So this is a very precarious situation. I don't think those countries in fact have to do much analysis to know that they can get away with quite a bit of increase in their contract price in the next few months. And I for one wouldn't be very optimistic at all. I think substantial increases in contract prices are quite possible. Senator BRADLEY. So it is the unanimous view of the panel that, yes indeed, contract prices will be influenced by the level of supply, the expected level of supply. And now let's flip it over.

Will these contract prices also be influenced by the level of expected demand? And if they will be influenced by the level of expected demand, might there be a downward price effect from an import tariff? Or if not downward, you wouldn't increase it as much, because you see the West getting their act together?

Mr. SWEENEY. That is precisely the major thrust of a major part of my testimony. So I clearly agree.

Senator BRADLEY. I thought I heard it somewhere.

Mr. SCHEPPACH. I would agree, Mr. Chairman.

Mr. WILLIAMS. Yes.

Mr. PLUMMER. Yes.

Senator BRADLEY. There are just a few other questions I would like to get into. One of them has to do with the gasoline tax and the automobile industry, and the question is how you gage the short-term versus the long-term effect.

If you put a gasoline tax on, in the short term you would have clearly reduced consumption. And you might make the assumption also, which I think is correct, that people would want to get more fuel efficient autos. Where do you draw the line whether that means the extinction of the automobile industry in this country? And wouldn't that be a force for protectionism, and wouldn't that sort of negate some of the other policy issues?

How do you make that judgment between the short-term loss and the long-term benefit from the gasoline tax with respect to fuel-efficient cars?

Mr. WILLIAMS. The problem you are putting your finger on here is one of the major reasons why you have a gasoline tax that should be phased in. It is important to have the expectations that the tax will be high at some later date, and it should be phased in in relatively small steps.

I think what is going to be very important is to ascertain the extent to which Detroit, in the face of an anticipated schedule of tax increases, could make the appropriate investments to keep up with the demand for the fuel-efficient automobiles, the extent to which they need support for the required capital investments.

Mr. PLUMMER. I would disagree that they would have any trouble keeping up with the demand for those cars. They look awfully small and awfully expensive.

I think if we are going to put on gasoline taxes to encourage them to buy those cars, we might also have to give them direct subsidies for purchasing those cars. I think we are moving very quickly in terms of reducing the size and performance of automobiles. We may in fact be moving faster than is economically feasible.

I don't think the American consumer looks forward as much as Bob Williams does to the 60-mile-per-gallon automobile.

Senator BRADLEY. Let me ask you this: Is there an electric car in the future?

Mr. PLUMMER. We are studying it at the Electric Power Institute. It is definitely in the future. [Laughter.]

Senator BRADLEY. That's too bad, that it's so far in the future. Mr. SCHEPPACH. We have just completed a fairly major study of the automobile industry. Our sense is that if you are talking about any major tax before 1984 or 1985-I mean anything above 25 to 30 cents a gallon-you are in for significant problems with respect to the auto industry. The only people who are going to be able to produce those automobiles at that time are going to be the Japanese.

In looking at the capital requirements for this industry, to go up to an automobile of about 40 miles per gallon by 1995 you are talking in excess of $11 billion a year over the 1985 to 1990 period in constant 1979 dollars, to make that kind of a retooling situation. Senator BRADLEY. This assumes the internal combustion engine in the vehicle.

Mr. SCHEPPACH. Yes, that's right. Such things as supercharged diesels and so on, but basically the same kind of engine.

Senator BRADLEY. $11 billion a year for the next 15 years? Mr. SCHEPPACH. I am talking about between 1985 and 1990. They are going to hit 27.5 or even a little bit better by 1985.

It is also important that a tax is a very sensible thing, because executives in Detroit-and I believe them-are worried whether the real price of oil may fall in 1985 or 1986. They are making decisions with respect to that now, and I think by coming forward with setting some tax at this time it gives them certainty that it will go up and they will push on to make the smaller cars.

Senator BRADLEY. Do you know for a fact that they are worried about the drop in the price of oil in 1985?

Mr. SCHEPPACH. You have to remember, between 1974 and 1979 we had a drop in the real price of oil. And so I think they are concerned about it.

Senator BRADLEY. Your researchers have been out talking to them and they have actually said that?

Mr. SCHEPPACH. Yes. We spent 4 days out with all of the executives in Detroit.

Senator BRADLEY. That raises a more general question. What if our tariff works beyond all of our wildest expectations and the price of oil drops? Then we have our friends in Detroit that we have to bail out for another reason, because they did the right thing, not the wrong thing.

Does that trouble any of you? Not about Detroit, but—just think about that. Bob, do you want to respond?

Mr. WILLIAMS. I want to comment on the investment. To double the new car fuel economy between 1985 and 1995 would result by the year 2000 in a savings of some 22 million barrels per day of gasoline. The required investment, which has been estimated to be on the order of $100 billion over 10 years, should be considered in the light of those savings.

Senator BRADLEY. Are you familiar with the study done by the National Academy of Sciences on the automobile industry? The numbers that I got from there said that, for an investment in the

range of $20 billion, you could increase the mileage of the average car on the road from 15 to about 30 to 33.

Mr. SCHEPPACH. I'm not sure I disagree with that. We are talking about going from the 27.5 in 1985, which is the mileage standard, to 40.

Senator BRADLEY. That's fleet average?

Mr. SCHEPPACH. Yes, that's fleet average. You have to remember that the easiest way to get fuel efficiency is downsizing, weight reduction, front-end axle. And many of these things will have in fact been done to a large extent by 1985.

So what you are talking about is going from 27.5 to 40 miles per gallon by 1995, which is a lot more expensive on the margin. Senator BRADLEY. I have found this very interesting.

Mr. WILLIAMS. One more comment. Even if an investment on the order of $100 billion is necessary to double the new car fuel economy between 1985 and 1995, the resulting oil savings would be some 22 million barrels per day by the turn of the century. That corre sponds to a cost of saved oil of approximately $10 per barrel. Senator BRADLEY. If oil were $40 a barrel, it would be a larger justifiable cost; is that right, Bob?

Mr. WILLIAMS. Yes.

Senator BRADLEY. I want to thank all four of you for your testimony and your questions and answers. This is a real problem area, not the least of which is thinking it through. I think politics may be not quite as difficult, but not easy.

And I think your help here on the substantive issues has been very important today, and I want to thank you very much. And although no other Senator attended, I think we will benefit from your words if we can formulate a policy.

Thank you very much.

[Whereupon, at 3:38 p.m., the hearing was adjourned.]

SPECIAL OIL TAXES

FRIDAY, DECEMBER 12, 1980

U.S. SENATE,

SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT,

COMMITTEE ON FINANCE,

Washington, D.C.

The subcommittee met at 9 a.m. in room 2221, Dirksen Senate Office Building, Senator Bill Bradley presiding.

[The press release announcing this hearing follows:]

[Press Release No. H-66]

FINANCE SUBCOMMITTEE ON TAXATION AND DEBT MANAGEMENT ANNOUNCES HEARING ON SPECIAL OIL TAXES

Senator Harry F. Byrd, Jr. (I-VA.), Chairman of the Senate Subcommittee on Taxation and Debt Management of the Committee on Finance announced today that the Subcommittee will hold the fourth in a series of hearings on special oil taxes in which Senator Bradley will participate.

The hearing will be held on Friday, December 12 in Room 2221 of the Dirksen Senate Office Building, and will begin at 9 a.m.

Witnesses.-Senator Bradley noted that a series of witnesses, each an expert in his field, has been invited to testify.

Invited to testify are:

Henry Jacoby, Sloan School of Management, Massachusetts Institute of Technology

William Hogan, John F. Kennedy School of Government, Harvard University Philip Verleger, Yale University

Alvin Alm, John F. Kennedy School of Government, Harvard University

Written testimony.-The Chairman stated that the Subcommittee would be pleased to receive written testimony from those persons or organizations who wish to submit statements for the record. Statements submitted for inclusion in the record should be mailed with five (5) copies by December 15, 1980, to Michael Stern, Staff Director, Committee on Finance, Room 2227 Dirksen Senate Office Building, Washington, D.C. 20510.

OPENING STATEMENT OF SENATOR BILL BRADLEY

Senator BRADLEY. Welcome to the fourth hearing in our series on special oil taxes. This is the last hearing we'll hold this year on the subject of market-oriented, tax-based approaches to reducing demand for imported petroleum and managing supply disruptions. But I fully expect the Congress to continue its inquiry next year, and for interest to heighten as we approach the time when existing standby allocation and price control legislation expires.

Today's hearing will focus on supply disruptions. But I'd also like to discuss long-term demand reduction as well and to use this opportunity to clarify a few issues that were not resolved in earlier sessions.

Finally, since we will be preparing a report of these hearings, I'd like to try and draw some conclusions and make some recommen

dations to facilitate further study of these issues by Congress and the incoming administration.

Our witnesses today are all experts on this subject. William Hogan, of Harvard, has written lucidly and provocatively on import premiums and tariffs. Alvin Alm, former Assistant Secretary for Policy and Evaluation at DOE, brings firsthand experience in dealing with supply disruptions through his involvement in managing the Iranian crisis in 1979. And Philip Verleger, of Yale, has done some thoughtful and illuminating analyses of allocations and price controls and how they appear to make a bad situation

worse.

We will follow the same format that we have used in other hearings which is to have each of you make a 10-minute statement and then to have a discussion. Everyone should feel free to interrupt the other parties and clarify the points that the other parties have failed to make lucidly as you would like them to. So, why don't we begin with Mr. Alm.

STATEMENT OF ALVIN ALM, JOHN F. KENNEDY SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY

Mr. ALM. Thank you, gentlemen.

I will say in the introduction you talked about my two colleagues' lucid intellectual work and complemented me on the management of the 1979 Iranian crisis, which is a somewhat uneven introduction.

I am delighted to be here. I have prepared testimony for the record but will go over briefly the various kinds of policies and how they are aimed at different policy objectives. There is often confusion when people discuss special taxes, because what they do not specify what kinds of objective they are aiming at.

The first question is what kinds of activities might one undertake to deal with the cost of oil imports, which add pressures on world oil prices. There pressures, in turn, can lead to inflation, recession, and other economic problems. A number of analysts have calculated these damages, Bill Hogan in particular, and he will speak about this. The calculation of these damages is called an oil premium. It is an amount from which one can either subsidize import reduction programs or justify increased domestic prices. Now what does one do in a steady state situation with economic measures to reduce imports? There are two possibilities that are often suggested. One is the tariff, a steady state tariff, for example, of $10 a barrel which can be justified on the basis of the oil import premium. The other approach will be the use of a quantitative quota, which would establish import targets for each year. The question is how does one manage a quota? One can manage quota through a regulatory program, which I think is something we would all like to avoid, through a tariff or through marketable auctions. Under the auction option, tickets to import oil would be periodically sold by the Government. If the quota were binding, auction tickets would be valuable. In turn, product prices would be increased, reducing demand and allocating the available supplies to the highest value uses.

Moving on to the area of supply disruptions, and I would like to cover a series of market options to Government allocations. One