September 8, 1975
Page 27848
CBO REPORT: OIL PRICE DECONTROL WILL MEAN FEWER JOBS, MORE INFLATION
Mr. MUSKIE. Mr. President, within the next few days Senators will be asked to decide what could well be the most critical issue we face in the current session: decontrol of oil prices. It is now a virtual certainty that President Ford will veto the measure extending controls over some 60 percent of the Nation's fuel supplies.
What would be the economic impact of immediate decontrol? What would the President's action do to jobs, to prices?
What effect would it have on our Nation's attempt to recover from the worst recession and worst inflation in decades?
People are asking these questions in Maine. We have an effective jobless rate of over 10 percent. Increased prices for heating fuel and gasoline meanwhile continue to shrink the purchasing power of every Maine family. With winter approaching, we can only expect the situation to become more severe. I am sure that our State is not alone.
Foreseeing this critical vote on oil decontrol, I asked the nonpartisan Congressional Budget Office to provide me with the best available analysis of the economic impact of decontrol.
Over the weekend, I received a preliminary report from the CBO which puts the potential cost of oil price decontrol on both employment and inflation in stark terms.
CBO's analysis says that immediate decontrol would result in a "significant setback both for the nascent economic recovery and for the continuing battle against inflation."
The CBO projects the following economic costs of the President's decontrol plan by the end of 1977: a loss of 600,000 jobs; a 4 percent increase in prices; and a 20 percent reduction in GNP growth.
These figures would be gloomy enough were they not based upon two extremely optimistic assumptions about the future price of oil: The removal of the $2 per barrel tariff on imported oil and a limitation on OPEC price increases of $1.50 per barrel over the next 2 years. If the tariff were retained or the OPEC price were to rise by a greater amount, the price impact of decontrol would be far more serious.
Moreover, the CBO report does not consider the question of natural gas price decontrol which could have an impact as large as oil decontrol.
In order that I might share this critical analysis with my colleagues, I ask unanimous consent that the CBO's preliminary figures be printed in the RECORD.
There being no objection, the report was ordered to be printed in the RECORD, as follows:
THE IMPACT OF DECONTROL OF OIL PRICES
In the course of preparing its next report on the economy (to be published September 15), the Congressional Budget Office (CBO) has been studying the impact of immediate decontrol of domestic oil prices on the nation's output, employment and price levels. While the analysis is not yet complete, and is thus subject to revision, the CBO is using this preliminary report to assist Congress in its debate over the extension of controls.
SUMMARY
CBO's analysis indicates that immediate decontrol of oil prices would be a significant setback both for the nascent economic recovery and for the continuing battle against inflation. Table 1 presents the estimated effects of immediate decontrol on some principal economic variables at the end of 1975, 1976, and 1977 (fourth quarter of each year).
Decontrol would, according to CBO's estimates, increase wholesale prices by nearly 1 percent by the end of 1975 and nearly 4 percent by the end of 1977. Consumer prices would not rise as much as wholesale prices because oil is more important in the Wholesale Price Index (WPI) than in the Consumer Price Index (CPI), and because the cost of crude is a larger fraction of the wholesale price of petroleum products than of the retail price. By the end of 1977, consumer prices would be nearly 2 percent higher on account of decontrol. In terms of annual rates of increase of consumer prices, decontrol would add just under 1 percent (at annual rates) to the 1975 inflation rate, just over 1 percent to the 1976 inflation rate, and about one-quarter of 1 percent to the 1977 inflation rate.
Gross National Product measured in 1958 dollars ("real GNP") would be reduced significantly. The estimated reduction of $17 billion amounts to roughly 20 percent of the total growth in real GNP between 1975:4 and 1977:4 in CBO's projections. The effects on output would build throughout the period, and would probably be somewhat larger in 1978. Unemployment must rise as output falls. The rolls of the unemployed would swell 0.6 percent or about 600,000 people by the end of 1977, making the unemployment rate about the same in late 1977 as in late 1976.
Gross National Product in current dollars would not change much. The higher prices just slightly outweigh the reduced levels of production for most of the period.
Decontrol would improve the federal budget picture in Fiscal Year 1976 largely because of increased corporate profits tax payments from oil companies. However, by late 1977 the weakness of the economy would reduce other tax revenues (including profits taxes paid by other corporations) by just about enough to compensate for this.
ASSUMPTIONS
The figures in Table 1 are estimates of what would happen if oil prices were completely decontrolled as of September 1, compared to what would happen if the present controls over "old" oil prices were extended through 1977. Three statistical models of the economy were used in preparing the estimates.
Decontrol allows the price of "old" oil — now fixed at $5.25 per barrel at the wellhead — to float up to the world price. Thus future developments in the world oil market dictate the economic impact of decontrol.
CBO has assumed that the special $2 per barrel tariff on crude (and $.60 per barrel on refined products) is removed beginning September 1, 1975, and that OPEC will increase the price of imported crude oil by $1.50 per barrel, effective October 1, 1975. Both of these events are assumed to occur whether controls end or not, so the analysis compares two scenarios which differ only in the continuation of oil price controls. If the tariff remains on the books, or if OPEC raises prices by more than $1.50 per barrel, the estimated economic effects would be greater than those presented in the accompanying tables because the world price would be higher. Conversely, if OPEC's increase is smaller than $1.50, the estimated effects of decontrol would be smaller than those presented here.
It is important to note that CBO's analysis assumes that OPEC holds prices fixed from October 1, 1975, through the end of 1977. If there are subsequent OPEC price hikes in 1976 or 1977, the economic impact of decontrol would be magnified.
Another principal set of assumptions concerns the so-called "sympathetic" movements in other energy prices. In this analysis, the price of coal is not assumed to be much higher under decontrol than it would be under a continuation of controls. Given the present excess capacity in the coal industry, this seems a likely scenario for 1976, and perhaps for 1977 as well.
Given the low price of natural gas relative to oil, and the existence of a free market in intrastate gas, CBO has assumed some limited response of natural gas prices to decontrol. As old contracts expire, the average price of natural gas will be rising over the next several years in any case.
Specifically, CBO has assumed that the average price of natural gas will rise by about 22 percent between now and the end of 1977 if controls on oil are maintained, and by about 51 percent if oil is decontrolled. Thus decontrol raises the price of natural gas roughly 23 percent over a period of two and one-quarter years. The CBO has assumed continuation of the current system of regulating natural gas prices. If higher oil prices lead to a softening or removal of some controls over natural gas prices, the impact of decontrol would be correspondingly larger.
The timing of the increase in petroleum prices has a significant effect on the estimated effects, especially for 1975:4, but also for later periods. The CBO has assumed that, even in the absence of legal sanctions, the oil companies will exercise restraint in raising the prices of gasoline.
Specifically, the higher crude oil prices — if passed through dollar-for-dollar, translate to a $.07 per gallon increase in refined petroleum product prices. CBO has assumed prices would increase by only about $0.3 per gallon during the fourth quarter of this year, and not register the full $0.7 per gallon until the second quarter of 1976.
As indicated, the higher costs of crude are assumed to be eventually passed through to the retail price of gasoline and other petroleum products on a dollar-for-dollar basis. While FEA regulations are in effect, refiners, wholesalers and retailers are limited to dollar-for-dollar pass-throughs of costs. But without controls it is an open question whether the free market would naturally enforce dollar-for-dollar cost pass-throughs.
Decontrol transfers money from consumers to producers of "old" oil, and OPEC price hikes transfers money from consumers to both foreign governments and domestic producers of uncontrolled oil. The CBO analysis has assumed that OPEC oil is decontrolled. Also ignored is the possibility that American companies — be they oil producers investing in exploration or oil users investing in energy-saving equipment — might invest more in a world of decontrol than they would otherwise.
Finally, it should be noted that the CBO analysis does not factor in any so-called "windfall profits tax." Many such plans have been advanced during the past few months, so it is hard to predict the form of a windfall profits tax that might accompany decontrol. If there is a windfall profits tax — with the proceeds returned partly to consumers and partly to oil companies — the effects on real output and employment would probably be smaller than those given in Table 1 because consumers and companies would have more income to spend. But the effects on prices would be slightly larger for the same reason.
COSTS AND BENEFITS OF DECONTROL
This brief report is primarily concerned with quantifying the rather substantial costs of immediate decontrol. It should be at least mentioned that there are benefits as well. For one thing, ending controls would mean the dismantling of a cumbersome system of government regulations which may distort decisions of drillers, refiners and consumers alike. For another, the higher price of oil would induce greater conservation. Given the role of imported oil in the U.S. — that of filling the gap between domestic production and domestic consumption — the entire reduction in consumption would come out of imports. CBO estimates that imports would be reduced by nearly 700,000 barrels per day by the end of 1977.
[Table omitted]