Use Less, Pay More

Carter's new energy plan: scrap controls, raise prices and production

"This is a painful step, and I'll give it to you straight. Each one of us will have to use less oil and pay more for it."

Straight it was. When he announced his first energy policy, way back in 1977, Jimmy Carter summoned the nation to a "moral equivalent of war," which was to be fought through a highly complex program of tax incentives and other gimmicks, and focused on conservation as the key to solving the nation's twin problems of declining oil production and rising dependence on price-gouging foreign suppliers. The new plan that he outlined in his plainspoken, 23-minute Oval Office address last week was far simpler--and much more likely to be effective. Henceforth, old-fashioned marketplace economics is to be the basic engine to spur not only fuel saving but also a much needed, intensified search for new domestic supplies. But as Carter promised, the change will be painful: during the coming months and years, U.S. oil prices will leap up, forcing consumers to dig even deeper into their pockets to pay for gasoline and heating oil and giving an upward kick to the country's already hurtful inflation.

The new policy also promises much political pain and peril for Carter. The essence of his program is to strip away the controls that have held the cost of domestically produced crude oil at artificially low levels ever since the postembargo days of 1974. Next month, using Executive authority, he will order a gradual phase-out of the controls so that they will be entirely eliminated by Oct. 1, 1981, when by law they would have expired anyway.

To prevent handing what he sees as an unearned bonanza to the oil companies, Carter called on Congress to enact a "windfall profits tax." It would skim off about half the $13 billion or so of extra revenue that oil firms stand to get as the price of domestic crude oil, which now averages $9.45 per bbl., rises to the world level. At the moment, that figure is $14.55 for OPEC oil, but Ecuador is now charging a premium price of $20.60 per bbl., and other producers are also levying surcharges on the basic OPEC price. Under Carter's plan, the proceeds of the oil tax would be funneled into an Energy Security Fund that would bankroll the development of alternative energy sources such as solar power and coal gasification, help low-income families pay for the rising cost of fuel and stimulate the development of energy-efficient mass transit systems such as rail and bus service.

Though White House officials had for weeks been promising a forceful message on energy by the President, the timetable kept slipping as he struggled to get the Egyptian-Israeli peace pact nailed down. Yet when the speech finally came, it more than lived up to the advance billing. In blunt terms the President sought to dispel the notion, reflected in polls, that most Americans feel the oil problem is somehow phony. "The energy crisis is real," he emphasized. The nation's dependence on foreign oil, which now supplies nearly 50% of the U.S.'s needs, up from 36% in 1973, has left the country gravely vulnerable. As the President said, "Our national strength is dangerously dependent on a thin line of oil tankers stretching halfway around the earth, originating in the Middle East and the Persian Gulf--one of the most unstable regions in the world."

In his message, Carter announced a cluster of measures--some substantial, others symbolic--to help deal with the energy situation. Among them:

> Parking restrictions. To discourage the use of cars for commuting to and from work, Carter said that he would eliminate free parking privileges for federal employees nationwide. He urged private corporations to do the same.

> State allocations. As a further move to curb gasoline demand, which is rising almost three times as rapidly as oil consumption as a whole, Carter announced a plan to bring state governments into the conservation act. He said that he would soon set strict gasoline reduction timetables for all 50 states, and that if they were not met he would ask for mandatory weekend closings of service stations.

> Voluntary driving cuts. The President asked each of the nation's 138 million licensed motorists to drive 15 miles a week less than they do now. The fuel savings could total 413,000 bbl. of oil every day. That is nearly half the amount of oil consumption that the U.S. pledged to cut during 1979 as part of a coordinated conservation drive by the 19 member-nations of the International Energy Agency.

> Red-tape reductions. To make it easier for important new energy projects such as refineries and pipelines to come on-stream without years of delays, regulatory hearings and appeals, Carter signed an Executive order setting strict deadlines for processing applications. He also said that the Administration would take action to slice through the bureaucratic barriers that have bogged down plans by Standard Oil of Ohio for a pipeline to carry Alaskan oil from California to Texas. The pipeline would enable some 350,000 bbl. per day of Alaskan oil to reach Eastern markets, thereby displacing the need for an equal amount of imports.

Yet the key to Carter's program is crude-oil decontrol. From the moment that President Nixon set up controls in December 1973 to prevent the price of U.S. oil from chasing OPEC crude into orbit, the whole cumbersome apparatus has provoked one wrangle after another between the oil industry, Congress and the White House. Just as Carter is now doing, Nixon and Gerald Ford also tried to dismantle price controls on domestic oil and tax away the resulting profits. All that those Presidents accomplished was to get themselves caught in crossfire quarrels between oil industry demands for immediate and full decontrol and equally insistent counterarguments from consumer groups and the industry's many critics on Capitol Hill.

Under Carter, the struggle over price controls has already produced some bitter contention, and that is now certain to intensify. In fact, the single most surprising aspect of Carter's entire message was its harsh indictment of the oil industry. More than just populist politics with a dash of down-home demagogy, the President's assault was a bold--perhaps even slightly desperate--gamble to outflank industry lobbying efforts in Congress and rally public opinion behind the profits tax.

Carter's aides openly concede that this is White House strategy. Says one presidential assistant: "We're on the side of the angels this time, for once."

Carter all but accused oilmen of energy treason in the name of profit, and he appealed to the nation to deluge Congress with demands that it pass his tax if for no other reason than to stop the oil firms from benefiting from the public's energy problems. Said the President: "Just as surely as the sun will rise, the oil companies can be expected to fight to keep the profits that they have not earned. Unless you speak out, they will have more influence on Congress than you do."

Carter also sought to put Congress on the spot, saying, "Please let your Senators and Representatives know that you support the windfall profits tax, and that you do not want the need to produce more energy to be turned into an excuse to cheat the public and damage our nation. Every vote in Congress for this fund will be a vote for America's future, and every vote against it will be a vote for excessive oil company profits and for reliance on the whims of the foreign oil cartel."

Though oilmen applauded decontrol, none welcomed the abuse they were getting from the President. Complained a Mobil vice president: "I have no idea why the President thinks it is in the interests of the U.S. to pit citizens against citizens. The way he was talking he seemed to think oil companies were a foreign country." Added T. Boone Pickens Jr., president of Mesa Petroleum, a big Texas-based exploration and drilling firm: "Why these frontal attacks on the industry? Never once does he say what a fine job we've done in finding 90% of the oil and gas that there is in the world. Instead, he almost infers dishonesty." One of the cooler judgments came from Thornton F. Bradshaw, president of Atlantic Richfield. Said he: "I'm not altogether sure that this kind of tax is necessary, but if Congress thinks so, then that's what will happen. If it is politically essential to accomplish decontrol, so be it."

In Congress, opinion about Carter's plan was sharply divided--and by no means along party lines. Many Republicans, especially those from oil states, cheered the decontrol decision. But some influential Democrats were aghast. Massachusetts Senator Edward Kennedy found Carter's program to be "seriously flawed," as did Senate Energy Committee Chairman Henry M. (Scoop) Jackson. But precisely because decontrol is such a touchy issue, many legislators may find it difficult not to vote for at least some form of an excess profits levy. House Speaker Thomas P. (Tip) O'Neill, whose Massachusetts constituents are suffering from surging home-heating-oil bills, conceded that if an effective tax was enacted, he could "live with the President's pricing decision."

Much will depend on what sort of treatment Carter's proposal gets in the two congressional committees that must shape the windfall oil tax act--Louisiana Democrat Russell Long's Senate Finance Committee and the House Ways and Means Committee, which originates all tax measures in Congress. Long, who is sometimes chided by oil industry critics as the Senator from OPEC for his strong support of legislation favorable to the industry, in 1977 urged passage of an "energy development fund" that bore close similarities to Carter's security fund proposal. So far, Long has not said whether he will support the oil tax, but considering his 1977 proposal, he may find it difficult to oppose.

The Ways and Means Committee, which is chaired by Oregon Democrat Al Ullman, is deeply split on the tax. Most Republicans argue that Carter's proposed tax rate is too steep, while committee Democrats such as Massachusetts' James Shannon say it is too low. Much backroom bargaining will have to go on before a majority sentiment emerges.

Carter has also called on Congress to revoke one of the oil industry's most zealously protected overseas business perks: the foreign tax credit. Such credits are earned when U.S. companies pay income taxes to foreign governments. To prevent double taxation, U.S. law permits the payments to be used to reduce, on a dollar for dollar basis, the amount of income tax that a company must pay to the IRS.

Big companies have reaped large benefits by structuring their payments to foreign oil nations to enable levies that would normally be considered royalty payments for the purchase of crude to qualify as income taxes. More than 75% of all foreign tax credits claimed by U.S. companies now go to oil and gas firms. Last year the companies saved an estimated $1.2 billion or more on taxes that they would otherwise have had to pay to the IRS.

Whatever the fate of the tax, decontrol alone will still bring benefits. Not only will rising prices, which are expected by the Administration to push up the cost of gasoline by 50 to 70 per gal. by 1982, encourage people to waste less fuel, but increased revenues to oil companies will certainly give the industry the financing needed to boost drilling activity.

There are, of course, uncertainties and risks. Though economists are willing enough to guess, none can say with confidence what the ultimate inflationary impact of decontrol will be. Nor is it entirely clear just how much decontrol will increase domestic oil production. By Administration reckoning, the gradual phase-out of controls should encourage companies to pump more and more oil from their wells until, by 1982, production reaches an additional 700,000 to 800,000 bbl. daily (the U.S. now uses about 19 million bbl. per day). That would displace an equivalent amount of imported oil, but energy demand throughout the economy would itself be growing. In effect, increased production from existing wells would do little more than keep pace with rising imports.

To displace significant amounts of imports, huge new oilfields will have to be discovered and developed. Unfortunately, the oil may just not be there to find. Even though oil companies drilled more than 48,000 new wells around the nation last year, nearly double the amount of 1973, production continues to decline gently but steadily. A new crash program of drilling could turn out to be a multibillion dollar disappointment.

For all that, decontrol remains the most effective energy policy step that the President is able to take. By allowing domestic crude prices to rise to world levels, Carter has sent a clear signal to the nation's trading partners and allies that the U.S. is at long last beginning to face up to the difficult decisions forced upon it by the energy squeeze. The President's speech was widely praised in other oil-consuming countries, and the mere anticipation of what he was going to say sent the dollar soaring in Japan, gold slumping in Europe and stock prices on Wall Street leaping to their best levels in six months.

Favorable congressional action on the windfall profits tax would strengthen Carter's new policy. As he said, "There is no single answer. We must produce more. We must conserve more. And we must join together in a great national effort to use American technology to give us energy security in the years ahead." Decontrol is a necessary first step to the creation of an effective energy policy, and the other steps proposed by the President can bring substantial additional progress.

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