Delivered herewith is the initial version of a lengthy book on
“Energy.”2 The
introductory section deals with the history of the energy problem, the
current situation, and the broad options for action. Following that is a
section of each major issue under consideration. Each section is made up
of (a) a background discussion, (b) a statement of the problem, (c) a
series of options, with pros and cons relating to each, and (d) a
statement of the conclusions and recommendations reached by the
responsible agencies. For some issues there is also included additional
information in appendices. Should you want further information or
studies on any issue, it is available. Where legislation is required by
the recommendations, it is prepared and available.
Attached is a seven page summary of the energy problem, and the
recommendations for dealing with it reached by the Domestic Council
Subcommittee.
For the quick “education” in energy which you requested, I particularly
commend to you the summary memo and the introductory section of the
book. Because the international aspects of energy are of particular
interest to you, I also recommend that you read the section entitled
“International.”
Attachment
THE ENERGY PROBLEM AND POSSIBLE SOLUTIONS
Summary
Background
During the last four years, the U.S.
energy picture has changed dramatically. We no longer have excess
oil production in Texas and Louisiana, and the Arab states control
two-thirds of the world’s proven oil reserves through the OPEC cartel. OPEC has increased crude prices [Page 385] 40% in the past two years; prices are
scheduled to rise significantly through 1975 and a further sharp
increase is expected in 1976. U.S.
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, and possible strip mining legislation.
The following is a review of the findings and recommendations of the
Domestic Council’s Subcommittee on Energy which has been working for
the past eight months 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.
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;3 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 (1973–1985), 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. They involve legislation,
action through executive order and international negotiations. 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 the President’s first Energy Message of June 4,
19714 and which holds the promise of providing
sufficient energy from our domestic resources at a reasonable
environmental and economic cost.
[Page 386]
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). 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. The President’s Economic Report of a year
ago5 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 December’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.
However, 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.
[Page 387]
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
accept the President’s proposal for a DNR, the present organization of energy management in
the Executive Branch is under constant Congressional and press
attack.
The Domestic Council and OMB have
developed a series of options for both improving the capability of
the Department of Interior and for broader reorganization. The
preferred reorganization would involve increased emphasis on energy
in DNR, renaming the department the
Department of Energy and Natural Resources (DENR). The most difficult question involves the conduct
of energy R&D, either including
most of the non-military, non-regulatory AEC functions under DENR (favored by the Domestic Council) or placing all
energy research under AEC (favored
by OMB).
4. Accelerate research and development on
hydrocarbons, nuclear energy and exotic forms of energy.
While this is one of the most frequently advanced 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 about $600 million in FY’73 to $660 million in FY’74, while OST recommends somewhat more than $700 million in
FY’74. Though this builds on the
substantial R&D program for
breeder reactors set forth in the first energy message, even the
high OST recommendation 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. When the MOIP was
instituted in 1959, the U.S. 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 U.S. reserves have been produced to
capacity, so increased demand has been met from increases in oil
imports. In 1972 imports averaged 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.
[Page 388]
6. Request Congress for legislation for federal
licensing 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 supertankers unloading at deepwater ports is preferable both from
an economic and an environmental point of view to the smaller
tankers now used for the U.S.
imports. The proposed action would incur no cost to the Federal
government, and private interests building deepwater unloading
facilities would have to comply with federal and state
regulations.
7. Maintain utilization of coal. Our most
abundant domestic source of energy is coal. Stringent air pollution
regulations make it difficult to use much of the high-sulphur coal
and utilities have 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.
Reasonable strip mining legislation is imperative; there are
essentially no alternatives. However, the interrelated problems of
the effect of current air quality standards, the state of the art of
stack gas cleaning, and the usability of coal do provide options. At
the present time, it is expected that delay by the states in
implementing the secondary standards (allowed under the Clean Air
Act) will allow continued production of high-sulphur coal at present
levels. With technological developments, production of high-sulphur
coal can increase by 1980.
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 Interior has a program to develop commercial-scale
prototype shale plants which was proposed in the first energy
message. Six 5,120 acre tracts will be leased, 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 U.S. 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. U.S. 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 [Page 389] 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 that we 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 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 Interior,
and compulsory labeling of energy efficiency and cost of operation
of appliances and automobiles. This initiative will be attacked as
inadequate, with proposals for federal regulation of the use of
energy.
[Omitted here is the section on Congressional Aspects.]5
