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Carter’s Powerless Energy Policy

National Energy Plan

by The Executive Office of the President, Energy Policy and Planning
Superintendent of Documents, Government Printing Office, 103 pp., $1.50

The national energy program produced by President Carter and now dispatched to Congress for legislative action has been moderately well received. It is likely to go through many changes in the battles in Congress that lie ahead, but nearly everyone agrees that some form of over-all national strategy was needed, if for nothing else than to promote a serious debate.

We should say forthrightly that we regard the plan as very seriously flawed. It fails entirely to confront the power of the oil industry. It fails to promote any serious change in the automotive culture of the country. It proposes drastic and undemocratic changes in the administration of energy policies. It makes a fundamental error in relying on the use of the tax code as a method of inducing change. It almost certainly will result in increased profits for the energy companies at the expense of consumers, who will have to pay higher prices. Most sorely affected will be the poor.

The President’s plan attempts to set forth ways of reducing demand for energy and of starting in a systematic way to move the economy away from its dependence on oil to other fuels—coal, nuclear, and, in the distant future, such sources as solar energy. Thus it focuses extensively on conservation. It also attempts to propose new policies to hasten changes in the use of fuel. Here the President has relied extensively on the tax system and on increased administrative powers.

Novel though it may appear, the program must be seen in its historical setting. For the last decade or so the major energy companies have themselves been responding to strong historical currents. They have begun to concentrate on coal and nuclear resources within the United States as their domination of foreign sources of oil wanes. The tendencies of the industry have been clear enough. But to accomplish their goal, the energy companies have required the assistance and sanction of the federal government. What they have wanted is a clear federal policy emphasizing growth in coal and in nuclear power; higher prices for natural gas which they have considered to be at artificially low levels; reduction of environmental constraints; off-shore drilling; importation of liquefied natural gas; development of synthetic fuels; and in general a firm commitment by the government to endorse these endeavors and desires.

At the very time that the energy industry has been articulating and trying to implement this policy, other political interests have been making themselves felt. The environmentalists, a politically significant force, have argued for energy conservation and strict safeguards. Consumer organizations and labor unions have struggled to keep fuel cheap, and as the question of energy has become increasingly visible Congress has become an arena for fighting out various policies.

Carter’s program has been hailed as an axe cleaving through this knot of conflicting interests. It has been regarded as a balanced and judicious compromise, going as far as is possible within the political system of the United States toward achieving a rational solution. The only way to address oneself to the program, once the legitimacy of such concepts as conservation and reduction in the growth of energy demand is accepted, is to look to the details of the plan.

Let us start with a central feature of the energy profile of the United States—its automotive culture. What does Carter’s program suggest here?

The plan proposes a national goal to reduce gasoline consumption. To do this the government would impose a graduated excise tax on new automobiles with poor fuel efficiency. Cars manufactured in the United States or Canada would be eligible for rebates if they achieve mileage better than the stated standard. The President also envisions the possibility of a standby gasoline tax if gas consumption is not brought down. As a practical political matter this tax is not taken very seriously in Congress, with such potent political forces as Senator Henry Jackson set against it.

Even without this probably doomed standby tax, the price of gasoline will rise, as a consequence of the rise in the price of crude oil generally. But it is arguable whether the slow rise in the price of gas will in fact affect consumption very much and deter consumers from traditional driving habits. It will be recalled that during and right after the oil embargo in 1973 the price of gasoline approximately doubled. This 100 percent increase had no noticeable effect on consumption.

There are also some troublesome international implications in the program’s promotion of small, fuel-efficient cars. A major reason that Americans are now driving such cars in increasing numbers is that they are manufactured abroad by companies which vigorously invaded the US market. The program could conceivably have encouraged more competition of this sort as an added incentive for Detroit to change its ways. Yet in fact the program says rather obscurely, “for cars manufactured in other countries, rebates would be provided only after agreements were reached with individual countries.” This appears to mean that such rebates would be given only if the foreign countries involved limited their exports to levels already attained. If this remains true, the US will be promoting and protecting the industry that single-handedly has created the inefficient transportation system that the President’s program is now trying to change. It will also be in considerable trouble with other countries such as Japan for restraint of international trade.

The most astounding omission in the President’s transportation proposals is the failure to produce anything more than the most vaporous rhetoric about alternative modes of transportation—most notably the reconstruction of the railroad system. Without concrete proposals designed to encourage a shift from cars to other methods of transport it is clearly difficult to affect in any notable way the automotive culture of the country.

On the vital matter of oil pricing Carter’s program sketches a provocative scenario. Advocates of the “free market” have long argued that oil prices should be allowed to rise in response to market demand. As a political matter this line of argument is worrisome for a Democratic president since in all likelihood the shift to free market pricing would give the oil companies windfall profits. The opposite position is that the government should sternly regulate the industry, determining costs and setting a fair rate of return for private enterprise. If actually put into practice this procedure is liable to merciless attack, having both the odor of radicalism attached to it and also unpleasant political consequences in estranging regional loyalties and support for Democratic candidates. The prospect of a united and pugnacious oil and gas industrial coalition arrayed against him is a gloomy one for any sensible American politician.

Carter’s strategists have consequently tried to slip adroitly along the dividing line between the two camps. The plan proposes to allow the price for newly discovered oil to rise to the current 1977 world oil price. Future prices of newly discovered oil would be adjusted for subsequent inflation. The President would then attach an equalization tax on crude oil at the wellhead, a tax that is equal to the difference between the controlled price and the world price. Net revenues from this tax would be returned to consumers in the form of a per capita energy credit, either against other taxes or in the longer run as part of a general tax reform.

Carter says,

These “energy payments” would result in lower withholding from weekly paychecks to make it unnecessary to wait a full year for the benefit of the energy credit. The poor who do not pay taxes would also be entitled to their per capita share of these tax revenues. Most would receive their payments through existing income maintenance programs. The remainder would collect their energy payments by applying to one of the existing state agencies through which federal funds are now distributed…. The oil tax would establish a more realistic energy pricing system, with no net gain to the Treasury, and no net loss to consumers as a group.

On its face this scheme would appear to be a way of limiting excess profits by the oil industry and of achieving—at least in principle—a measure of income redistribution. But difficulties appear to lie ahead for some of the promised rebates.

Let us for example take the matter of home-heating oil. Carter says, “Home heating oil users would receive an additional share of the equalization tax as a dollar-for-dollar reduction in price when they buy fuel oil.” It is not clear how this munificence would be achieved. As we understand it, the rebate would be at the wholesale level, i.e., the local company from which a customer buys his fuel oil would receive the rebate from the government and theoretically pass it on to the customer. But how can one be sure that he would pass it on? It looks as if this proposal will, at best, entail a new bureaucracy devoted to supervision of the new system.

Matters become even more complex. Oil refineries produce different products, and it will be necessary to allocate what portion of the total equalization tax will go to fuel oil. To be effective the plan would have to provide for inspection of each different refinery, because some refineries are more efficient than others, and consequently some have higher costs than others. The Federal Energy Administration has struggled in vain to determine the real costs of different products made from crude oil. One of the major reasons for this vain battle is that the books kept by the companies elaborately mask true costs. The basic question here is whether and how the government will be able to determine actual costs and hence assign portions of the tax rebates to different products. Since refineries differ in their efficiency and costs, there may be differences in prices of home-heating oil supplied to the wholesaler. This could occasion a black market, or, at the very least, would involve the creation of an elaborate bureaucracy to ensure an equitable system.

Another difficulty crops up with the provision of home-heating oil to US wholesalers from foreign refineries located in the Caribbean. Very large amounts of home-heating fuel used in New England come from these sources. These refineries of course are not subject to the equalization tax applied to US crude. But are the wholesalers who handle this foreign oil to get rebates as if they were supplied from a domestic source? If so, then this would appear to be a subsidy for these foreign refineries.

As the above illustrations suggest, the President’s program, when it comes to oil pricing, has noble ideals, but carried forward in practice would be inordinately complex, necessitating just the sort of bureaucracy Carter wants to get rid of. By trying to toe the middle line between the two traditional positions the Carter plan fails to confront the basic problem, which is the structure of the oil industry.

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