanded by those cars will be available. By rejecting both rationing and a stiff gasoline tax, the White House is attempting to dispel this uncertainty. It is also attempting the impossible. As long as fuel shortages remain live possibilities—and that's the foreseeable future then both rationing and a big excise tax increase will remain on the shelf of likely solutions. Torn now between past preferences and current uncertainty, buyers will remain vulnerable to future attacks of the same paralysis. The auto industry will continue to cling to the illusion that it can accommodate to the new energy reality simply by slimming down its current cars and tinkering with "They're scared that Americans simply won't buy small cars, no matter how hard they market them," says one government official. But if a new energy crunch comes, the industry is likely to be caught out of step again and the disastrous experience of the past year may simply repeat itself: Buyers will desert larger cars (which will still have relatively poor gas mileage) in droves, causing auto layoffs and assuring that an energy crisis automatically becomes an economic crisis. What the auto makers desperately need is an end to the current uncertainty that would permit them to gear up-as rapidly as possible-to produce cars for which there is a relatively long-term, assured demand. The only way to create such a climate is for the President to indicate decisvely that fuel-inefficient carsincluding conventional large cars, even slimmed down-are a luxury that an energy-short America can no longer afford. To do that requires not only tough, clear language, but also the tough, clear action of either a gasoline tax or rationing. Such action, especially an increase in the gasoline tax, would create demand for small cars by giving them a significant advantage in operating economies over bigger cars. As long as new car prices continue increasing and gasoline prices don't, many owners of existing cars won't be tempted to trade in their current models. NO QUICK RELIEF None of this, however, necessarily promises any quick relief for the auto industry. Even if they wanted to, the auto makers couldn't shift instantly to full production of smaller cars. Expensive new tooling simply doesn't materialize from thin air; there are two-year to three-year lead times, and the tooling industry itself has limited capacity to produce new equipment. Moreover, the car manufacturers have enormous investment in existing plants and equipment designed to build larger models. A radical change to smaller cars would make obsolete much of this investment; indeed, in its negotiations with the manufacturers, the Department of Transportation appears to have avoided insisting on a maximum conversion. Faced with all these realities and the further reality of Detroit's bulging parking lots, the President proposed his complicated plan for a tax and tariff on crude oil. That the plan is soft on the automobile may come as a surprise to most consumers, but a close examination of the intricacies of oil pricing shows that this is so. Such an examination begins with the byzantine pricing structure of crude oil. Rather than one price of oil in America today, there are three: imported oil, which reaches American shores at about $12 a barrel; so-called "new" U.S. crude, which is not covered by price controls and sells for about $11; and "old" U.S. crude, whose price is controlled by the government at $5.25 a barrel. The Ford proposal is to end price controls on the "old" oil (which presumably would raise its price to about $11 a barrel, too), then slap a $2 excise tax on U.S. crude and a $2 tariff on imported oil. (The tariff would initially be set at $3 but would be reduced once Congress gives the President authority to impose the excise tax on domestic crude). The final price of all oil would be about $13 to $14 a barrel, about a 50 per cent increase from today's average of about $9. What matters to consumers, of course, is the final price they pay. Here the arithmetic is crucial. For a variety of reasons, a gallon of gasoline has traditionally cost more than a gallon of most other oil fuels (the reasons include the existing state and federal excise taxes on gasoline and the extra refining and marketing costs for gasoline). This means that passing through the increase in crude oil prices to final fuel products on a roughly equal basis-the same penny increase on each gallon of fuel-results in a lower percentage increase for gasoline than for most other fuels. The following table shows this (there are 42 gallons in a barrel, meaning a $4.50 increase in a barrel of oil adds 10 cents to every gallon of fuel): The same arithmetic means that gasoline prices have risen less significantly over the last 18 months than other fuel prices. (Since mid-1973, for example, gasoline prices have increased about 37 per cent, but diesel fuel is up 49 per cent, home heating oil 66 per cent, aviation fuel 100 per cent and residual fuel oil (burned by electric utilities and factories) 143 per cent.) Most of these increases, of course, are less visible to consumers than rises in gasoline prices— which may be one reason why the President found his tariff-tax proposal so attractive-but they affect the price of almost everything. The sad thing is that, in trying to avoid the unpleasant shock effect of a large increase in the gasoline tax, the President evolved an alternative policy whose economic impact seems much worse. Given the huge increases that have occurred in most other fuels, common sense suggests that most businesses-and many consumers have already eliminated the most obvious and least painless forms of energy waste. Thus, higher prices now will increasingly cause businesses either to increase their own prices or to save fuel simply by cutting back production. The White House estimates that the policy may add 2 per cent to consumer prices. Combined with previous estimates of a 1975 inflation rate of 6 per cent to 9 per cent, this additional increase virtually eliminates any chance of a meaningful reduction in inflation-a decline that administration economists repeatedly have cited as a prerequisite to restoring consumer confidence and leading a sound economic recovery. Little reliable information exists about how consumers will react to price increases, but common sense suggests that curbing unnecessary driving may have been a less painful and inflationary alternative. If the economy revives, it can only increase the demand for fuel, either causing new shortages or threatening the President's objective of reducing imports. Likewise, increasing the price of all domestic oil so sharply seems a strange way of convincing the international oil producers that their prices are too high. It tempts them to make further increases of their own. The fact that the President's policy actually treats the automobile relatively mildly will not be lost on foreign officials of both exporting and consuming nations. The chance of enhancing the United States' international bargaining position (or at least its moral position) by dealing realistically with the auto-which is seen widely as the most conspicuous example of U.S. energy extravagence-will be lost. The inability to come to terms with the enormous energy appetite of the auto is not only a quirk of the President's. There has hardly been an outpouring of congressional sentiment for the unpopular steps that might reorient the American consumer and the auto industry. Platitudes about mass transit sound fine but, given America's suburban and rural geography, even the most ambitious transit schemes can relieve only a tiny part of the transportation burden from the car. In an energy-short world, who can doubt that keeping factories running is a more vital use for fuel than feeding greedy cars? That seems a simple truth, but, if so, it's one that Americans are having difficulty seeing and accepting. Senator ABOUREZK. Senator Stone. Senator STONE. What price can the United States afford to pay for oil and still be able to make a reasonable profit on the goods and services produced from use of that oil in the current economy? Mr. ZAUSNER. Are you talking about international competition? Senator STONE. Let me repeat the question. What price can the United States afford to pay for oil and still be able to make a reasonable profit using that oil? Mr. ZARB. When you say the United States, are you referring- Mr. ZARE. Oh, I see, individual corporations. Senator STONE. Everybody that buys oil. You buy oil, too. The U.S. executive branch buys oil, the Navy buys oil, people that pull up to the gasoline pump buy oil. What is the fair price we can afford to pay and still make a reasonable profit using the oil? Mr. ZARB. That's a tough number to come to, Senator. It would be |