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Mcf and the American Gas Association estimates the cost of gas substitutes to cover shortages over the next eight years will be $30 billion. The question is will it cost more to regulate or deregulate gas?
Finally the taxes proposed in the NEP on the industrial use of oil and gas will certainly encourage the conversion to coal or other fuels. But it may also tax away the profits necessary to accumulate enough capital to pay for the conversion.
These types of conflicts are not resolved in the NEP. The almost universal criticism of the NEP is that it concentrates on conservation and conversion to coal from oil and gas for industrial use to the exclusion of increased domestic oil and gas. It raises existing prices without providing the means to replace domestic supplies with new discoveries and production. Its goals for increasing coal use and production and nuclear plants will fall far short due to costs, lack of capital at a reasonable price and environmental, health and safety restrictions. Thus, in any event more oil and gas is needed to bridge the energy gap.
The more optimistic studies indicate such strong supply response for oil and gas to higher prices as to obviate or significantly delay and reduce the requirements for expensive and environmentally costly conversion to coal as called for in the NEP.
CONSUMPTION AND RESERVES
Seventy-five percent of our current energy demand is supplied by oil and gas. With regard to oil, approximately 46 percent of our requirements are met by imports. Imports will exceed 50 percent next year (7-8 MM bbls/day). Current oil demand is approximately 15 MM bbls/day of oil and natural gas consumption is approximately 20 trillion cubic feet/year (20 quads-a quad is one quadrillion BTU's and is the heat equivalent of about one trillion cubic feet of natural gas).
The U.S. has enormous reserves of oil and gas that fall into the "probable" and "undiscovered recoverable" categories from both conventional and unconventional resources. Unconventional sources of oil would include at least 1.7 trillion bbls. from oil shale and up to a trillion bbls. from tar sands. These could be recoverable at only slightly higher costs, depending on costs of capital at time of development, than are currently possible at world prices. Unconventional sources of gas include at least 285 trillion cubic feet (Tef) in Devonian shale in the Appalachian Basin, 300 Tcf in tight sands, 300 Tcf from methane drainage from coal beds, 1,000 Tef from geopressurized methane, and at least 6,000 Tef from in-situ gasification. Technology advances and increased cost accommodations could increase these estimates by a trillion bbls. of oil and tens of thousands Tef of gas.
So the question arises-do we have an energy crisis through a shortage of oil and gas up to and beyond the year 2000? As of today, under current policies, the answer has to be yes. The economic and energy policies of the U.S. do not encourage development of these resources. The cost of capital for exploration and production of oil and gas is very high if capital is available at all. In the past, the principal source of capital has been high risk, speculative equity investment or profits. Recently, developers have been able to borrow capital based on proven, recoverable reserves in a discovered field.
USING "PROVEN" RESERVES
A final disturbing factor that confuses the political decision-making process is the unrealiability of estimates of "proven" recoverable reserves, i.e., how much oil and gas do we have left in the U.S. under current conventional technology, cost of development and capital availability. Some say gas production has peaked and will level off, and oil production will level off certainly by 1985. World production will level off under these standards between 1985-1995. Demand, however, will at least double at current rates of consumption by that same period. So, yes we do have an energy crisis at this time.
We have three basic policy choices to deal with the problem. Conservation in existing uses of energy, conversion from oil and gas to alternative fuels, particularly coal and nuclear power where possible; and development of conventional and unconventional oil and gas resources and renewable sources of energy such as solar, geothermal and fusion.
While these examples are instructive, a brief statement of the fundamental elements of the President's energy plan should be understood. The NEP has three broad objectives. The first is to reduce dependence on foreign oil and limit poten
tial disruptions. It would require lighter and more fuel efficient automobiles and conversion by industry to coal and other fuels from oil and gas where possible. For instance, a reduction in the weight of automobiles to 3,000 pounds would save 2.5 to 3.0 MM bbls. of oil per day. The NEP objective is to reduce this consumption by 2.2 MM bbls/day by 1985. All new electrical utilities and industrial boilers would be required to use coal or other fuels than oil and gas. Taxes on the continued use of oil and gas for such purposes would be levied to further encourage conversion. There is still substantial disagreement among the experts whether this can be accomplished by 1985 and, if so, to what extent and at what cost.
DECLINE OF OIL SUPPLY
The second major objective of the NEP is to provide the means to weather the eventual decline in the availability of world oil supplies. Again, the principal means to accomplish this objective is primarily conservation as opposed to new production of existing energy resources. This is probably the major inadequacy of the President's NEP. Not only are the necessary economic incentives lacking, significant economic and political disincentives are imposed. Environmental controls are necessary, but costly. No adequate off-setting incentives are provided to cover these costs. Tax credits proposed for pollution control equipment are severely restricted in the plan. For instance, it is not yet clear whether Congress will provide the necessary incentives to cover these costs. The continuation of price controls on natural gas and the phased decontrol on the price of oil, together with the taxes imposed on the production of oil and gas, discourage further investment and development of available resources. The Federal Government owns approximately 50 percent of our available energy resources in the form of offshore deposits of oil and gas, coal deposits, coal tar and oil shale deposits. Only about 10 percent of our current energy needs are provided from Federal lands. Seventy-five percent of the Federal estate is withdrawn from mineral leasing. Only four percent of the offshore deposits have been developed. Forty percent of our coal reserves are on Federal lands. Most of that is in the West but twenty-five percent of these western lands are withdrawn from leasing. Seventyfive percent of the oil shale, eighty-five percent of tar sand, fifteen percent of developed oil reserves, estimated thirty-three percent of undiscovered recoverable oil reserves, twenty percent of discovered gas, twenty percent of total gas resources and forty-three percent of undiscovered gas reserves are estimated to be in the Federal estate. The NEP proposed by President Carter established no policies whatsoever regarding the development of these energy resources on Federal Land. Almost as an afterthought, Secretary of the Interior Andrus only recently indicated that the Administration is delaying leasing on the Outer Continental Shelf for oil and gas production, but is committed to the eventual development of those resources in some form. That form is unclear at this time. The Administration apparently has no current proposals for the development of coal tar and oil shale deposits in the near future. In addition, the Carter Administration has no stated policy on mineral leasing. The Congress will consider these issues, but it would be premature to predict the outcome of that debate at this time.
FINDING NEW SOURCES
The third major objective of the NEP is to develop renewable and essentially inexhaustible sources of energy for sustained economic growth over the long-run. Such resources include solar power and heating, geothermal and fusion technologies. Even the most optimistic experts indicate that such resources will not be available on a large scale until sometime after the year 2000.
Specific goals the President has set are reduction in the rate of increase in energy demand to less than 2 percent a year; direct reduction in the consumption of gasoline by automobiles by 10 percent; reducing oil imports from a projected 16 MM bbls/day in 1985 to 6-7 MM bbls/day; an increase in the production and use of coal from 600 MM tons/year to 1 billion tons/year; an increase from 63 nuclear plants to 300 plants by around 1990, and the insulation of 90 percent of all residential and commercial buildings and use of solar energy in 2.5 million homes. These objectives are to be achieved while sustaining a healthy rate of economic growth and protecting the environment.
The capital costs to achieve this program exclusive of taxes are estimated to be $645 billion, which costs fall almost totally on industry for conversion and conservation measures. This capital would be lost to increase productive capacity.
The pass through of these costs in higher prices together with the taxes imposed has to be inflationary. There is considerable dispute over how much the NEP would increase the inflation rate, but suffice it to say that the Carter Administration's estimates are believed to be low.
The NEP calls for the following production increases by 1985:
Total production increases in million barrels of oil equivalent per day (m.b.o.e.) are called for from a 30 m.b.o.e. level in 1976 (including imports) to 40 m.b.o.e. in 1985. Currently 20 m.b.o.e. is produced domestically. Thus we must not only replace declining existing reserves but also develop additional capacity of 20 m.b.o.e. Of that amount oil and gas are to make up 52 percent, coal 33 percent and nuclear 14 percent. The anomoly is that this level of production of oil and gas is well above current production curves through 1985. It means we must find and bring to market 19.4 m.b.o.e. per day and 18 billion b.o.e. total for oil and gas by 1985. In the last nine years we posted an average of 10 m.b.o.e. Yet there are no incentives for oil and gas production in the NEP. These are the raw numbers and this is the Achilles' heel of the NEP. If coal and nuclear development lag below NEP levels as predicted and oil and gas production follows current production curves the shortfall to be covered by oil imports will exceed current projections of 16 million bbls/day. Yet the NEP calls for a reduction in imports to 6 million bbls by 1985. If conservation and conversion efforts are ineffective to any degree the numbers go up again. Even if everything in the NEP were enacted with continued price controls on oil and gas together with "windfall" profit taxes and no other incentives for oil and gas production the NEP will fall short of its 52 percent requirement. The difference must be made up in coal, nuclear or oil imports through 1985 and probably beyond. Finally, it will take four to five years to reverse production declines in oil and gas and in excess of $300 billion of capital investment over the next eight years to meet NEP goals even assuming the incentives were available. This compares to investment of $120 billion over the last nine years. Reliable studies show we can more than double oil and gas production by 1985 but not under NEP. Where will the $300+ billion come from?
To reach the other NEP goals we must increase coal production from 3 m.b.o.e, in 1976 to 14.5 m.b.o.e. in 1985 and a cumulative total of 30 m.b.o.e. Nuclear must be increased from 3.5 m.b.o.e. over the last nine years to 3.8 m.b.o.e. However, to add a cumulative production capacity of 8 m.b.o.e. by 1985 it means building 200-250 new plants compared to the approximately 60 we have now. The total capital investment for the NEP of $645 billion will constitute 24 percent of total GNP capital expenditures of $2,670 billion projected between now and 1985. This compares to 15 percent in 1965-1975 and 18 percent in the single year 1974. This is the actual magnitude of the problem.
U.S. REGIONAL CONFLICTS
Finally, regional conflicts and differing politics will develop between producing and consuming regions of the country if concentration of production is not spread out more than called for in the NEP. This will at best reduce the effectiveness of any energy plan and at worst defeat it entirely through balkanization and Federal/State confrontation. In addition, we have not even considered domestic and foreign policy concerning development and restrictions on the use of nuclear power.
The cornerstone of the Carter Administration energy policy is the creation of an Energy Department. The Energy Department is supposed to pull together and coordinate all the various agencies and boards involved in devlopment and management of energy resources, except price controls. Both Houses of the Congress have passed legislation to create such a department and are now resolving the differences between the two versions. Also, President Carter will have at least three and one-half years, if not almost eight years, to carry out these policies. At least in this area, the Carter Administration and the Democratic majority in the
Congress appear to be in substantial agreement. While disagreements between the Executive and Legislative Branches are bound to occur over the management of energy policy, there is strong political support at this time for that effort.
Most of the goals proposed in the President's NEP will be approved and enacted into law by the Congress as far as they go. The means and methods of achieving those goals, however, may be substantially modified. The price of oil and gas, as well as its continued long-term availability, is already encouraging industrial conversion and conservation. Continued price controls and taxes on the use of those fuels would at best delay that process, reduce the amount of capital available for the cost of conversion by taxing away profits and ultimately increase the costs of that development unnecessarily.
It is possible that many of the Members of Congress understand the economics of conservation and conversion better than the Carter Administration at this time. Congressional concession to those economic considerations cannot thus be fairly criticized as "caving in" to the special interest lobbies. The political pressures in Congress in these areas are primarily economics pressures. The Congress has already fought many battles with the special interests and will fight many more.
BASIC POLICY QUESTIONS
The political conflicts between industry and environmentalists, between producers and consumers, and between those who favor market oriented approaches as opposed to regulatory controls will continue. The President's NEP failed to adequately balance those competing and conflicting interests. However, the Congress is more likely to balance those interests. Hopefully, that balancing will be achieved while still achieving the basic goals and policies proposed by the President. In fact, it is likely that the Congress will go much further than the President in dealing with the issues of increased production domestically on both Federally and privately owned lands, which issues were not addressed by the President's proposal to any degree.
There is a fundemental wisdom in a statement by Jean Monnet in his recently published Mémoires. In discussing the principles on which the postwar French modernization plan was to be based, he stated to General de Gaulle in 1945, "I am sure of one thing. One cannot transform the French economy without the French people participating in the transformation. When I say the people, it is not an abstract entity. I am referring to the unions, business firms, government departments, all those who will be associated with the plan "In the large, multifaceted continental and decentralized society of the United States, Monnet's statement is even more releveant for our country than it was for more centralized France. Herein lies a massive political issue with which the Congress must deal.
WILL THERE BE A POLICY?
There is no assurance that this legislative process in the Congress will develop a consistent and effective national policy. The Congress in opposition to the Executive has been unable to do so in the past. On the positive side, however, increased public awareness of the problem is developing through the efforts of President Carter. There is better leadership in the House and Senate in this Congress than there has been in the past. In addition, increased cooperation between the Executiye and Legislative Branches could develop if the Carter Administration learns how to work more effectively with the Congress and if the Congress is more willing to face up to some of these problems in a more realistic manner than it has in the past. One thing can be said with assurance-that the energy policies of the United States will undergo a very rapid change. For better or for worse, policies will be developed and those policies will be managed and carried out more vigorously than they have been in the past. If good, hard, realistic decisions are made then those policies will be of benefit to the whole world, not just to the United States. On the other hand, to the extent poor decisions are made, the adverse impact could be increased.
There is some growing awarness in the United States that its energy future is very much tied to that of other countries in the world in general. That awareness is still inadequate to be wholly effective and to provide positive direction. Thus, it is incumbent on other countries to make their interest in problems well-known and very clear to the United States, not only to U.S. Government officials and Members of Congress, but to the American people as well.
INFORMATION NOTE ON PRESIDENT CARTER'S ENERGY PROGRAM AND CONGRESS
(Paper by Mr. Corman)
The oil interests would have preferred the Committee reject the tax altogether, but since there was a strong sentiment on the Committee for the tax, an attempt was made to gut it by plowing back a large share of it to oil producers. The Committee rejected three attempts to grant a plowback and ended up by endorsing the President's proposal with only minor changes.
Only on the much publicized proposal for a tax on gasoline did the Committee give in to outside demands-demands made by a determined public.
Several Members of Congress have polled their constituencies recently on their reaction to the President's energy plan. The results have invariably pointed to a strong public opposition to a tax on gasoline.
The Ways and Means Committee did approve a small increase in the gasoline tax in 1975, but it was defeated on the floor of the House. It is very possible that we will have to tax gasoline more heavily in the future, as a tax could be an effective way of inducing conservation. Private transportation represents the most wasteful use of petroleum by Americans, and should be restrained. But until a majority of Members of Congress, as representatives of the people, find that a gasoline tax would be acceptable to those they represent, action will not be taken.
The elimination of the standby gasoline tax has not severely weakened the President's energy plan and for the most part Members of Congress do support the program. The Bill that finally emerges will be carefully drawn legislation that closely follows the President's original proposal. It will have undergone the fine-tuning that only a legislative body can provide and it will be both politically feasible and responsive to the President's goals.
As members of a representative body, each Member of Congress is subject to the pressure of certain interest groups depending on the makeup of his or her congressional district. Since these interest groups usually represent industries that provide employment in congressional districts, their arguments must be heard. However, even stronger than the pressures of interest groups is the pressure exerted by private citizens within a congressional district. Rather than offering its own resistance to the President's Energy Program, it seems that Congress is simply reflecting public resistance to certain provisions.
RESISTING BUSINESS INTERESTS
No one argues with the President's premise that we are using up our energy resources faster than we can produce them at a reasonable cost, and that conservation is vitally needed. But when it came time for the tough decisions on the unpopular provisions of the President's bill, Congress did a better job of resisting the pressures of highpowered business interests than in resisting public demands.
The Ways and Means Committee was assigned a large part of the energy legislation and, it seems, more than its share of the difficult decisions. Many people have been quick to charge the Committee with caving in to special interests, but a closer examination will prove this to be untrue.
While the Committee did decide to delay the impact of the tax on inefficient automobiles for a year until 1979, this was only reasonable since the 1978 model cars will be on the market before the bill is enacted and an after-the-fact tax would only be punitive and not provide incentive. In addition, the Committee weakened the tax somewhat in the early years, but made up the difference by stiffening it considerably in later years after manufacturers will have had more than adequate notice to improve efficiency.
The Committee also eliminated the rebate for efficient automobiles, but this was done because of the disadvantage a rebate could inflict on our international trading partners.