Energy: Policy Stalemate in an Eventful Year

The failure to enact major new federal energy legislation during 1977 camouflages the eventfulness of a year that saw continued adjustment to earlier dramatic changes in energy cost and availability. Those changes were first brought to public attention in 1973 by the embargo; they have not yet been fully assimilated. The question for 1978 is whether the adjustment under way—to be facilitated by new legislation—will be adequate to assure that energy availability and cost will not threaten international stability or the continued prosperity of the United States and the rest of the world.

President Carter's key proposals would have gradually raised the price of energy for most U.S. consumers to near world market levels. His other proposals would have disproportionately discouraged the consumption of petroleum, lessened the demand for natural gas, and increased use of coal. Existing price controls restricting the monetary returns of oil and gas producers would have been joined by selective measures to stimulate domestic energy production.

The principal goal of the president's program was to reduce oil imports. The president contended that excessive imports reduced national security, posed a threat to long-term world availability of liquid fuels, and lessened the ability of the nation to meet international commitments and economic goals. Further premises of the program were that income distribution would not be substantially altered, that its net budget and employment effects would be approximately neutral, and that environmental quality would not be lessened. However, as did Presidents Nixon and Ford earlier, Mr. Carter discovered that proposing an energy policy is not the same thing as obtaining one.

The program's overall aims found considerable support, but specific goals and the instruments to achieve them have proved highly controversial. Opposition arose over five issues: (1) the relative priority to be given reduced energy consumption versus increased domestic energy supply; (2) the income distribution effects of the program by economic sector, region, and income class; (3) the relative emphasis to be given environmental quality and human health safety targets; (4) the relative efficiency of various measures to meet these goals; and (5) the amount of discretion over energy production and use to be granted the federal government.

The House of Representatives passed a measure that incorporated a substantial proportion of the proposed program. The Senate accepted a revised version of some of it. The year ended, however, without congressional agreement on the central issues of the pricing and taxation of petroleum and natural gas. Also unsettled was the disposition of the revenues to be collected by the program; the president had urged that they be returned to consumers, but sentiment in the Senate favored their use in supporting domestic energy production.

Even if implemented in full, the Carter program appears inadequate to meet its targets. Estimates within and without government generally agree that oil imports may reach double the level which the Carter administration has pledged to attain by 1985. Additional policy initiatives in 1978 are therefore likely.

The policy record for 1977 was not completely disappointing, however, because progress was made on four major initiatives to increase the future reliability of energy supply. The first oil flowed into the Strategic Petroleum Reserve, and President Carter announced his support to build the reserve to the full 1 billion barrel level authorized by legislation. An overland route for Alaskan North Slope natural gas was selected by the president. While some doubt exists that the project will be built, at least on schedule, gas could begin to flow as early as 1984. (However, there is a possibility for a gas swap with Canada that would bring some gas in earlier.) A major project to bring natural gas from new discoveries in Mexico was also announced and received preliminary approval. Arrangements are being held up, however, because of a dispute over the pricing of the gas. Finally, exploration for oil and gas off the East Coast moved closer to realization.

One part of President Carter's program became a reality: the Department of Energy was created, and began operation. This new agency brought together a variety of functions and organizations; at its birth it became the eighth largest of the twelve Cabinet departments in terms of budget. While organizational changes do not solve problems, consolidation of most energy activities into one department may improve the focus of federal operations.

Major developments occurred in the energy sector even though U.S. policies remained unchanged. Most striking was the increase in production outside the Organization of Petroleum Exporting Countries (OPEC), but just as important was the continuation of the stability of energy prices since 1974 and the ongoing adjustment of consumption to the sharply higher level of prices after the discontinuous jumps of 1973-74.
Non-OPEC production. The increase in oil production outside OPEC resulted mostly from the first flow of oil from the Alaska North Slope, from the United Kingdom section of the North Sea, and from Mexico. Oil flows west from Communist countries declined and offset some of the increase. Preliminary estimates of crude oil available to market economies from non-OPEC sources show an increase, third quarter over third quarter, of over 1 million barrels a day, or about 8 percent. U.S. production rose for the first time since 1972. Further increases in non-OPEC oil production are likely at least for the next several years.

There has also been a growth in production of other sources of energy. Natural gas output has slowed its decline in the United States and risen elsewhere in the world. Coal production is up, and nuclear power is taking on a growing though still small share of the electric generation load. In the absence of an unforeseen upsurge in economic growth (and hence energy consumption) in the developed world, these increases in energy output mean that demand for OPEC oil may remain at below-1973 levels for the next several years.

As for OPEC, production by cartel members peaked in 1973 and fell substantially in 1975 due to the worldwide recession and to conservation brought on by the higher oil price. Output increased in 1976 and in early 1977, but has been falling since then. It appears that over one-half of the decline in output since mid-1977 has been absorbed by Saudi Arabia, with the remainder shared by other producers. Meanwhile, productive capacity has likely been rising in OPEC countries, with Saudi Arabia engaged in a major expansion drive.

The decline in demand for OPEC oil is likely to be short-lived, however. After the new oil from Alaska, the North Sea, and Mexico is on the market, OPEC will be the major source of increments to oil supply, unless and until major new discoveries elsewhere start to produce. The existing downward pressure on oil prices may thus continue for a year or so, but then, as energy demand grows, the price picture will become increasingly uncertain. Rates of demand growth, oil exporter decisions to expand output potential, political developments in the oil-exporting countries, and prospects for increased energy supply outside OPEC all will have major influences on the path of oil prices.

Price developments. In the meantime, the OPEC decision in December to hold prices steady was welcome to world economies which—almost three years after the bottoming of the recession in the United States—still remain woefully underemployed.

World oil prices have declined in real terms since their enormous in-creases of 1973-74. When adjusted for wholesale price changes within the United States (but ignoring exchange rate fluctuations), in 1977 dollars the official selling price per barrel of a key crude oil, Saudi Arabian light, peaked at about $14.00 in early 1974. It has fluctuated between about $11.70 and $12.70 per barrel since the beginning of 1975. With adjustment for expected inflation, the price will be near the bottom of that range at the time the next scheduled OPEC pricing decision is made. The real return per barrel to OPEC exporters recently has been further depressed from 1974 levels by the decline in the value of the dollar against the currencies of the countries with which oil exporters trade and by the higher level of inflation outside the United States.

The prices received by U.S. oil, gas, and coal producers have demonstrated a mixed pattern that is difficult to interpret. For crude oil, for example, the average real price jumped in 1973-74 but has been stable since.

The price of oil by each regulatory category—"old oil," "upper-tier" oil (after 1975), and unregulated—has declined. It is the price by category, of course, that affects investment decisions, but it is the average price that affects consumers and that determines oil industry revenues. Natural gas prices have risen steadily, even when general price movements are taken into account, but coal prices on average have declined.
Energy prices to U.S. consumers, when adjusted for overall consumer price movements, have also demonstrated a mixed pattern. Gasoline prices peaked in 1974 and have declined slightly since. Home heating oil prices rose precipitously in 1974 and were about 6 percent higher still in 1977. Residential electricity prices have risen slightly faster than other consumer prices since 1973. The cost of natural gas service has risen much more rapidly than have other prices; it took large jumps in each of the last three years. Federal regulation of oil and natural gas prices, along with relatively low energy taxes, has still left consumer prices in the United States below those in most other developed nations, however.

U.S. energy consumption. Energy consumption in the United States rose about 3.5 percent during 1977, fueled by the continued recovery and by the severe winter of 1976-77. Use was greater than in 1973 for the first time.

Oil use increased about 6 percent and also rose as a proportion of total energy used in the United States. Coal and nuclear power also increased their shares in the nation's energy diet, while natural gas and hydropower became absolutely and proportionately less important.

The critical natural gas shortage of 1976-77 was caused by an extraordinarily severe winter. Its immediate effects had passed before spring, but the interruptions of supply to industrial consumers hastened the shift of some of these users away from gas. As a consequence, larger and larger proportions of the natural gas supply will be devoted to end uses where the special characteristics of that fuel are important. In many regions of the country new residential and commercial gas customers are being added for the first time in several years.

Imported oil fills the energy demand, unmet by other fuels. For the year, oil imports were about 20 percent higher than in 1976, and at record levels. imported oil was about 48 percent of of oil used in 1977, compared with 36 percent in 1973, and imported oil met 23 percent of total energy needs in 1917 rather than the 17 percent of 1973. The rate of imports dropped during the year however, due to the increase in domestic production and to the passing of the effects of the 1976-77 winter. At present about 85 percent of all oil imports come from OPEC member nations, and over 40 percent of total imports originate in Arab countries.

Stocks of petroleum ended the year about 15 percent above 1976 levels, and are adequate for all but the most severe winter emergencies. It also appears that reduction of industrial use of natural gas and additions to storage will make natural gas supplies adequate for this heating season. Certainly no fuel shortages of the magnitude of the 1976-77 winter are anticipated.

Policy decisions, not directional changes in trends of supply, demand, and price, are likely to be the source of major developments for the next few years though surprises cannot be ruled out.

Major U.S. policy decisions are due on natural gas pricing, crude oil pricing and taxation, access to public lands, and on licensing of light-water reactors. Regulations to implement such measures as the Clean Air Act Amendments of 1977 and the Surface Mine Control and Reclamation Act have yet to be drafted, approved, and interpreted. In addition, it seems clear that new policy initiatives will be launched to meet those objectives—especially lower oil imports—that will not be met with whatever measures pass Congress as the Carter program of 1977. The question is, will the nation be any more successful in achieving agreement on these issues in 1978 or beyond than it has been since the embargo of 1973?

There is much to be said for the view that energy policy formation has suffered from widespread public ignorance about the nature of the problem and about the implications of different courses of action. The tradeoffs are not easy to visualize in matters as complex as the effects of nuclear moratoria on air quality (due to SO2 emissions from substitute coal-fired boilers), or of natural gas field price regulation on the level of oil imports. The inherent complexity of the issues makes them prey both to confusion and to manipulation for short-term political advantage. Public exposure to analyses of these issues can surely reduce disagreement and improve the quality of the debate.

Additional information may not by itself, however, lead to an acceptable overall energy policy. It may fail to do so because divisions exist over goals and values, and present institutions enable protagonists to prevent adoption of proposals they oppose even if they cannot implement those they seek. For example, anti-nuclear forces have delayed new reactor or siting but have not convinced customers to want less electricity or to love coal. Distributional concerns have stymied the price or tax approach to restricting consumption, while other forces have killed mandatory conservation measures.

The process of energy policy development is perhaps not so different from what one normally sees in policy formation. Multiple goals exist, many instruments are used, and the system muddles along with many midcourse corrections. The essence of successful "muddling," however, is that the system is not fully determined; that is, room for adjustment exists among the proximate goals. If it does not, then disruptive change may occur. And such changes may be on the horizon—perhaps most clearly reference to oil imports, but in other respects as well.

The majority who see an imminent danger in the growth of oil imports have not been able to mobilize efforts to do anything significant toward reducing them or toward making them less hazardous. Whether that danger is actualized in an embargo or shortage, or to whether fear of such an event leads us to embargo ourselves, rapid reductions in energy availability could have serious effects on an economy made less resilient by contending goals which bind its ability to respond to energy price and availability changes. Even less dramatic developments can have serious consequences due to lack of symmetry in the lead times involved. In essence, it is easy to concoct plausible scenarios in which energy price or availability could change more rapidly than the economy can adjust, and serious harm could ensue.

The conclusion to which this analysis leads is that it is potentially hazardous to continue to "muddle through" in energy policy, but that doing anything else will be difficult.