146. Memorandum From the President’s Assistant for International Economic Affairs (Flanigan) to President Nixon1

  • SUBJECT
    • Progress Report on Administration Energy Initiative

Background

During your first term, the US energy picture has changed dramatically. We no longer have excess oil production in Texas and Louisiana, and the Arab states control 62% of the world’s proven oil reserves through the OPEC cartel. OPEC has increased crude prices 40% in the past two years; prices are expected to rise significantly again in 1976. US oil production has peaked, constrained by price and availability of new oil bearing areas on the Outer Continental Shelf. Natural gas production has also peaked because gas exploration and development are unprofitable at prices set by the FPC. Production of coal, our most abundant fossil fuel, has been stymied due to increasing costs, the uncertainty created by the Clean Air Act,2 and possible strip mining legislation.

The following is an interim report on the progress of the Domestic Council’s Subcommittee on Energy which has been working for the past eight months under my direction on solutions to the nation’s energy problem. The urgency of the problem is indicated by the intense attention it has been given in recent weeks throughout the media and in Congress. The limited fuel shortage in the Middle West during the recent cold spell may well be followed by broader shortages elsewhere this winter.

After an initial Subcommittee meeting at the Secretary level, work during the summer was limited to seven Task Forces, with further meetings of principals delayed until after the election to avoid making this already difficult problem a campaign issue. Though McGovern3 did deliver one ineffective speech on energy, the so called energy “crisis” never surfaced as a full blown issue.

[Page 367]

Since the election, the principals have met six times to review and refine Task Force proposals.4 As a result of this effort, there soon will be developed for your consideration a set of proposed actions—some through executive orders, some through international negotiations, and some through legislative proposals. In considering these proposals it is important to recognize that past action by the Federal government has been one of the primary causes of the energy problem. For valid security reasons the government has limited oil imports from abroad; for environmental reasons the government has set standards prohibiting the burning of much of the nation’s coal; and for price reasons the government has so limited the cost of natural gas at the well-head as to discourage exploration for new gas reserves.

While not purporting to be the final and complete solution to a constantly evolving problem, the proposals listed below will comprise a comprehensive initial attack on the energy problem in the near term (1973–85), the medium term (1985–2000), and the long term (after 2000). They relate to all forms of energy, and to both the domestic and international fronts. The principle underlying these proposals is that government interference with the free market system should be as limited as possible, and that this system is best capable of providing sufficient clean energy at an acceptable price. This is a consistent set of proposals which will build on your first Energy Message of June 4, 19715 and which holds the promise of providing sufficient energy from our domestic resources at a reasonable environmental and economic cost.

Proposals

1. Request Congress to pass legislation permitting competition to set the price at the well-head of newly found natural gas. Twice since the Supreme Court ruled in 1956 that the Federal Power Commission has the power to regulate the well-head price of gas the Congress has reversed this, only to have it vetoed, the last time when President Eisenhower vetoed the Harris Bill. The result has been a lid on gas prices which has made gas the cheapest fuel, thus increasing demand, while at the same time making gas exploration uneconomic, thus decreasing supply. Studies by industry and academic experts uniformly predict that a continuation of present policies would result in cutting current domestic gas production in half by 1985 (with the difference made up by 10 million barrels per day of imported oil at an annual cost of $14 billion). [Page 368]By allowing the market to set the price, an increase in prices (perhaps 65¢ a thousand cubic feet compared with today’s 26¢) would increase production by 1985 by 50% to a level equal to demand.

In the face of today’s acute and growing gas shortage, we are restricting the price paid to the domestic producer to one-fifth of the equivalent price of imported LNG and other substitutes. This anomaly is so blatant, and the results of FPC regulation so stifling, that such disparate groups as the environmentalists, certain gas distributors, the gas producers, and even the Washington Post have called for a change in the pricing system. Consumerists will, of course, oppose any lessening of federal regulation. Your Economic Report of a year ago6 called for competitive pricing of new gas.

2. Instruct the Department of Interior to accelerate its leasing on the Outer Continental Shelf (OCS). The American continental shelf is believed by most geologists to be rich in oil and gas, and the areas where work has been done—the Gulf of Mexico and the southern California coast—have confirmed the projection. The need for development of these areas was emphasized by this week’s auction of offshore leases which brought the Treasury bids of a record $1.67 billion.

A continuation in the present leasing schedule is projected to yield no significant increase in annual gas and oil production by 1985. A sharply expanded leasing schedule, which the Department of Interior now proposes, including the Atlantic coast, the Gulf of Alaska, and continued leasing in the Gulf of Mexico into waters deeper than 200 meters, is projected to yield an important portion of our gas and oil requirements.

This program will bring objections from some environmentalists but the alternative to drilling in these areas would be increased oil imports.

3. Reorganize the Executive Branch’s mechanism for handling energy problems. Although the Congress refused to move your proposal for a DNR, the present organization of the Executive Branch is under constant Congressional and press attack.

John Ehrlichman, together with Interior and OMB, is developing a three phase proposal to (a) reorganize Interior by Executive Order to better manage energy, (b) perhaps request an additional Under Secretary for this purpose from Congress and (c) consider resubmitting legislation for a Department of Energy and Natural Resources.

4. Accelerate research and development on hydrocarbons, nuclear energy and exotic forms of energy. While this is one of the most frequently advanced [Page 369]solutions to the energy problem, there is also serious exaggeration of how much could be accomplished in the next few years. OMB proposes increases in R & D from $596 million in FY 73 to $643 million in FY 74, while OST recommends $709 million in FY 74. Though this builds on the substantial R & D program for breeder reactors set forth in your first energy message, it will inevitably be castigated by Congressional and other critics as inadequate.

A proposal is also being developed to encourage substantial increases in private utility funded R & D.

5. Alterations in the Mandatory Oil Import Program.7 When the MOIP was instituted in 1959 the US had considerable surplus spare production capacity, imports were limited to 12% of domestic production, and shortfalls in demand were made up by increased domestic production. Since early in 1972 US reserves have been produced to capacity, so increased demand has been met from increases in oil imports. In 1972 imports will average about 4.7 million barrels per day; in 1973 they will rise to over 6 million.

The Oil Policy Committee is considering two changes in the Program: (a) auction any increase in quota tickets, instead of giving them away, and (b) allow free importation of foreign crude oil for production of synthetic natural gas and residual fuel oil. Although the latter would result in high price gas, it would be quickly available and the procedure would encourage development of domestic refining capacity for fuel oil. These steps would be supported by critics of the Oil Import Program.

6. Request Congress for legislation for federal leasing of deepwater ports. Our imports of oil and other raw materials in the future, regardless of what other action we take, will increase. Most oil in world trade is now carried by giant tankers, which currently can dock at no American port. Importing oil by super-tankers unloading at deepwater ports is preferable both from an economic and an environmental point of view to the smaller tankers now used for the US imports. The proposed action would incur no cost to the federal government, and private interests building deepwater unloading facilities would have to comply with state regulations.

7. Increase utilization of coal. Our most abundant domestic source of energy is coal, yet production in 1972 declined. Stringent air pollution regulations made it difficult to use much of the high-sulfur coal [Page 370]and utilities switched to imported oil; safety regulations have resulted in a decline in productivity in most deep mines in the last two years and strip-mining is under constant attack.

Proposals are being studied regarding the interrelated problems of the effect of currently proposed air quality standards, the state of the art of stack gas cleaning, and the cost of alternate fuels. Study is also being given to the appropriate Administration position on strip-mining legislation.

8. Proceed with leasing of shale lands. There are very substantial oil reserves—estimates run as high as a trillion barrels—in the oil shales of the West. The cost of production is high, the water requirements are enormous, and the problems of disposing of the waste material have not been solved. The Department of the Interior has a program to lease six 5,120 acre tracts, two each in Colorado, Utah and Wyoming. (This is less than 0.3% of the shale lands in these three States). It is expected that these leases will result in the development of technology so that shale can be an important long term source of energy for the US. Environmentalists have opposed this program.

9. International actions regarding the energy problem. Cooperation between major consumers and major producing nations on developing new sources of energy and on handling available energy in times of shortages must be increased. Europe and Japan are entirely dependent on imported oil. US representatives have talked with the Europeans and Japanese for two years on a possible cooperative approach to the problem but until recently they have looked on these overtures as a not-too-subtle attempt to regain economic hegemony over them. Their views have now changed and they seem to understand well that if each nation tries to solve its own problems, the solutions will be slower; and if each nation tries to sew up available hydrocarbons around the world, the result would be bidding prices up to astronomical levels. An intensification of these discussions is under consideration. It may well be appropriate to include in a Presidential energy message a statement that we recognize the international nature of the problem and desire to examine the possibility of a wide cooperative approach.

Negotiations are underway with both Canada and Venezuela on energy matters. If the talks with Canada are completed, the removal of quantitative restrictions on Canadian oil could be included in an energy message. Reference could also be made to the negotiations with Venezuela which we hope will result in the exploitation of Venezuela’s very large heavy oil reserves.

10. Measures to conserve energy and use it more efficiently. References to the Administration’s backing of legislation to use part of the gasoline tax for mass transit, to work being done by the GSA on energy conservation in homes and office buildings, to DOT’s work on more [Page 371]efficient automobile engines, and to research being carried out on more efficient electricity generation and transmission could be included in an energy message. Study is being given to proposals for the formation of an “Office of Energy Conservation” in the Department of the Interior, and compulsory labeling of energy efficiency and cost operation of appliances and automobiles. This initiative will be attacked as inadequate, with proposals for federal regulation of the use of energy.

Congressional Aspects

The above proposals cover so broad a field as to engage many Committees in the Congress, including Interior, Commerce, Government Operations, Joint Committee on Atomic Energy and Science and Astronautics—at least on the House side.

In the Senate, Jackson has shown the greatest interest in energy matters and has a commanding position as Chairman of Interior and as a senior Democrat on Government Operations and JAEC. As such, he can be the key Committee member on legislative proposals involving Government Organization, Research and Development, the Oil Import Program, and Land Use. However, the key proposal—allowing the market to set the well-head price of new gas—would go before the Commerce Committee. Here Magnuson would be the key, with Norris Cotton instrumental to the success of our efforts.8

I had Jackson to lunch at the White House (where he requested the subsequent meeting with you) and have met with the Republican side of his Committee twice. Based on these meetings and discussions with his staff, I am convinced that, while calling for “more” in Government Organization and R & D, he will generally support the proposals described above as long as credit for progress is fully shared with him.

Cotton is concerned about Magnuson’s reaction to any proposal to remove from federal regulation the price of new gas. He points out, however, that Magnuson will probably again propose legislation to reverse the Supreme Court’s decision in the El Paso case, which legislation the Administration has opposed in the past.9 Consideration might be given to reviewing this Administration position.

While the House has no broad energy leader, Holifield chairs Government Operations and is senior on JAEC. As such he will be [Page 372]important on both Government Organization and R & D. On the latter, however, Science and Astronautics has taken the lead, with Mc-Cormack (the junior Democrat) heading the Subcommittee. I have met with him, Mosher (the ranking Republican) and their staff and am convinced their only criticism of the Administration proposal will be that it is “too little.” The key to the House may well be the Speaker, and through him, his fellow Oklahoman, Jarman,10 who is number three on Interstate and Foreign Commerce to which legislation regarding gas pricing will be directed.

To assure prompt and successful Congressional attention to the Administration’s proposals will require a broad and well designed effort. The program must and can be sold as pro environment and pro consumer. The tag of pro industry must be avoided. In working the Congress, however, individuals, such as Charls Walker, who is already counseling with me, will be invaluable.

Timing

The question of the optimum timing for launching the Administration’s initiatives is controlled by the urgency of the problem. This includes:

(a)
The possibility of area energy shortages this winter;
(b)
Industry uncertainty as to how to proceed, leading to the possibility of major investment decisions (ie, LNG imports) based on the assumption of no change in domestic policy; and (c) The likelihood of early Congressional action which could force the Administration into a reactive, rather than a leadership, position. Jackson’s hearings will commence again on January 9th.

The arguments counseling delay are:

(a)
Time to have a fully developed set of proposals;
(b)
Congressional discussions; and
(c)
Public education as to the problem, and its effect on national security, the environment and the economy.

As this memo indicates, the substantive proposals and Options Papers for Presidential decision are well advanced and will be ready by mid-January. Congressional contacts are underway, with expanded effort awaiting a return of Congress. Finally, the process of educating the public has started, with speeches and/or TV appearances laying the groundwork for Administration action, having been made by Ehrlich-man, Ruckelshaus, Schlesinger, Morton, Peterson and Akins. I have met [Page 373]with the Washington leaders of the environmentalists, and obtained at least their qualified support for some of our proposals. The schedule of Administration appearances will be increased after the first of the year.

Given this base, energy could be a major topic for your State of the Union speech. This could be followed by an Energy Message to Congress, including all the required legislation, by mid-February. Should you decide to use this schedule, the total work program will meet it.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 219, Agency Files, Council on International Economic Policy (CIEP), 1972. No classification marking. A copy was sent to Ehrlichman, Shultz, and Kissinger.
  2. The Clean Air Act of 1970 was amended in 1972. (42 USC 7401–7671)
  3. Senator George McGovern (D–South Dakota) was the Democratic Presidential candidate.
  4. Materials for the December 13 meeting of the Energy Subcommittee are in the National Archives, Nixon Presidential Materials, White House Special Files, Staff Member and Office Files, John D. Ehrlichman, Box 44, Special Subject File 1958, (1969)–1973, Energy Subcommittee Meeting. Materials for other Subcommittee meetings have not been found.
  5. See Document 90.
  6. Reference is to Nixon’s Annual Message to the Congress, “The Economic Report of the President,” January 27, printed in Public Papers: Nixon, 1972, pp. 111–114.
  7. Flanigan submitted a report on the Mandatory Oil Import Program to Nixon on September 29, but any decision to alter the program was deferred until after the November Presidential election. (National Archives, Nixon Presidential Materials, White House Special Files, Staff Member and Office Files, President’s Office Files, Box 18, President’s Handwriting, Sep 16–30, 1972)
  8. Senator Warren G. Magnuson (D–Washington) and Senator Norris Cotton (R–New Hampshire).
  9. Reference is to the Supreme Court decision in The United States v. El Paso Co., 376 US 651 (1964), which reversed a lower court decision that had dismissed U.S. charges that the purchase of Pacific Northwest Pipeline Corporation by El Paso Natural Gas Company substantially lessened competition and was therefore in violation of the Clayton Act.
  10. Representative Chester E. Holifield (D–California); Representative John W. McCormack (D–Massachusetts), Representative Charles A. Mosher (R–Ohio); Representative and Speaker of the House Carl Albert (D–Oklahoma); and John Jarman (D–Oklahoma).