draw down inventories short-term in such a way that we do not precipitate economic difficulties in the United States and yet avoid so great a drawdown that we create difficulties next winter. There are a number of policy issues to which you referred in your statement, Mr. Chairman, a number of contingency plans that have been in preparation. These include a general rationing scheme which we do not expect to use but will be available on a standby basis and four contingency plans. Those contingency plans may or may not be employed, depending on the severity of the Iranian situation. Mr. Chairman, there are a number of things that we can do in addition to deal with this problem. One is voluntary curtailments. The President has called on the American people to observe the 55-mile limit, avoid unnecessary driving, hold thermostat controls at 65°. These are the kinds of voluntary measures that we can take that will alleviate the 500,000 barrels a day shortfall that is a consequence of the developments in Iran. But beyond that, Mr. Chairman, we have a number of measures that we can and, I believe, should take. As a result of the Natural Gas Policy Act, which created a single unified market, and on which you, Mr. Chairman, and other members of this committee worked, we have shaken loose from the intrastate market a substantial volume of gas that can be employed, at least a trillion cubic feet, some of the industry estimate it higher. That will permit us to back out about 500,000 barrels of oil a day and we are working closely with the FERC to see that that gas is appropriately absorbed. The consequence of this will be alleviation of the worldwide oil shortage, a reduction of our balance of payments drain, and, of course, better use of our domestic resources in such a way as to provide additional stimulus to the industry for drilling activities. Mr. Chairman, the situation that we face today is serious. It is not as yet critical. We must watch it carefully to see at what point it becomes critical. I think that it may be of interest to this committee to review the developments as a result of Iran in connection with the pattern that developed at the time of the Arab oil embargo of 1973-74. Members of this committee will recall that at the time of that embargo there was a very sharp increase in the supplies that were withdrawn from the market by certain members of OPEC. It reached a peak of about 5 million barrels a day and then fell off rather rapidly. As a result of the withdrawal of 5 million barrels of oil a day from Iran on a gross level, we are matching what occurred in the case of the Arab oil embargo of 1973-74. A continuation for another 5 weeks will lead to an equivalent gross shortfall. However, in these circumstances the compensating increases in production by other producing countries have been greater than they were during the Arab oil embargo. At that time the increases in production from other countries was less than 1 million barrels a day. At this time increases in production are upward of 3 million barrels a day, almost 3 million barrels a day. As a result the net drain is less than it was at the time of the embargo. Nonetheless, a continuation of this drain without a restoration of production in Iran will result in an equivalent loss of oil after compensating increases by June of this year. I think that these measures are indicated in the cumulative shortfall chart that I have which indicates that about the time of June we will find, unless there is a restoration of production in Iran, that the net drain from the reduction of production will be equivalent to that experienced in the Arab oil embargo. There are two basic conundrums in this Area: When and how soon Iranian production may be restored. The events in recent days have eliminated the political impasse that existed in that country, but the country as yet has shown no signs of recovery from the chaos into which it has plunged. Projections about the restoration of production consequently are iffy. I think that we must recognize that the forces that are in control of the oilfields may not be responsive to guidance from Tehran should Tehran choose to give its guidance to restored production. Oil company estimates with regard to the speed with which production can be restored vary. Some companies believe within a month that you can get up to 3 million barrels a day. Others believe it will be at least 3 months before such production is restored, given the conditions in that country. I think that we will not know, until we test the circumstances, which projection is right. We do know, Mr. Chairman, that in order to operate above 3 million barrels a day it will require the use of gas injection techniques. And in the past those techniques have been administered by expatriates who have been removed from the oilfields. Consequently, the big unknown question is how quickly and to what extent oil production will be restored in Iran. As yet we cannot bank upon a quick restoration. The other conundrum, Mr. Chairman, is to the extent to which other producers will maintain production. Some of them have indicated that they are operating above the level that they desire, that they are doing so only in the short run until such time as Iranian production is restores. To the extent that indeed the present level of production from other producing states fails to continue at its present high level, but instead is adjusted downward in the event of an increase in Iranian production, the effect of the restoration of Iranian production would be mitigated. Mr. Chairman, we are going into the hole worldwide about 2 million barrels a day. Here in the United States our share is about 500,000 barrels a day after offsetting increases by other countries. Under the international energy program we are obligated to share in difficult circumstances with other consuming nations and, as a consequence, we will face the possibility that the program may be triggered. If that program should be triggered on the basis of domestic consumption, our obligations may rise from 500,000 barrels a day to 800,000 barrels a day or something slightly in excess of that; that is, that the operation of the IEP may increase the requirements placed upon the United States. Under these circumstances, Mr. Chairman, it behooves us to look vigorously around for those measures that can serve to offset the requirements for increased oil imports in the United States. I have mentioned better use of new gas. There are other alternatives: shifting from oil to coal in the case of certain utility plants where that is consistent with ambient air quality standards; adjustments of environmental regulations to slow down the phaseout of lead form gasoline which ultimately could save up to 500,000 barrels a day and will save 50,000 to 100,000 barrels a day quickly; the wheeling of power from those areas in which we have substantial nuclear and coal-fired capabilities to those areas that are particularly dependent upon oil for the production of electric power. These are actions that we can take quickly, we can institute quickly, although it will take some time to implement. But they are the kinds of measures that can, to a very large extent, offset the consequences of the loss of Iranian production. Mr. Chairman, I will say a few words on the budget. You have indicated the gross outlines of the budget. Mr. Loeffler has indicated in what ways Representative Brown thinks the budget is gross in more senses than one. Mr. DINGELL. I might observe that Mr. Brown and I might have differences on that point. Secretary SCHLESINGER. There is an increase in the budget, leaving out strategic petroleum reserves, of about 7 or 8 percent in terms of budget authority. Many of the programs of this Department have increased. As a result of economization in those areas which are a reflection of Government energy activities, we have been able to realize funds that can be better employed for research and development activities. For example, we have substantially reduced our expenditures by $600 million on uranium enrichment services, including centrifuge operations, because of a declining estimate of demand for nuclear fuel for our nuclear industry. By this release we have been able to maintain other programs at a higher level than would otherwise have been possible. As you indicated, Mr. Chairman, we are moving ahead in the strategic petroleum reserve. We have, over recent months, surmounted some of the difficulties that arose with regard to the creation of appropriate storage capacity. These difficulties, despite the fact that this agency received better cooperation from other Government agencies, I think, than private industry receives, lead to a considerable investment of time in obtaining the appropriate permits. It took us 18 months, I believe, to obtain a permit from EPA to put brine into the Gulf of Mexico. We are still wrestling with the Mine Safety Administration with regard to the appropriate design of the Week's Inland facility, and we have some difficulties with the State of Louisiana regarding permitting activities. All of these activities have resulted in some delay in obtaining the appropriate capacity to emplace oil in the domes. By the month of December we had reached our scheduled rate of fill, which was 10 million barrels a month. We still have some 20 million barrels on contract which we will continue as of the present moment to install in those domes. I should point out that because of the developments in the international oil market that the tenders that we have released for additional purchases of oil have come in at a price that is quite unsatisfactory, and given the tightness of the market, the pace of oil acquisition in the future will have to be reviewed. This committee deals, Mr. Chairman, with certain budgets in particular, conservation budget, the budgets of the regulatory agencies. Mr. Loeffler has indicated in the statement that he read, presented by Mr. Brown, that there is an increase in the budgets for the regulatory agencies. Indeed, as you indicate, Mr. Chairman, there has been a decline in manpower in ERA. That decline has been premised on the elimination of certain types of price controls. But we have brought down manpower and we intend to hold that manpower to a lower level. There is some increase in manpower for the FERC on which you will hold an independent hearing, Mr. Chairman. It amounts to approximately 320 people. About half of those, as I recall, are designated for the implementation of the Natural Gas Policy Act. The budget for the Office of Hearings and Appeals is designed to expedite hearings. We do not want to have a long queue or a queue that is any longer than necessary. When producers apply for relief they should be given an answer on that relief as quickly as possible. Mr. Chairman, your statement referred to conservation. Conservation, I think, has been one of the principal accomplishments in the energy area of the United States in recent years. Two years ago, Mr. Chairman, there was widespread doubt whether, indeed, improvements in fuel efficiency could be attained in the United States. There was a view widespread in industry that there was a lock-step relationship between the growth of energy usage and the growth of the GNP, so that each 1 percent increase in GNP required a 1-percent increase in energy consumption. I think experience in the last 2 years has demonstrated that that view was wrong. Indeed, that we have been able to achieve a very substantial rate of growth of economic activity with energy coefficients much lower than 1.0. Over the last 3 years our energy coefficient has been 0.7 rather than the historic 1.0 or 1.1. The credit for this should be spread widely. I think industry has kept a very sharp pencil as energy prices have increased, as they have responded to the voluntary program set up in the early 1970's. Energy consumption per unit of output has diminished. As a result, the industrial share of our energy use has declined from 45 percent to approximately 38 or 37 percent today. I think this underscores how much can be accomplished in the area of conservation. The household sector has lagged in this regard behind the industrial sector. But with the tax credits that were provided by the Congress last year for insulation, with greater awareness both of rising energy prices, and the need for conservation, I think that the response will be far greater on the part of the household sector. Mr. Chairman, we have many aspects of conservation that we need to push. And one of the great stimuli to conservation has been the rising price of energy, particularly in the industrial area. Another has been the tax credits that have been provided by the Congress in the course of the deliberations of the last 2 years. This Congress has increased to 20 percent the tax credit obtainable by a business firm for shifting to more fuel efficient methods of production as well as a tax credit of 20 percent for shifting to alternative fuels. The consequence, I think, Mr. Chairman, will be that the greater growth of petroleum consumption in the United States, which had been at a high pitch, has been reduced and will continue to increase at a relatively lower level. If, as a result of these activities we are able to constrain our demand for oil and thereby constrain the demand for imported oil we will be well served in the long run in avoiding economic and political difficulties in the middle 1980's and well served in the short run by avoiding undue pressure on international oil markets during this period of shortage generated by Iran. Mr. Chairman, I think that summarizes the main points that I wanted to bring to the attention of this committee and I am pleased to take your questions. [Testimony resumes on p. 118.] [Secretary Schlesinger's prepared statement follows:] TESTIMONY OF JAMES R. SCHLESINGER SECRETARY OF ENERGY BEFORE THE UNITED STATES HOUSE OF REPRESENTATIVES COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE SUBCOMMITTEE ON ENERGY AND POWER FEBRUARY 13, 1979 |