Historical Newspapers of South Carolina

Below is the OCR text representation for this newspapers page. It is also available as plain text as well as XML.

ENERC BY DR. ROBERT T. COLLINS The history of civilizations is intimately connected with the discovery and development .of energy. In a little more than two generations our society has been completely transformed as a result of the innovations of the internal combustion engine and electricity. While some electricity is still generated using water power and coal, a considerable portion of electricity is currently generated from petroleum products. Since a large concentration of petroleum reserves existed in the United States and could be refined relatively cheaply, we became adjusted to cheap energy. In addition to using petroleum products for energy, they also form the raw material base for many products such as synthetics, plastics and fertilizer. Until about 1970 the production of crude oil exceeded the con sumption of crude oil products in the United States. Since 1970 the United States has become in creasingly dependent on foreign oil. An indication of this in Gependence was forcefully brought home during the Arab oil embargo in 4973. Since the embargo was liftbd the only significant change hei been that the petroleum ex pc tdg countries (OPEC) have set th price at approximately five ti es the pre-embargo price for a barrel of oil. Considerable windfall profits w,uld have accrued to the owners oi producing wells if the price of dt mestically produced oil was aPowed to rise to the level of fc eign crude oil. The price of ci ide oil from domestic wells pi Aducing at the time of the em b rgo was controlled by the G vernment. rude oil from new wells, or fi >m old wells not currently producing, was not regulated so that the price on this crude rose to approximately the world price. T'ie price oil refineries could carge for their products was based on their costs, which would vary depending on the source of thpir crude oil. The above is a very simplified summary of the situation at the present time. The United States is stili Importing oil. The percentage of the imports from Arab countries is up slightly because Canada and Venezuela have cut back their exports to the United States. There has been talk of Project Independence, to reduce our reliance on foreign oil, for over a year. .To date, Project In dependence has remained mostly talk. President Ford has taken the first positive action by using his power to increase the tariff on imported oil. He has signed a proclamation raising the tariff on imported crude oil $1 per barrel on Feb. 1. He has announced further Increases of $1 per barrel on March Dr. Robert T. Collins Is a professor In the USC College of Business Aamsrnatlon. A USC proj 1 and April 1, making a total of $3 a barrel imported tax increase after April 1. Given the circumstances, what options are available? The first option is to do nothing. The United States is in the deepest recession since World War II. The un certainties and price changes. generated by any major action might prolong the recession. No action, on the other hand, con tinues the balance of payments problems and might weaken our diplomatic position in trying to defuse the Middle East situation. Assuming that a reduction in crude oil imports is to be ac complished, what options or choices are available and what are the implications of each? An important point to keep in mind in evaluating the alternative options is that pursuing a goal of energy independence will not be achieved overnight. It is a long range project and can only be achieved with significant increases in domestic energy production. Unless some technological breakthrough occur, the current situation probably will not be significantly alleviated for decades. Also, some decision should be reached concerning the maximum amount of oil that can be imported per day. Presumably, imports of 100 barrels or 1,000 barrels per day would be so insignificant that our national security would not be endangered if they were stopped. Unless some long-run goal is specified it will be impossible to achieve a goal. In a free enterprise economy the most "rational" technique would be through price increases. People constantly adjust their purchases based on the relative prices of alternative goods, their preference patterns and their income. If a good becomes relatively scarce, its price increases and some in dividuals drop the item from their budget. Those who were most willing to live in a cooler house in winter, forget traveling vacations, spend money to insulate their house better, etc., would be the ones who reduced their energy use most. The argument can be raised that the poor people would be the ones who would have to cut back most. This is not an argument against Increasing the price of energy but is an argument against the inequality of income distribution in society. Poor people are not able to buy as much as those whose in comes are higher. The solution should be to increase the amount of income redistributed to the poor rather than keep the price of energy lower than it should be which would encourage wasteful uses of energy. Let us assume that the increased price of energy would mean $100 a year increase in energy costs to a poor family if they used the same amount of energy that they did before the price increase. If this family was given an increase in income of $100 a year they probably would spend part of the $100 on non-energy items and cut back on their use of energy somewhat. The same logic applies to ressor looks business. Some firms may be able to reduce their energy uses more than other firms. With the in creased costs of petroleum by products, cost differentials may induce people to substitute cotton and wool for synthetic yarns. Some resources, such as aluminum, require very large amounts of electricity for their manufacture. Some current users of aluminum might find it preferable to substitute steel or some other metal for aluminum. The possibilities for substitution are almost endless. One of the major areas that might be significantly affected is building construction. Houses and office buildings with large areas of glass use considerably more energy. Square buildings have less exterior Energy indepo not be achieve wall space than rectangular buildings than With the same floor space and thus would take less energy to heat or cool. The most rational way to discover the possibilities for substitution is through a price increase for petroleum products. Decreasing oil imports by means of price increases will mean that most people will experience a decrease in their real income and in their standard of living. The impact on real income and costs of production will also vary in dif ferent regions of the country. Under the current situation the New England area has been af fected most. About 90 per cent of their energy production is from petroleum products and about 75 per cent of their petroleum products is imported. President Ford's increase in the tariff on imported crude oil unless matched with increased excise taxes on domestic crude oil would create further distortions. Removing the price control on domestic petroleum would raise the price of petroleum products in the rest of the country to the price of foreign crude plus the import duty. With a higher price for crude oil, users would try to switch to alternative energy sources. Coal is one substitute whose price is not regulated and the increase in demand for coal should result in some increases in prices. Natural gas is also an alternative energy source. The price of natural gas entering interstate commerce is regulated so that the price could not increase as a result of the in crease in demand for natural gas. Natural gas is currently being rationed through refusals to accept new customers and through the cutting of service to interruptable industrial customers. In effect, current gas users are being sub sidized by the price reduction. President Ford proposes to remove price regulations on natural gas. The cost of natural gas should increase significantly. So far the rationing effect of the price increase has been em phasized. The prie increase at the energ would have a strong incentive for domestic producers of coal, petroleum and natural gas to in crease production. The higher price of energy would offer added incentive to research and development of alternative energy sources such as thermal, solar, soil shale, wind and possibly other energy sources. To counteract the effect of the ernrgy taxes on the distribution of income, President Ford proposed that the revenue from the energy taxes be refunded to income tax payers and a grant to those whose income was so low that they had no income tax liability. An alternative to raising the price on all energy users has been an increase in the tax on gasoline. Such a program would require that !ndence wil d overnight. the gasoline tax raise the price of gasoline to the level that the desired reduction in imports was achieved. A weakness of the gasoline tax approach as a long run solution is that there would be less incentive to other users of petroleum products to conserve petroleum usage. Any increase in the demand for petroleum by utilities or industry would necessitate a l%rther cutback in the use in gasoline. Although a tax on gasoline would affect tran sportation prices only, the impact would permeate the entire economy. The automobile and its allied industries such as rubber and glass would undergo significant demand changes. With significantly increased tran sportation costs some industries might find it desirable to relocate many tourist areas, motels and other travel orientated industries such as filling station and garages might be forced out of business due to the decline in demand. Housing values in subdivisions distant from the center of the city might decline relative to housing located closer to the city. Industry might reconsider locating in rural areas because of transportation problems. The major incentive from using a gasoline tax would be to develop new and more efficient energy sources for transportation vehicles. If current price policies remained in effect there would be no incentive to pump additional oil from existing wells. The existing price differential offers the in centive to develop new wells and THE GAM~ Editor Managing Editor JIM Hi STEVE PARKER The Gamecock welcomes letters from red subject and a maximum of 300 words. TI name. Pseudonyms or other aliases will r withheld if circumstances warrant. To asi please include your mailing address and reached. We reser ve the right to edIt all let1 limitations. Addrss: Ca.nupn... n,C) y situation reopen old oil wells that have been closed down. The price of petroleum products would inerease as increased percentages of oil came from new wells. Different adjustment would be made under the gasoline tax option compared to a price increases for all energy users. Which set of adjustments are preferable depend on the value judgments of the in dividual. The other options that have been suggested have been to use some non-price rationing device. One non-price option would be to put a quota on the number of barrels of crude oil that could be imported per day. The quota should be the same number of barrels that the import tariff would allow to be imported. Unless rationing and price controls were imposed, the price would rise to the same level as under price rationing and the allocation among different uses would be the same. Instead of the revenue going to the govern ment as tax revenue, the increased revenue would go to the oil com panies. These increased profits could be recaptured through ex cess profits taxes. The incentive to increase oil production would not be present unless some credit was given for exploration costs. This would provide no incentive to in crease production from existing fields, however. The major problem with rationing and price controls is that there is no incentive for users to conserve energy beyond their allocation. The major incentive is to legally, or illegally get more gasoline. If the fuel to utilities is rationed so that their customers are to reduce their average c onsumption, how do you handle the situation where some customers do not conserve? The utility could be forced to curtail the electric power to all, resulting in brownouts or reduced voltage. Rationing and quotas are suggested so that price will not be increased. Some power users may be perfectly willing to pay a penalty price for additional power. Suppose new firms want to go start or existing firms want to expand, who decides if they be allocated petroleum products directly, or indirectly through the use of electricity? Price controls freeze the existing uses of energy even though a more efficient allocation would be achieved through price rationing. Unless some unforeseen technological breakthrough occurs energy prices must rise because potential energy sources are more expensive than existing energy Continued on Page 11 [ECOCK SR SH Advertising Manager ART FRANK ders. Letters should be limited to a single ey must be signed with the writer's true 0t be used, but the writer's name will be ist us in verifying the identity of writers, a telephone number where you can be en nfr conent, bu tmeet our space