It Won't Work

PRESIDENT CARTER'S decision to decontrol the price of oil before the 1981 deadline set by law makes the worst of a bad situation. In the first place, early decontrol will not increase oil production; the reason is simple. Decontrol is scheduled to take place in 1981, two and a half years form now. But oil companies, which need a minimum of three years to plan and drill a well, process the oil, and get the product to market, are now planning all their new production on the assumption that there will be no price controls. Early decontrol doesn't give them any incentive they don't already have.

In addition, despite his populist rhetoric, Carter seems to be doing his best to insure that the energy conglomerates will walk away with the windfall profits resulting from decontrol. First, his tax proposal, billed as a 50 per cent windfall profits tax would actually tax only 18 per cent of the added revenues that oil companies will rake in from early decontrol, according to The Wall Street Journal. But more seriously, Carter has not made decontrol contingent on the passage of any profits tax.

Our criticism of Carter's approach to oil price regulation, however, goes beyond when and how he has decided to decontrol oil prices: we contend that wholesale decontrol of oil prices is an ineffective and regressive policy that should not be part of any rational energy policy, much less its cornerstone.

The costs of decontrol far outweigh its minimal benefits. The Congressional Budget Office (CBO) estimates that it will cost consumers a staggering $16 billion annually in higher prices, not to speak of a higher rate of inflation throughout the economy. And the distribution of this cost will fall most heavily on the elderly and the poor, who spend a greater proportion of their income on fuel.

Proponents of decontrol contend that higher oil prices will induce consumers to conserve energy. But the demand for oil is highly inelastic: price increases do not lead to a proportionate decline in use. From 1973 to the present, the price of home heating oil increased by 184 percent; but instead of falling as the theory would predict, consumption rose 17 percent. The CBO estimates that by 1985 decontrol will reduce current levels of consumption by, at best, a meagre 1.7 percent.

THE SENSIBLE WAY to encourage conservation is to attack the causes of high consumption: for instance, uninsulated homes and offices, huge investments in highway systems, and utility rate structures that reward large energy consumers. Higher prices have proven themselves an ineffective and costly method of forcing conservation.

Next, proponents contend that decontrol would increase oil production. But decontrol is a very inefficient way to increase oil production. While, as one expert put it, "smaller and smaller increments of hard-to-get oil are produced at higher prices, such marginal increases do not justify trebling or quadrupling the price of all oil."

A much more cost-efficient way to increase oil production would be with tiered pricing regulation, which would allow oil companies to charge higher prices for oil that had not been produced without that incentive.

There is a second problem with relying on the oil companies to use their windfall profits to increase oil production. The evidence now available suggests that oil companies are not reinvesting their money in oil. They have seen the future, and it is not petroleum. The oil companies are buying up as many other energy sources as they can find, such as coal fields and uranium mines. Decontrol will give them the resources to control our energy future--a happy prospect. And much of the huge 1973-74 oil profits went into unrelated industries. For example, Atlantic Richfield bought The London Observer and Mobil paid cash for Montgomery Ward's.

When the CBO calculates that decontrol will increase oil production by less than two percent we should not be surprised.

Carter's decision to decontrol the price of oil will not merely 'alert" Americans to the energy crisis; it will create a crisis. Not only will his policy fuel the already disastrously high level of inflation, it just plain won't work.

PRESIDENT CARTER has no sweeping, coherent vision of a national energy policy that could inspire public support. Instead, he has fixated on decontrol of oil prices -- the quick fix of market forces, instead of the tougher job of building national policy. If indeed the energy crisis is "the moral equivalent of war," Carter should not leave the shooting up to the oil companies.