July 21, 1975
Page 23901
ENERGY: BAD MATH AND BAD ADVICE
Mr. MUSKIE. Mr. President, last Thursday the Federal Energy Administration released a report entitled "The Economic Impact of the President's Proposed Program of Phased Decontrol."
The report was disturbing on two accounts.
First of all, it failed to provide a full and accurate assessment of the overall impact of the President's decontrol plan. Not only did it underestimate the adverse economic consequences on inflation, on jobs and on the Nation's chances for recovery, but it overestimated the positive aspects of the program for conservation and increased energy production.
A second, and equally disturbing, aspect of the report is what this gross deficiency in economic analysis says about the competence of those currently advising the President in the whole energy and economic policymaking area.
The FEA report considerably underestimates the burden to be placed on the average household, not only by the oil price increase itself but by the indirect impact this price increase would have on the cost of other energy sources, particularly coal and natural gas.
The FEA maintains that decontrol of "old" oil would raise the annual energy cost of the average American household by $114. An objective look at the data would suggest a figure twice that amount when controls were removed.
The FEA figure of $114 assumes that the Nation's 70 million households would pay a total of $8 billion in higher energy costs as a result of decontrol. Such a figure, however, accounts for only half of the total price impact. What we are talking about here is an annual volume of some 2 billion barrels rising from a controlled price of $5.25 to an international market price, which is now $13.50 — $16 billion all together. Where is the additional $8 billion in increased energy cost to be absorbed if not by consumers?
The FEA's assumptions concerning the impact of oil price decontrol on the cost of other energy sources is equally questionable. It maintains that increased oil prices will result in a decrease in coal prices of some 12 percent. Why, then, we might ask, have coal prices more than doubled during the past 2 years, the same period that has witnessed a major increase in the price of crude petroleum? Oil and coal are substitutes for each other. Raising the price of one of these fuel commodities increases the price which producers of the others can charge. Rather than reducing the price of coal by 1.2 percent, oil decontrol would likely cause an increase of 30 to 50 percent.
The impact on gas prices would be in the same range. Rather than leaving the price of natural gas unaffected as the FEA report has suggested, oil decontrol is more likely to increase the cost of uncontrolled natural gas by at least one-third.
In addition to underestimating the adverse impacts of the President's decontrol policy, the FEA has failed totally to demonstrate its positive results in terms of increased production. Arguing that phased increases in "old" oil prices will serve as an incentive for greater levels of production, FEA ignores the likelihood that the phased decontrol plan will itself serve as an incentive actually to withhold crude petroleum from the market. Yet this is what the logic would indicate.
Assuming that OPEC increases its price by $3 per barrel over the next 30 months, and the President retains the $2 tariff, the price of imported oil could be $17.50 by February of 1978, the time that the phased decontrol plan has run its course. At that time domestic oil producers will be able to take advantage of a world crude petroleum price of $17.50 per barrel. Why pump more now when it will be worth more later?
In addition to the gross deficiencies in its economic assumptions, the FEA compared the President's 30-month phased decontrol program with a 60-month decontrol plan rather than comparing it with continued controls. This comparison was apparently made as a result of sheer error — asking the computer the wrong questions and getting an answer with no relevance to the issue at hand.
The combined impact of the FEA report's unreasonable assumptions and inappropriate simulations has been a gross underestimation of the adverse economic consequences of the President's phased decontrol policy. The FEA maintains that such a policy would increase the unemployment rate by only 0.1 percent, the inflation rate by only 0.5 percent. A recent study by the Congressional Budget Office, however, estimates a similar program would have an employment and inflationary impact five times as great next year and more thereafter.
FEA's evaluation simply does not square with the facts of the energy situation. For this reason, its analysis, like the President's program which it is based upon, is simply wrong. This week the Budget Committee continues hearings on energy-related economic subjects at which competent economists will attempt to determine what careful analysis suggests is the likely result of alternative energy programs.
I strongly suggest that the Congress reject the President's decontrol program, and that the President sign the bill to extend the current controls for another 6 months. Certainly the economy and energy situation require prompt action by the Congress and the administration, but not programs developed in bewildered haste and sold on the basis of suspect information.