175. Memorandum From the Under Secretary of State for Economic Affairs (Cooper) to the President’s Assistant for Domestic Affairs and Policy (Eizenstat)1
SUBJECT
- Recommendation for the President on U.S. Oil Pricing Policy
I. Issue
How to fulfill the President’s commitment to reduce U.S. imports of oil by raising U.S. crude oil prices to world level by the end of 1980, while at the same time limiting the inflationary impact of this action. The policy adopted should also eliminate the complicated oil price control and entitlements programs and prevent oil producers from capturing windfall profits.
II. Essential Factors
An interagency memorandum to the President on December , 1978, described options on oil pricing policy.2 The policy the State Department recommends is a phased decontrol of U.S. crude oil prices combined with an excise or “severance” tax on old oil (excluding stripper and enhanced recovery production). The decontrol of oil prices should not be contingent upon Congressional passage of the excise tax but should proceed independently. This policy will minimize the inflationary impact of decontrolling oil prices while permitting the President to fulfill his Bonn summit commitment to raise prices paid for oil in the United States to the world level by the end of 1980.3
The proposal is illustrated in a schematic diagram on page 5 and would work as follows (on the assumption of annual 10% OPEC price increases):
—Early in 1979, the President would announce that controlled prices for all U.S. oil would be raised by the statutory limit through December 31, 1979, and that on January 1, 1980, wellhead prices for upper-tier oil would be completely decontrolled, as would retail product prices. As stripper and enhanced recovery oil prices are already decontrolled, this would leave only the price of lower-tier oil controlled. These price controls would be gradually raised until the control authority expires in September 1981.
[Page 565]—At the same time, the President would propose legislation for an excise or “severance” tax to be initiated on January 1, 1980. This tax will increase during the year to raise the price of old oil to refiners to the world level by the end of the year. After December 31, 1980, this tax would prevent oil producers from obtaining windfall profits from old oil.
—If OPEC increases oil prices on January 1, 1981, the excise tax would be used to adjust the composite price to U.S. refiners to the new world price level by September 1981, when the control authority expires. U.S. prices thereafter would remain at the world level.
—After October 1, 1981, the excise tax would be adjusted to permit wellhead prices of old oil to reach world levels gradually, minimizing any incentive to withhold production, while preventing windfall profits in the interim.
III. Pros and Cons
Advantages of this approach are:
—It utilizes your existing authority to implement a phased decontrol of oil prices without requiring Congressional action.
—Decontrol is not contingent upon Congressional enactment of a windfall profits tax. In fact, the reverse is true. The burden falls to Congress to act quickly and responsibly on the Administration’s excise tax proposal if it wishes to restrict excess profits by producers.
—Internationally, the United States would fulfill what is viewed by our allies to be an important Bonn Summit commitment. Failure by the United States to honor this commitment, together with Japan’s failure to implement fully their summit commitments, may be used by others, especially West Germany, as an excuse to back away from some of their own already-implemented commitments. Our failure would also have an adverse effect on U.S. credibility regarding future commitments.
—It would eliminate the need for the complex entitlement and price control programs after September 31, 1981, because the refiner acquisition price for all categories of oil would be equalized.
—Because the date at which the excise or “severance” tax drops to zero is unspecified, companies will have no incentive to withhold production of old oil.
—The major economic impact would not be felt until 1980 or 1981, thereby minimizing adverse effects on your anti-inflation program in 1979.
Some disadvantages are:
—The proposal includes Congressional passage of an excise tax. It may be difficult to get Congressional approval at the time, in the form [Page 566] and with the tax revenues allocated as envisioned by the Administration.
—Failure to enact the tax would mean that producers of old oil would receive windfall profits when control authority ends on October 1, 1981. These producers would also be likely to reduce production of old oil until that date.
—Small windfall profits will accrue to producers by decontrolling upper tier oil.
—An excise tax which varies with world prices and with the old oil wellhead price may be criticized as too complex. However, it will be less complex than the present entitlements program.
IV. Recommendation
That you adopt the approach described above.4
[Omitted here is the schematic diagram described in Section II.]
- Source: Carter Library, White House Central Files, Subject File, Box TA–26, Trade. Confidential.↩
- The date was left blank on the original. The memorandum was not found.↩
- See footnotes 2 and 3, Document 157.↩
- There is no indication of approval or disapproval of the recommendation.↩