JUNE WILL BE a magic month this year, a month in which many of our past mistakes on energy can be redeemed -- if only President Carter has the political courage.
Jerry Ford had a similar moment in 1975. But his advisers whispered in his ear, "What about the risk? What about the election?" Ford faltered, losing his chance and the nation's.
As a consequence, we are still stuck with an absurd, penny-wise, poundfoolish energy policy -- all because Washington has been unable to decide how to divvy up a $13 billion windfall that would result from ending government price controls over domestic oil.
For those who have forgotten, when the OPEC oil cartel quadrupled foreign oil prices back in 1973-74, American oil continued to be held down by the Nixon price controls. Though domestic oil prices have risen gradually over the past five years, there is still a gap -- the difference between U.S. prices and the world price -- totaling $13 billion. If Washington were to abandon price controls, who should get the $13 billion? The oil companies? The U.S. Treasury? The consumer in the form of tax rebates?
The impasse over this question led directly to unnecessarily high oil consumption, subsidization of oil imports and loss of up to 500,000 barrels a day of U.S. oil output. As a result, world oil prices today are higher than they need have been, and the dollar is weaker.
Meanwhile, oil price controls have served as a giant income transfer system, the true effect of which is only dimly known. "Small" refiners, New England oil users, producers of heavy California crudes -- all are getting some of the billions of dollars in benefits at the expense of someone else.
Consumers, as a group, probably are getting no more than two-thirds of the $13 billion in the form of lower prices, perhaps much less. This savings, when spread among 220 million Americans, doesn't mean big bucks to the average auto owner -- but in terms of U.S. energy policy, it has meant considerable damage to common sense.
The actual regulations controlling prices were so awkwardly drawn that they encouraged many producers to let their wells' output drop, in the certain knowledge that when it fell below 10 barrels a day and reached "stripper" status, controls no longer applied.
If any true accounting of who is getting what, by law and regulation, were ever toted up, the system would probably fall in an avalanche of outrage.
White House Meetings
ALL THIS could have been avoided had President Ford not blinked in 1975 when, in the maneuvering over extending controls, the Democratic congressional leadership told him that if he vetoed a bill continuing them, there would be no attempt to override.
Even though an end to controls was what he had been trying to force on Congress earlier that year when he imposed a $1-a-barrel import fee on crude oil, Ford decided he could not chance it politically. Controls were extended for nearly four years.
Now President Carter is preparing a speech on how we should respond to the new concerns about future Iranian oil production. He is expected to call again for "voluntary" steps to cut oil use, and perhaps mandatory conservation measures as well.
But for much of the last two weeks, there has been a series of meetings at the White House and elsewhere on a vastly more important long-run energy issue that Carter will address: what to do about oil price controls.
Some White House officials are now saying the same things Ford heard in the summer of 1975. How can we afford to push crude oil prices to world levels right away? Jimmy will be plowing through the snow of New Hampshire a year from now, and those people will be furious about their oil bills, argued one Carter aide.
All this is over a measly $13 billion. That may sound large, but it's roughly the size of the modest income-tax cut that took effect Jan. 1, a cut that has hardly made a big difference in any family's finances.
Of course it was not just the White House that has had trouble facing this issue. Congress refused, too, in 1977 and 1978 when it scuttled Carter's crude oil equalization tax, which would have brought U.S. crude oil prices close to world levels after three years, but which also would have taxed away most of the oil industry's windfall.
The need to get domestic oil prices to world levels -- as Carter, at last year's Bonn economic summit, promised we would do by 1980 -- hasn't changed. Nor has the need to end the distortions and windfalls created by the controls program. If anything, it's more imperative than ever.
Less than three months from now, Carter has a chance to do the job.On June 1, mandatory controls end on U.S. crude oil prices. From then until Sept. 30, 1981, the president has sole discretion on whether to continue controls and, if so, in what form. The authority to have them at all expires in 1981.
Moreover, Congress will have no automatic right to veto any step the president might take, as it has now, for instance, over decontrol of retail gasoline prices.
A Smaller Impact
THE IMPACT of decontrol would be smaller now than in 1975. Then the windfall -- and the potential for price increases -- amounted to nearly 1 percent of GNP. Now the gap is only about half that. Politically, however, there remains a fear that the impact would be every bit as great.
The average cost to refiners of domestic crude oil would rise from about $11.20 now to about the $15.75 of imported crude landed in this country -- a 40 percent hike. That might translate eventually into as much as a 1 percent-age-point rise in consumer prices if the jump in the retail cost of oil products also causes wages to go up faster.
But such a rise in average crude oil prices, if passed through dollar-for-dollar into higher prices for all petroleum products, would mean only a6-cent to 7-cent-a-gallon rise in gasoline and home heating oil prices.
Consumers, however, might not be hit that hard.
Many economists think that a hefty portion of that $13 billion annual windfall has ended up in oil industry pockets anyway -- in the form of higher profit margins for refiners. The reasoning is that U.S. refiners' ultimate competition is from imports of refined products, and that in several cases, U.S. prices are essentially as high as world prices for the finished product despite the lower cost of U.S. crude.
While estimates of what the refiners have recaptured vary all the way from 100 percent down to 20 percent, nearly everyone agrees the refiners have gained to some extent.The administration believes refiners' profits are fatter by at least $4 billion, or about a third of the windfall. If the administration is right, decontrol might mean only about a 4-cent jump in retail gasoline and heating oil prices.
What would those increases buy? A lot:
Up to a 500,000-barrel-a-day increase in production from older U.S. wells whose output of so-called lowertier oil sells for only $5.80 a barrel.
A 300,000-to-400,000-barrel-a-day cut in oil use because of higher prices.
A $4 billion rise in tax revenues from higher oil company profits.
An end to the implicit subsidy of all oil imports arising from the socalled entitlements program, under which refiners with access to lowercost U.S. crude must buy an "entitlement" to process that cheap crude, with the proceds -- now about $2 a barrel -- going to refiners using higher-cost foreign crude.
New investments in U.S. refineries, particularly on the West Coast, to enable them to use heavier, more "sour" crudes -- such as from Alaska -- once we drop the perverse prohibition barring refiners from earning a profit on such investment.
A halt to the spectacle of an oil company having to allocate supplies among its dealers when it cannot cope with a surge of customer demand -- a surge that hit Shell at one point last year solely because controls forced it to sell gasoline more cheaply than its rivals no matter what the demand.
Finally, an end to the cumbersome and costly bureaucracy running the controls program.
Those are just the domestic benefits. The impact of the United States, the world's largest oil consumer, finally tackling its energy problem could sufficiently stun the OPEC nations so that OPEC prices will not rise as fast this year as they seem destined to do.
That same impact could give the still-troubled dollar a major boost. "If we were to swallow the whole thing at once," says an administration official, "the foreign exchange reaction might be phenomenal."
The Inflation Effect
WHAT IS measured against these benefits? The possible damage to the administration's anti-inflation drive and to its reelection chances.
The inflation danger, at least, is real.
When Alfred Kahn was named chief of the anti-inflation campaign last fall, he carefully excluded oil from his price targets. Oil prices would have to rise, he said.
Then, a few weeks ago, after some disaster inflation reports for January and with more on the way, Kahn flatly and publicly declared, "This is not the time to raise oil prices."
"Gee, now is never the time to decontrol," exclaims another administration economist angrily. "Sometimes you have to eat something. We should have done it in 1977 or last year. Fighting inflation does not mean you will not allow any price increases."
The danger is there, since no matter how you slice it, decontrol will add to inflation. But there is at least an even chance that decontrol might stave off yet more OPEC increases this year as the oil exporters chase spiraling spot market prices with ever higher "official" prices.
For one thing, even with the world shortage of oil caused by the virtual halt in Iranian production, companies like Ashland Oil would probably be much less willing to shell out $18 to $20 a barrel if the entitlements part of the controls program did not exist. That willingness may help prod OPEC into raising "official" prices at its March 26 meeting in Geneva.
Ashland, which bought an unspecified amount of Iranian oil two weeks ago despite opposition from top Carter officials, was relying upon that $2-a-barrel entitlement payment it will get for using imported oil.
The whole point on inflation is that the choice is not just whether to incur that extra percentage point of pain associated with decontrol. That pain may be inflicted in any event.
But with decontrol, at least the higher oil industry income will be going to Houston instead of Tehran or Riyadh, and a large chunk siphoned off into the U.S. Treasury.
Still, as a top Carter adviser laments about the Iranian impact on the decontrol struggle, "I can't remember another incident that so strengthened both sides of an argument."
Support for Decontrol
AS LATE as two months ago, presidential assistant Stuart Eizenstat was so concerned about political fallout of decontrol that he suggested the administration again offer to free prices only if Congress approves a companion windfall tax on oil companies.
That, of course, is precisely the package Congress was unable to handle in either of the last two years, and there is no sign that the level of political courage has since risen much higher on Capitol Hill.
In the debates that ultimately produced a long memo on decontrol and other energy issues, sent to Carter on Jan. 3, it was argued that Carter, not Congress, would be hurt if decontrol were begun and Congress still refused to pass a tax to capture the windfall.
Since then, the tax question has receded a bit, with most officials from the Energy, Treasury and State departments, plus those from the Council of Economic Advisers and the White House, divided over whether to push for a phased decontrol or an extension of controls past Sept. 30, 1981. It's mostly the White House troops who want the extension.
Energy Secretary James Schlesinger wants decontrol. So does Treasury Secretary W. Michael Blumenthal. CEA Chairman Charles Schultze does, too, but perhaps with a slower phase-in that would leave a gap in the fall of 1981 that could be closed all at once.
Despite his public statement, Kahn might go along with phased decontrol, White House sources say. And, while he is not directly part of the current decisionmaking process, Federal Reserve Chairman G. William Miller backs decontrol despite its "inflation component." That component is "modest compared to the [inflation] threat from a weak dollar" that could result if U.S. oil prices don't go up to world levels, Miller said last month.
With that kind of support, why is there any question about what Carter will do? Because Stuart Eizenstat and the White House political advisers haven't agreed to go along yet, and their advice will carry a lot of weight.
Oil Company Advantage
THERE ARE also all those folks in the oil business who are doing better under controls than they would in a free market. Some oil company representatives are already muddying the waters by asking for protection from international competition once controls are lifted.
Refiners today do not want to lose their vast cost advantage over foreign rivals. Their preferred solution: decontrol U.S. crude prices -- but put a new import fee on refined products.
Also, small refiners will fight to keep their own windfall under the so-called small refiner bias built into the control regulations at congressional insistence.
At the moment, the best bet for Carter action looks like immediate decontrol of newly discovered oil and freeing of the $12.75 price for so-called upper-tier oil between now and 1981. Lower-tier oil, the $5.80 variety, will be allowed to rise, too, but by how much is unclear.
The Jan. 3 memo included options to keep lower-tier oil controlled until 1985, or to let its price rise slowly until the fall of 1981, when the remaining gap would be closed.
Another variation in the memo would change the definition of stripper oil to relate production volume to the well depth. Sen Lloyd Bentsen (D-Texas) has introduced a bill to require this, and it may stand a good chance of passage. A House subcommittee will mark up such a bill, and Carter may well decide to go along.
In fact, the administration might decide just to eliminate lower-tier oil gradually by creating more and more exemptions.
Chances are good, too, that Carter will ask Congress to hit oil producers with a "windfall profits" tax that will be, in reality, an excise tax keyed to the amount of price-controlled oil produced. Carter tax experts want nothing to do with a genuine excess profits tax because of the difficult job of trying to determine what a "normal" profit would be.
If Carter, unlike his predecessor, decided to decontrol oil prices, even if he were to do it immediately, it would not break OPEC or otherwise mean an end of the U.S. energy dilemma. Problems will remain so long as the nation uses so much more energy than it produces.
But decontrol would reduce oil consumption and stimulate production. That would help hold down future OPEC price hikes and lower the need for U.S. oil imports. It also would enable us to keep our Bonn pledge to allow prices to rise to world levels, a pledge that seems to count for little with some officials.
This is a game that is worth the candle, whatever the political anxieties at the White House.