The Great Energy Mess

The question will not be on any formal agenda.

But when two groups of powerful leaders gather on opposite sides of the globe this week, both will know the real issue facing them: Must the entire non-Communist world go through a repetition of the oil-fired recession of 1974-75? The answer will not be clear even when the final gavel ends the OPEC meeting in Geneva and the economic summit in Tokyo. But the prospects are cheerless: at best, a slowdown in global growth, accompanied by more inflation; at worst, an outright recession--also accompanied by more inflation. Already, the downturn-that-might-be has picked up a name. Washington economists are calling it Khomeini's Recession--after the Ayatullah Ruhollah Khomeini, whose Iranian revolution began the oil shortages and rocketing prices that are causing world economic anxiety.

Americans last week began getting an unpleasant taste of what lies ahead. Gasoline lines, which once seemed a temporary California phenomenon, were snaking through the suburbs of Washington and streets of Manhattan, and by last week had spread all up and down the Eastern seaboard. Seven states--Connecticut, Florida, Maryland, New Jersey, New York, Texas and Virginia--and the District of Columbia had to begin odd-even allocation. Independent truckers, who charge that rising fuel prices are depriving them of a livelihood, started a strike that soon led to food shortages, scattered violence and threats of worse to come. Although the Department of Energy had contributed to the gas shortage by urging oil companies to build up their depleted stocks of heating fuel, it was disclosed last week that home fuel prices will be a paralyzing 80-c- per gal. by next winter (up almost 50% from last winter) and there will be shortages too.*

The Ayatullah will not be on hand to view the latest round in this protracted conflict, but his Finance Minister, Ali Ardalan, will sit down in Geneva on Tuesday with his opposite numbers from the other twelve nations in the OPEC cartel.

Brushing aside warnings that they cannot in the long run prosper by gouging their customers, the OPEC ministers in effect have already decided to pile another price increase on top of the 35% rise that they have put into effect since December. The only question is how large it will be. Prevailing guess: the "marker" price will go up to $20 per bbl., from $14.54 now, bringing the total increase since December, when the price was $12.70, to about 50%. Still unsettled is the question of whether that will be a unified charge or merely a base to which individual OPEC members will add surcharges; such surcharges now bring the average OPEC price to around $17 per bbl.

In either case, the increase has menacing consequences for the oil-burning world. It will further fan the inflation that is raging at double-digit fury in the U.S., Britain, France and Italy. U.S. Treasury Secretary Michael Blumenthal estimates that petroleum increases alone have so far this year jacked up the inflation rate by 2.5% in the industrial countries. A further $5.45-a-bbl. boost is likely to siphon an additional $80 billion a year out of the major industrial nations, reducing their citizens' ability to buy food, clothes, houses--indeed, everything except oil. Result: further slowing of growth rates that have only recently begun to pick up (see ECONOMY & BUSINESS), and increasing unemployment.

Equally troublesome, the OPEC countries show no disposition to raise production to ease the shortages. Quite the contrary: they know the shortages are what enable them to charge more for oil than anyone would have dreamed possible as the '70s began (the 1970 price per bbl. was $1.80). Saudi Arabia's Crown Prince Fahd last week shot down a hopeful rumor that his country would increase production, and Iran is holding exports to barely half of prerevolutionary levels. Oil-industry publications buzz with talk of further cutbacks in Algeria and Libya.

Against that background, the heads of government of the non-Communist world's seven strongest industrial powers --Britain, Canada, France, Italy, Japan, West Germany and the U.S.--will convene Thursday in Tokyo's ornate Akasaka Palace to consider what they might do. The meeting, fifth in a series of annual summits devoted to economics, was scheduled before the latest oil crisis broke, but it will be so dominated by petroleum worries that it is being called the energy summit. For Jimmy Carter, the meeting will be especially critical; American voters are far more irate about the gasoline shortage than they are pleased by any diplomatic triumph the President might claim in negotiating a SALT II treaty.

Unfortunately, Carter and his confreres are unlikely to form anything resembling a tough united front to bargain with OPEC. Diplomats drawing up proposals for the meeting have simply been unable to devise measures that could both win agreement and save on oil bills without cutting economic growth severely.

Sighs a U.S. official: "We have no firm ideas, and it would be impossible to get everyone to agree even if we did."

The planners have discarded as all but unworkable various schemes to form a kind of consumers' cartel to negotiate with OPEC, or to put a ceiling on the price the seven countries would permit corporations to pay for oil on the Rotterdam "spot" market (users bid there for supplies not tied up under long-term contracts, and prices have shot as high as $40 per bbl.). French President Valery Giscard d'Estaing, speaking on behalf of the European Community, outlined a plan to freeze European oil imports at last year's level and to "dissuade companies from lending themselves to transactions at excessive prices" in Rotterdam. But that stops well short of Giscard's earlier ideas to set specific, country-by-country import ceilings, and to put a flat ban on high-priced dealings in Rotterdam.

In the all-too-thin blue vinyl notebooks that he takes to Tokyo, Carter will carry a proposal to set up an international corporation that would fund efforts to develop synthetic fuels--for example, the conversion of coal into liquid fuel.

Such processes are feasible but at present very expensive, and they may have severe environmental side effects.

Carter is likely to win agreement only on the principle that production of synthetic fuels should be encouraged--no international body, and no pledges of hard cash. The seven nations doubtless will exchange promises to cut oil imports and to expand production of coal and nuclear power, but not bind themselves to any specific steps to reach any of those goals.

None of that is likely to make OPEC leaders do anything but smile.

Across the U.S., as citizens struggle with the irritation of gas lines and dollar-a-gallon prices, a large number persist in believing that the whole mess has been deliberately contrived by the oil companies, aided and abetted by Government collusion or ineptitude. Washington in fact cannot evade the charge of bungling. A few weeks ago the Department of Energy was predicting that gasoline supplies would be more plentiful in June than in May. Now officials confess that they have no idea how much gas drivers can count on buying for the rest of the month, the summer, the year.

One source of trouble has been that the Government has been trying to please everybody in managing the shortage. The Department of Energy has set up a hideously complex allocation system that essentially works like this: an oil company first sets aside 5% of whatever gasoline and diesel fuel it expects to have available each month to be used as state governments direct. It then sets aside as much more as may be demanded by certain priority users--police, for example. After that, it parcels out the remaining supplies among gas stations, essentially equally but with some adjustments; stations in areas where population and consumption have been growing rapidly get more.

Trying to manipulate this system, allocators resemble a tailor who tries to get cloth to mend a hole in the sleeve of a coat by snipping a piece out of the back and hoping no one will notice. Critics charge that far too many exemptions have been granted. One example: the rule that farmers should get as much gasoline and diesel fuel as they demanded made sense in early spring, when they were rushing to plant crops. But the regulation was continued too long, and may be one reason why some rural areas now are awash in gasoline while cities run dry.

But, while it is easy enough to blame the Government, the public's "me first" spirit is fouling up matters too. Truckers are now demanding unrestricted access to diesel fuel, while farmers get all they want. Simultaneously, other consumers clamor for exemptions for any gas-rationing system or demand that heating-oil stocks be built up to guard against a cold winter. There is no way that refineries can give farmers and truckers unlimited supplies, turn out maximum supplies of gasoline and build heating-oil inventories--and the Government has failed to set clear priorities.

Secretary of Energy James Schlesinger has scarcely helped. He got off to a good start by warning in February that the shutoff of oil exports from Iran had created a situation " prospectively more serious than the Arab oil embargo" of 1973-74. That statement was widely dismissed as alarmist, but it now seems only too accurate. Lately, the Secretary's statements have been so contradictory that one oil executive exclaims: "The real odd-and-even plan is Schlesinger's assessment of the energy situation!"

The fundamental difficulty is that the U.S. cannot import enough oil right now to fill its needs. Imports are running about 8 million bbl. a day--roughly half of U.S. consumption, up 3% just since late April --but oilmen estimate that they need an other 500,000 to 1 million to assure an even flow of all products through their refineries. The prime reason for the shortage is that the other members of OPEC have never increased production enough to make up for the curtailment of supplies from Iran. The situation raises two questions: 1) Which products should be rushed out? The Department of Energy has never seemed able to make up its mind whether to urge maximum output of gasoline or of distillates (heating oil and diesel fuel), though last week Schlesinger came down firmly on the side of distillates. 2) How fast should refineries run down their stocks of crude oil in order to supply gasoline, heating oil and other end-products right now?

Oilmen have been trying to build up stocks of crude, so that they can assure a continued flow of supplies and guard against another interruption like that caused by the Iranian revolt. Two weeks ago, Schlesinger accused them of being "unduly conservative," and even threatened to take crude away from some refiners and give it to others who would process it faster. That sounded like an endorsement of the conspiracy theory that oilmen are deliberately withholding supplies to force up prices--or at the very least take advantage of the higher prices sure to come.

Last week Schlesinger hastened to make amends, and succeeded in getting still more deeply mired. He conceded that the dispute over the proper balance between crude stocks and refinery runs is a legitimate difference of opinion, and he softened the threat to take crude away from refiners who do not use it rapidly enough. His reason: if he did that, the refiners might retaliate by importing less oil. Startled reporters asked if the Government was yielding to oil-company blackmail. No, no, said Schlesinger, no company had made any such threat; he was merely worried that he has no authority to force oilmen to import as much crude as they can find to buy.

Congress has hardly covered itself with glory either. It has buried such mild conservation bills as one to curtail outdoor lighting displays, and in May the House voted down a Carter plan to set up a stand-by gasoline-rationing plan that could be imposed in a real emergency.

Now Congressmen who seem at last to realize the severity of the situation--partly, perhaps, because they too must wait on gasoline lines in Washington--are scurrying to introduce energy bills of all sorts.

Says one congressional leader: "They are in a mood to do something, and they don't give a damn what it is. If they thought the Lord's Prayer dealt with energy, they would probably re-enact it. If they thought it did not apply to energy, they would probably oppose it."

A rundown on Capitol Hill action:

P: The House Ways and Means Committee approved a tougher tax or oil-company "windfall" profits than Jimmy Carter had proposed. The President's plan would have let oil companies keep 29-c- to 34-c- of each extra dollar in profit that they make from the decontrol of domestic oil prices that Carter began June 1. The Ways and Means bill reduces the figure to between 17-c- and 23-c-. It is likely to be watered down in the Senate, and end about where Carter wanted it.

P: Congressional Democratic leaders at a White House breakfast told Carter that they are uniting behind a plan offered by Representative Toby Moffett of Connecticut to force every driver to choose one day a week on which he would leave his car or cars in the garage (windshield stickers would identify the forbidden day). They also invited Carter to work with them in devising a new gas-rationing plan. Said House Democratic Whip John Brademas of Indiana: "In effect, we told the President, 'The train is leaving the station; would you like to get aboard?' "

P: A consensus is building behind the idea of setting up a Government funding for a crash effort to produce synthetic fuels in the U.S., even if other nations will not go along. A House education and labor subcommittee last week approved a synthetic-fuels bill, blandly ignoring the fact that it has no jurisdiction in the matter. Chairman Henry ("Scoop") Jackson called the Senate Energy Committee together at the unheard-of hour of 7 a.m. last Wednesday to start work on his own synthetic-fuels bill. Said Scoop: "People who never saw the sun rise are now getting up before dawn to buy gasoline. We are getting started a little later than that." Both House and Senate leaders are promising floor votes on synthetic-fuels bills in July The leading possibility is a House proposal to have the Government guarantee a market and a price tc synthetic-fuels makers al a cost of $2 billion a year.

That would be a start in the right direction, as would the proposal that President Carter announced last week to make more money available for development of solar energy. The nation does need to push production of alternate forms of energy, to reduce its debilitating dependence on unpredictable and outrageously priced oil supplies from OPEC. But neither solar power nor synthetic fuels will help much to shorten gasoline lines, or to keep homes warm, for years to come.

The immediate necessity is to set firm priorities for gasoline, diesel fuel and heating oil production, devise a more effective allocation system for distributing them, and enact a stand-by gas-rationing plan. Those steps will not increase overall supply, but they might calm the panic buying that is turning what should be a moderate shortage into a nightmare. Indeed, the nation had better get used to coping with shortages. The one in 1973-74 disappeared quickly after OPEC turned on the spigot following the end of the Arab oil embargo. The cartel seems unlikely to do so again, and even if it did, no one could trust an increase in output to last. Meanwhile, the threat of economic slowdown and runaway inflation in the non-Communist world gets stronger every day.

* By contrast, supplies of natural gas, which is also widely used for home heating, ran desperately short in recent winters because of an artificial pricing system, but they now appear to be ample.

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