The Whirlwind Confronts the Skeptics
In mid-fall, the energy crisis burst upon the U.S. with the emotional impact of a modern-day handwriting on the wall. After a long Belshazzar's feast of energy gluttony, it seemed, Americans were being called to a bitter reckoning. The winter loomed as a grim season of cold bedrooms and chilly classrooms, of painful shortages of oil-related products ranging from phonograph records to penicillin, of cramped inability to travel, of shuttered factories and high unemployment. And that supposedly would be only the start of a new lifestyle of thrift, sharing and self-denial --spiritually cathartic, perhaps, but hardly very comfortable.
Now winter is well under way--and most homes are still warm, virtually all factories are still humming, and the popular mood is swinging mercurially from aggravated alarm to sour skepticism. The nation is being swept by rumors of tankers idling at sea to await higher prices before unloading, of refineries bulging with reserve stocks, of price-gouging from dock to gas pump. Forgetting how much their lives have already changed--who would have dared predict a year ago that 68DEG thermostat settings and gasless Sundays would so quickly become routine?--many Americans are asking not how the nation has managed to avoid the worst but whether there really is any energy shortage worth worrying about. Growing numbers are voicing suspicion that the whole emergency has been a hoax engineered by the oil companies to squeeze out huge price increases.
That cynicism immensely complicates the job of Washington's latest whirlwind, William E. (for Edward) Simon, chief of the new Federal Energy Office. A bond trader who was unknown outside Wall Street in late 1972, a modestly publicized No. 2 man at the Treasury as recently as last November, the 46-year-old Simon in the past month has become one of the most powerful and visible figures in a Government starved for leadership. Now he is putting his credibility on the line almost daily to declare, in press release after news conference after TV interview, that the shortage is only too real and will not go away even after the Arabs lift their embargo on oil shipments to the U.S.
Overnight Agency. Americans, Simon argues convincingly, are "energy wastrels" who have been increasing their consumption by 4% to 5% a year even though domestic oil production peaked out in 1970 and now supplies only two-thirds of demand. He preaches that the nation must continue and intensify its efforts to save energy and develop other sources of fuel. The only alternative, Simon says, is to have "the American people subjecting themselves to the economic and political blackmail of any foreign nation" that might wish to cut off the supply of the oil it exports or raise its price to outrageous heights. Still, Simon readily concedes: "My hardest job will be to keep up the momentum --to keep the American people awake to the fact that we da have a problem and will continue to have a problem."
That comment indicates how far Simon has come in the month that he has been directing energy policy. When he was named to head the new Federal Energy Office last Dec. 4, his hardest job certainly was not to convince people that there was a problem, but to bring order out of chaos in the Government's attempts to deal with it. Energy policy was being made by more than 60 frequently clashing federal departments, offices and agencies. Although oilmen and others had warned for several years of an impending energy shortage, bureaucrats had dithered away the summer before finally adopting an allocation program to parcel out fuel among competing users. Meanwhile, the Government had agonized endlessly and inconclusively about whether to prepare for gasoline rationing.
Simon, a decisive policymaker and superbly organized administrator, had to create a superagency virtually overnight. The Federal Energy Office was set up to centralize policy and run nearly all energy programs; Administrator Simon and his deputy, John Sawhill, 37, former senior vice president of Baltimore's Commercial Credit Co., had to decide how to put together the pieces. Simon raided other Government departments, including Interior and the Office of Management and Budget, to assemble a staff of 1,000, many of them young, eager troubleshooters, and some fresh out of the ranks of financial management. So far, Simon has:
> Set a basic strategy of allocating plenty of fuel to industry, in order to protect jobs, and putting the main burden of conservation on homeowners and motorists. Simon has decreed that most industries can buy as much oil as they used in 1972--if they can find it. Petrochemical producers can buy as much as they need, even if it is more than 20% above their 1972 usage. Homeowners, however, are limited to enough oil to keep thermostats at 6DEG below 1972's settings, or 68DEG for most people. Simon has ordered refiners to cut gasoline production 5% below 1972 levels, in order to free more capacity for turning out heating oil and industrial fuel.
> Tightened up administration of the program. Before Simon took over, regional branches of the Office of Petroleum Allocation, understaffed and lacking clear guidance from Washington, had built up a staggering backlog of 15,000 unanswered letters and calls from fuel customers anxious to know just how much oil they would be allowed to buy. The harried staff in the New York regional office took phones off the hooks so that no callers could get through. Simon installed experienced administrators in the offices and issued guidelines that have enabled them to reduce the backlog of unanswered letters to 2,600 and to field phone calls promptly. The FEO staff is also shifting fuel from well-supplied regions to areas facing shortages. Simon's predecessors took far too long even to start looking for ships that could carry oil to New England, the most threatened region. Last month Simon's office informed New England utility executives that it had located tankers capable of hauling in up to 4.5 million bbl. any time it was needed.
> Resolved the long debate on gasoline rationing by a straightforward decision: try to avoid it, but get ready anyway. Simon, a free-marketeer who views rationing as a last resort, says that he will not be able to tell before mid-February whether it can be avoided, but he has drafted a detailed and imaginative plan that could be put into effect as early as March 1.
> Placed primary reliance on voluntary conservation measures--gasless Sundays, slower driving, lowered thermostats. Simon seems to urge a new measure every week. Now he is asking gas stations to limit each sale to ten gallons. The rule is basically unenforceable, but Simon hopes through publicity to nag station owners into complying.
Moving fast to compile this record, Simon has stumbled once or twice. Last month his office announced that 1.5 million bbl. of jet fuel would be taken away from the Pentagon and reallocated to civilian jetliners. Nobody seems to have consulted Secretary of Defense James Schlesinger, who protested angrily. The result was a "compromise," under which the Pentagon will keep 600,000 bbl. of its fuel at least for a while. Also, the FEO prompted scare headlines by announcing, in one set of hastily prepared allocation regulations, that gasoline production would be cut 25% below 1972 output, and took a full day to correct the figure to 5%.
In general, though, Simon's show of purpose, vigor and decisiveness has won almost unanimous praise. The energy czar has moved quite deliberately to heighten his take-charge impression by running an open shop, which is remarkable in an Administration noted for its secrecy. By now, Simon must have set some sort of record for appearances on TV. He comes across to some watchers as self-assured and purposeful, to others as arrogant. Newsmen are delighted by his habit of returning their calls, no matter how late he has been working, and insisting that his staff do the same. Right at the start, Simon promised to meet with newsmen every Thursday to answer any questions that they might ask. He has rigorously kept the pledge, to the horror of some Administration p.r. men, who insist that no bureaucrat can stand that much exposure.
Indeed, Simon almost instantaneously has propelled himself into the elite circle of Administration officials --which includes Schlesinger, Secretary of State Henry Kissinger and Treasury Secretary George Shultz--who run vital parts of the Government as virtual baronies under a distracted monarch. Simon's predecessor as energy policy chief, John Love, complained that he could not get Nixon's attention; in five months in office, he was able to see the President alone only four or five times. Self-confident Simon took office proclaiming that he did not need to go running to the White House on every decision; he wanted to avoid bothering the President with matters, such as allocation details, that the energy chief could decide himself. In fact, Simon has easy access to Nixon; they have had at least 15 meetings in the past month and have almost daily telephone chats. But Nixon seems content to leave energy policy to his driving subordinate, who has made nearly all his announcements on his own authority.
There is, of course, the danger that Simon will suffer instant overexposure. He is beginning to sound like a politician at the end of a long campaign, answering the same questions by repeating the same phrases ("We want to be able to prepare for the worst" or "The day of cheap energy is over"). If people stop listening, that could badly hurt Simon's program, which depends greatly on voluntary cooperation. In particular, public boredom with Simon could foil his attempts to dispel the growing suspicion that the energy shortage is a phony.
Devil Theory. That suspicion has been fanned largely by one fact: after three months of Arab embargo, blaring crisis headlines, long lines at gas stations and airline and auto-plant layoffs, the stocks of refined products held in the U.S. by oil companies are on the whole higher than they were a year ago. The latest figures from the American Petroleum Institute show that on Jan. 4 stocks of gasoline and residual oil (used to power factories and electric utility plants) were slightly lower than a year earlier. But inventories of jet fuels were slightly above those of early 1973, and refinery stocks of middle distillates (heating oils and diesel fuel), at 198.5 million bbl., were a startling 22% higher than they were a year earlier. The total for all major products, 488.4 million bbl., was almost 9% above the amount at the start of 1973. Thus many people are taking a line that goes roughly like this: the companies have plenty of oil to sell, but they have been talking up a crisis so that they can get big price increases. The Administration has helped the companies in this campaign, so this devil theory goes, because the White House wants to help its business friends create a crisis that will take the public's mind off Watergate.
The suspicion unites extremists and conservatives, consumerists, Congressmen and local government officials. Contends Harvard's Nobel prizewinning Economist Wassily Leontief: "The oil shortage is not simply the result of the Arab embargo, but a gross mismanagement on the part of our oil industry, obviously abetted by our Government." Consumerist Ralph Nader conceded a month ago that there was a shortage, but labeled it "artificial." Now he says he does not think there is any shortage at all. "To this very hour," he asserts, "the industry refuses to disclose its reserves to the Government. If there was a real energy shortage, that is the first thing they would want to show. Basically, this country is groaning in a sea of oil and gas."
Environmentalist Barry Commoner is among many skeptics who demand a far-ranging congressional investigation to uncover the true state of the nation's oil supplies. Politicians are beginning to listen. Democratic Senator John Tunney of California says that he will press for an investigation into the size and availability of petroleum supplies when Congress reconvenes next week. At least four congressional committees already have scheduled hearings on energy troubles. A growing number of people argue that the Government must have precise company-by-company petroleum inventory figures if it is to manage the nation's energy resources effectively.
The darkest suspicion of all is that the industry is concealing reserve stocks that do not show up in the A.P.I, statistics. One shocking indication of the lack of energy policy planning in pre-Simon Washington is that the Government has meekly accepted industry figures on refinery inventories. The Government has never compiled figures on how much oil might be held by wholesalers, distributors and users of fuel. "We have never had what one might call an adequate reporting system for this industry," says Simon. He adds that inventory figures are "the biggest mystery of all."
Oilmen long adamantly refused to disclose many company-by-company statistics on supply and production, pleading that it was information that competitors could exploit. They report weekly inventory figures to the A.P.I., which releases industry totals but does not tell the amounts held by individual firms. Under heavy pressure from public opinion, Mobil, Texaco and Gulf, among others, laudably decided last week to reveal company-wide figures on their own inventories (they showed about the same pattern as the A.P.I. numbers). But many companies still will not say how much they are producing daily or monthly, or how much they hold at specific refineries--all information that could help Government officials and the public gauge the exact extent of shortages.
Black Eye. Simon is doing what he can to get better statistics. Last week he ordered all 250 U.S. refiners to report figures on imports, production and inventories directly to his FEO, which will run them through its own computers to come up with industry totals. The FEO will also send out agents to spot-audit refineries and verify the figures. The penalty for false reporting: fines up to $7,500--and a hideous public black eye.
Reacting to widespread rumors of fuel hoarding by users, Simon further has asked 32 trucking lines and 19 railroads to report their inventories to him. "Where we find people who have a 90-day or 120-day supply and we deem 30 days reasonable, we are going to roll them back," he pledges. "Either we will reallocate their product to put it where it needs to be, or we will not give them additional supplies until they are back to a reasonable level." Finally, Simon has appointed a panel of eight top economists, which will begin meeting this week to review all petroleum statistics.
Is the energy crunch real? Despite all the statistics that the skeptics can muster, the answer is yes, there is a genuine shortage. It has been coming on for years because U.S. energy demand has been increasing by about 5% or more annually and domestic supplies have not kept up.
Since about the late 1960s, proven natural-gas reserves have declined because Government price controls have discouraged new exploration. Domestic oil reserves shrank because companies found it cheaper to drill abroad. Domestic refinery capacity became inadequate. Oilmen did not expand refineries enough to meet demand because import quotas left them with too little oil, and environmental controls increased the price of construction.
The U.S. might have got by without an energy crunch for two or three more years, but the emergency was brought on by the Arab embargo. The country has become dependent on the Arabs for a pivotal 11% of its oil, and if even part of that is cut off, the U.S. is in a jam. Now the embargo is beginning to bite. The latest A.P.I, statistics show that oil imports two weeks ago were running at 2.6 million bbl. per day, down from 4.2 million bbl. in late October. Because of the shortage of crude, Texaco, for example, has reduced the output of its U.S. refineries to 85% of capacity; it was 93% a year ago. The difference will have to be made up by pulling oil out of inventories at a faster-than-normal rate.
Adding up all the figures that he can get, Simon calculates that the U.S. supply of oil during the current quarter will fall 2.7 million bbl. per day, or 14% below estimated demand of 20 million bbl. per day. That is down from his original calculation of a shortfall of 3.4 million bbl. per day, or 17%, but high enough to indicate a real shortage.
Some other estimates run lower, and some are higher. A most optimistic calculation by Alan Greenspan, a Nixon adviser and member of TIME'S Board of Economists, is that supply during this quarter will fall 700,000 bbl. per day below demand--still a shortage, though relatively mild. Greenspan arrives at that figure by guessing that conservation measures and high prices will hold demand for oil to 18 million bbl. per day.
In the near future, fuel could become considerably scarcer. Heating-oil stocks could be depleted in a hurry by a prolonged spell of near-zero weather across wide areas of the nation, especially if homeowners concluded that there was no shortage and turned their thermostats back up to 74DEG. The gasoline squeeze may become much more severe around March. Then driving will pick up as the snows melt, and inventories will have been reduced by the shift of refinery output from gasoline to heating oil.
If there is a Middle East settlement soon, and the Arabs turn on the spigots, as many experts expect, the situation will ease--but the U.S. will still not be secure. The producing states can always shut off supplies at any time. And Arab oilmen say that they will not rapidly increase production because, with demand and prices rapidly rising, they want to save their oil for future sales.
The key to the energy future is not only supply but demand. There may well be enough oil to meet demand in a nation that keeps its thermostats at 68DEG, switches off unneeded lights in homes and offices, and bunches passengers into small cars limited to 55 m.p.h.--although not even that is a certainty. There is not and will not soon be enough oil to slake the thirst of a country whose citizens live and work in overheated, poorly insulated buildings, put up elaborate lighting displays for show, and pilot gas-gulping cars down the turnpikes at 70 m.p.h.
One big reason for the widespread skepticism is that the U.S. has so far got by without suffering the severe shortages that were predicted a month ago. Yet this unexpected windfall has been largely the result of a combination of good luck and good sense. Three key factors have helped:
1) Voluntary conservation has become far more effective than might have been anticipated in a supposedly self-indulgent nation. A kind of energy chic has taken hold; people really are lowering thermostats, switching off lights and driving more slowly. For the four weeks ending Dec. 28, gasoline demand dropped 8.7% below forecasts. Use of residual oil fell 2.5% below predictions, indicating that industry has also adopted the conservation ethic.
2) The nation has lucked out on weather. Late fall and early winter were unusually mild across much of the country, especially the Eastern Seaboard, which faced the most serious shortage. For the heating season through Dec. 30, degree days (the basis on which oil companies calculate heating needs) nationwide ran 10% below normal. New England energy experts estimate that a prolonged Indian summer in that region held home heating oil consumption 7% below forecasts.
3) The U.S. until recently was able to import more oil than could have been expected because the Arab embargo was not fully effective. The Arabs apparently never did cut production by as much as the 25% that they claimed; total tanker loadings at six Middle East ports for the last three months of 1973 rose 31% above those of a year earlier. The international oil companies have been rerouting much crude from Iran, Indonesia and Nigeria to the U.S., replacing Arab oil that America, as a friend of Israel, is not supposed to get.
That good luck cannot be guaranteed to continue, as the recent sharp decline in crude-oil imports illustrates. Simon argues that he has an obligation not to be overoptimistic. He will fail in his duty if he tells the nation that there will be no shortage and then a supply crisis hits an unprepared country. Instead, he says, he must plan for the worst possible eventuality.
In order to take the edge off America's voracious energy appetite, Simon has gone along with some big price increases. That approach is swiftly becoming the focus of what little sharp criticism he gets. Simon is the obvious target for those dismayed by the soaring cost of fuel, because as FEO head he is the nation's energy price controller as well as policy planner and allocator in chief.
Displaying a sure political instinct, Simon has been extremely sensitive to reports of domestic price-gouging. When truck drivers last month blockaded highways to protest, among other things, allegedly illegal price boosts on diesel fuel, Simon ordered Internal Revenue Service agents to "sweep" truck stops in 16 states. The taxmen found 1,222 of 4,689 truck stops violating regulations. Most were ordered to roll back prices and make refunds to truckers.
When whispers abounded that tankers were anchored off the East Coast, waiting for prices to go up before unloading their oil, Simon asked the Coast Guard, Maritime Administration and even the CIA to check. Characteristically, he then brought the matter up voluntarily at his weekly press conference, before anyone had a chance to ask. His report: only normal tanker traffic had been discovered. Anyway, he added, the rumored tactic would make no sense, because the oil could legally be sold only for its original cost plus freight charges and normal profit markup.
Lenient Line. Last week Simon announced that he would send FEO and IRS agents to audit the supply, profit and price figures of every refiner in the country. Purpose: to make sure that the refiners are not jacking up prices more than the control regulations permit. Finally, the energy chief asked 26 big refiners to sell more relatively low-priced domestic oil to independent wholesalers, in order to reduce huge disparities in the price of heating fuel. At present, a householder who buys from an independent dealer that must use costly imported crude may pay 20-c- per gal. more than his next-door neighbor who buys from a big company that has access to domestic oil.
When it comes to overall, legal price increases, though, Simon takes a lenient line. He freely predicts that by March, U.S. gasoline prices will rise 8-c- to 11-c- per gal., to perhaps 55-c- for regular. He says that heating oil by March will go up a dime a gallon, to an average 39-c- plus tax. He speaks of a price of $11, $12 or even more for a barrel of Persian Gulf crude landed in the U.S. after the Arab embargo--as if it were already a fait accompli. Last year the price of Saudi crude in the U.S. averaged $4.
Ralph Nader has called Simon "an official price escalator" for the oil industry, and even some businessmen are protesting. Recently, Boston Edison Co. asked the FEO to help it find some urgently needed residual oil. Simon's office replied that by working with a New York City oil dealer the utility could get 300,000 bbl. in a complicated deal. Boston Edison checked and found that the price would be $27.50 per bbl. v. the $8 that it was paying on contract purchases. President Thomas J. Galligan angrily telegraphed Simon: "We do not believe it was the intent of Congress or the allocation program to require payment of such exorbitant and unreasonable prices."
Simon's response to criticism of his price policy is untypically ambiguous. He pledges that he will not let oil prices rise to "emotional" levels--whatever that may mean. But he says that price boosts are inevitable because the Arabs are calling the tune in world petroleum markets. He notes that increases will help oil companies to raise the hundreds of billions of dollars that will be required to find, produce and refine more oil.
But Simon has underemphasized a politically vital dimension of the debate: the close relationship between oil prices and taxes. Liberal critics of the oil industry complain not only that higher prices will bring huge new revenues to the companies, but also that those revenues will be taxed only rightly. Simon has backed an Administration proposal for a mislabeled "windfall profits tax," which would actually be an excise tax on sales, unrelated to profits; that proposal goes nowhere near far enough to satisfy the critics.
Economists Walter Heller and George Perry calculate that price boosts will increase U.S. oil companies' gross income this year $24 billion over that of 1973. Some $8 billion of that will go to foreign governments, they reckon, and the windfall tax would funnel $3 billion into the U.S. Treasury--leaving some $13 billion that should be subject to normal income taxes. But, say Heller and Perry, "petroleum accounting very likely will be inventive enough to keep a considerable part of this windfall from showing on the bottom line"--where taxable profits are tallied.
How Long? In some cases tax benefits to the industry become more generous as prices go higher. One reason is the depletion allowance, which basically permits oil companies to deduct from their tax bills 22% of the value of the oil that their wells produce. The higher the price, the higher the tax write-off.
Many Congressmen are agitating for an excess-profits tax that would slap extra levies on oil-company earnings higher than the 1969-72 average. Simon opposes that idea, on the sensible ground that excess profits taxes are inefficient; there are too many ways in which a company can lessen their impact. But he will have to decide soon whether to stick with the Administration's windfall proposal, and risk provoking a congressional revolt, or propose tougher tax rules that would anger the oil companies.
The tax quarrel is the principal dispute holding up passage of the Emergency Energy Act, which would empower Simon to order rather than merely advocate many conservation measures. Nixon is also asking Congress to convert the FEO into a permanent Federal Energy Administration, with energetic Bill Simon at its head.
Simon, however, claims that he has no idea how long he will remain energy czar. There are persistent rumors that he would like to succeed Shultz as Treasury Secretary, and Simon does not exactly knock down the idea. "For a financial man," he says, "becoming Secretary of the Treasury is like becoming a Supreme Court Justice for a lawyer."
Meanwhile, energy is the pressing concern--and not only for the immediate future. While Simon has a reputation as a daily problem-solver rather than a long-run thinker, he spins off many long-range ideas. He wants to increase coal production so that it would supply 25% to 30% of U.S. energy needs v. 17% at present, and intends to set up a task force to study how that could be accomplished. He ruminates about Government-industry joint ventures to develop alternative sources of fuel, such as oil from shale. The Government might put up seed money for demonstration plants using new technology, and provide a guaranteed-price market for the oil.
On the conservation side, Simon grumbles that "we waste 30% to 40% of our energy. We need a national energy audit, sweeping legislation to study how we use our energy. We have to look at what is possible without restricting freedoms. We need to change building codes, reduce lighting, increase car pooling, improve mass transit." Few if any of these changes can be accomplished in the two years that Simon originally said that he would stay in Washington. The energy problem seems sure to become a semi-permanent feature of American life--and, as the man who has finally got a handle on it, ambitious William Simon may be too.
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