release it. Second, he would receive market prices for it. The only difference between this and what now occurs is that you would say, and this may be the source of confusion, that it can be released only when the price rises a certain amount. So it can't be used for normal trading purposes.

Mr. EADS. But let's look at the farmer-owned reserves for just a second. The way we encourage farmers to put grain in farm owned reserves is, in part, by absorbing storage payments and, in part— again I do not think however long I am in Government I will totally understand the entire grain storage system-by setting the point at which we release the reserve and require repayment the loans that were made against the grain.

Our experience, if I remember right, in farmer owned reserves is that when reserves hit the release point, they generally don't all flow out because, as was suggested, farmers historically have seen that they if they are going to hit the release point they are liable to go up higher.

When they hit the "call point," namely, the point at which the farmers must payoff the loans, and to do so they either have to sell the grain or they have to go to the local bank and say, "I think that I am going to make enough money by continuing to hold these stocks that I think you should loan me money," that is when the grain really flows out.

So if we are going to make do an analogy to the farmer owned reserves, and I think that it is useful to think about this problem. Although the supply elasticity in grain may be greater than oil, let's think about the full analogy. We probably would not only have to have something which locked up the stocks up to some point, but which also provided positive pressure in the way of, let us say, a repayment of deferred storage payments, or something like this, that began to require that that oil got fed into the market, unless people really felt that the price was to go up rapidly.

Senator BRADLEY. There is a major difference between oil and grain. We are the cartel for grain. The cartel for oil is on the other side of the world. Next year you know that there will be another crop, so you have got to fill up the silo again, isn't that a major difference?

Mr. EADS. That is a difference. There are some useful analogies, through. We have been able, through various loan arrangements and tax incentive systems, to encourage a higher level of grain storage than the market would normally encourage. When you are beginning to think about the value of privately owned storage, I think that it is useful to look at the grain experience. It does help to be a net exporter rather than a net importer, and when the market pressures get strong enough, we take other actions in addition to just releasing the reserve-or we have at least in the past. It is a useful analogy, but it is not a total analogy.

Mr. NORDHAUS. There are lots of features about the grain market that are different from the oil market. The point I was making about grains, and the reason that I use that as an analogy is not because we are an exporter rather than an importer, or because of the balance of payments or anything. It was simply to come back to

the key question that this panel is addressing which is, what can we do better to prepare for oil emergencies.

The two points I was making with relation to the grain market were: First, by setting up a subsidy scheme for the private sector, we have encouraged an enormous amount of grain be held by the farmers in the private sector, contrary to what is happening in oil; and, second, and it comes back to the point about stabilization, as we look at the history of what happens in grain markets after bad harvests, the fact of the matter is that almost all the time the behavior of stockpiles has been appropriate rather than perverse. After the great grain disaster of 1972, after the corn blight of 1975, in both of those occasions grain stocks were run down as price rose. Whereas in the oil embargo of 1973, the stocks went the wrong way, they went up rather than down.

Senator BRADLEY. It is on that last point that I think it makes a difference if you produce the grain and don't produce the oil. You can afford to let stocks flow out in a shortage year because you know next year you are going to have another supply. Whereas if you let stocks flow out in an oil shortfall, you are not certain that you are going to get the oil to put back into the supply.

Mr. NORDHAUS. That is exactly the problem that paralyzes public decisionmaking on when to release stockpiles. There is one more analogy going back to the strategic stockpile. In 1973, we did not want to release copper because we thought that the world was running out of resources.

From a private speculator's point of view the question is, is price going to go down, or is it going to go up. If you are in the middle of an embargo, which you think is going to end, or a war which is going to end in 2 months, the price is probably going to go down, and you release it now, or you should.

I think that those are decisions that the public sector has a great deal of difficulty making.

Senator BRADLEY. This idea of the oil price going down intrigues me, because one of the things that I thought was one of the problems with the world oil market is that disruptions provide the basis for future contract prices, and, in fact, they don't go down as they might in theory. Am I wrong there, and the spot market prices are going down?

Mr. NORDHAUS. Spot market prices went down 30 percent.
Mr. ROWEN. They did go down from 1974 to 1978.

Senator BRADLEY. That is why I have you people here.

Mr. EADS. It is also the important thing to differentiate between the type of disruptions you are talking about. Some people may have thought, for example, that the original Iranian disruption was temporary and we would get that supply back, others may think that it is permanent. So far it has turned out to be a relatively permanent feature of life.

If you are dealing with disruptions, you have to have a system that can distinguish between a situation in which you encourage people to begin to adjust their behavior-to invest capital, to buy automobiles, to buy insulated houses-as though the price of oil is going to be at a certain level permanently, and those that are really designed to alter shortrun behavior.

One of the problems I see with using prices only on a major disruption-especially one which you think may be temporary—is that it may be harder to convey the appropriate longrun signal.

Ms. RIVLIN. It seems to me also that this discussion points up the usefulness of doing a lot of different things. We may well need a better system for encouraging private stocks, and the release of them at appropriate moments, but it does not mean that we don't also need some public stocks in case we guess wrong.

Senator BRADLEY. That is precisely the point. Do any of you disagree with the proposition that we need a number of different strategies, and a number of different actors out there trying to stock?

Mr. ROWEN. I would put it more strongly than that. We are in such a bad position right now, and the situation in the Persian Gulf area is so dangerous looking, that we might try virtually everything that we can think of, and we can think of a lot of bad ideas. After we had sorted out the bad ones, we should go with the reasonable ones and try virtually all of them, particularly on the supply side.

As we know, if we just stick with oil, whether it be private or public holdings, it takes a long time to build a stock and doing so has an effect on the oil price. So this suggests the importance of looking at substitutes for oil, like natural gas.

Senator BRADLEY. Can you tell me where the 400,000 to 900,000 barrels in the short period of time come from? Is that from enhanced recovery?

Mr. ROWEN. No. There is a very long leadtime for that. It is from four or five different categories. On oil, there are about four oilfields in the United States that have some shut-in capacity that over the course of 12 months could be increased by 100,000 to 200,000 barrels a day, including the North Slope of Alaska, and a couple of major fields in Texas.

I should add by the way, with regard to oil, accelerated workover of wells, many of them not producing very much, is possible. It may pay to intensify the rate at which the wells are worked

over.

There is also surplus capacity for natural gas in the country, which has been at about 500,000 barrels a day equivalent. That is not simply a matter of turning valves open, although that is part of it.

Senator BRADLEY. If we could, I would like to come back to the question of quotas and tariffs.

I would like to ask Mr. Nordhaus, if we had a quota system, and we had an auction, who would benefit from the rents?

One of the aspects of the tariff is that you have a quantity of revenue that is rebatable. Would that be less so under the quota auction system?

Mr. NORDHAUS. In principle, let's say that you wanted to lower U.S. imports to 5 million barrels a day, and you could in principle do that either through a tariff or through a quota. In a regime where oil prices were not controlled or oil supplies allocated, those would lead to a value on the import ticket or license that was exactly the same as the amount of tariff.

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In that particular case, where that revenue would go, I presume that it would go into the general fund. But that is, of course, a decision made here.

There is one further point. The one thing, I think I would very much like to see avoided is administering it like the old mandatory oil import program. There the rents were essentially given to domestic refiners and producers because the tickets were not auctioned, but were allocated on a historical basis.

Senator BRADLEY. Given what is the purpose of this hearing, which is to try to think through some emergency preparedness in the areas of tax and allocation, what information do you think we need that we don't have now to be able to make this kind of policy judgment? What do you see as the real choices that will face this Congress in this area?

Mr. EADS. Let me be the first one to try to deal with that question.

I would agree with you completely that we need a range of authorities, or a range of strategies. But one of the key bits of information we crucially need, and what I think the work going on is intended to give us, is some notion of strategies that reinforce each other, and others that are self-canceling.

As Bill Nordhaus pointed out, for example, a strategy which has even standby price and allocation controls operates directly at variance with any strategy that depends heavily on private stock holding. So it is important to understand which of these things work together, and which cancel each other out.

Another thing that is important, and only you gentlemen in the Senate and the House can determine it, is just how willing is the Congress to grant authority to the executive to do the kind of things that would have to be done under price and allocation. Senator BRADLEY. You made that point earlier.

I want you to finish your statement, or your comment, but I would like other people to react to what you said earlier about the extraordinary discretion that would have to be given to the President to adjust these tariffs.

Mr. EADS. In some sense, you could argue that if we allow our current price control authorities to expire in September 1981, and have no allocation authority and don't plan to put any in, we have, in effect, decided to rely on a tax rebate option of a sort.

The tax in this case is the standard corporate income tax and the windfall profit tax. There taxes do not attempt to capture any of the rents that are going to OPEC, but at least they capture a portion of the domestic rents.

Senator BRADLEY. But isn't that one of the fundamentals?

Mr. EADS. That is one of the things that we would like to do. All I am saying is that we do have a tax system that captures some of the increase in profits. We will have something like rebate system in that our entitlement programs such as social security are indexed and would go up.

Presumably, if you believe any of the simulations, or any of the indications of what will happen, someone would have to begin to decide fairly quickly if it was a major disruption what to do with the money that was coming into the Government because the

combination of increased income taxes and increased windfall profits taxes would raise Government money rather substantially.

So you cannot avoid dealing with the issue of rebating money, even if you decide to let the control authorities expire. My point in my notes or in my statement was, if you are really going to do it right, and you are going to have to be able to use the tax rebate system to deal with, let us say, a shortage of varying amounts, and to capture all of the theoretical benefits in tax-rebate schemes, you may have to allow taxes and rebates to be varied on fairly short notice. Certainly, you would have to allow the structure of taxes and rebates to be set in advance, unless you are willing to let much of the benefit that you otherwise must obtain from tax rebates just go away.

Mr. NORDHAUS. On the question of information, I don't think there is any data that are easily available that we don't have, and that would help us make these choices. I think that it is simply a question of thinking carefully about what we know, and weighing priorities.

I see three choices that have to be made in the next Congress and beyond about the short run problem. We are talking about the shortrun problem of coping with energy emergencies.

The first is the issue of price controls, and whether to extend those on a standby basis. The second one is the allocation of scarce Federal resources. I see the question of stockpiles as an extremely important one, whether to continue the route of public stocks, or to go private stocks when there are severe restraints on Federal spending.

The final question, which I think is the one you are most interested in, is the question of what to do in the case of a severe emergency. Here there are subquestions. One is, should you go a rationing route, or a tax route. Second, in either case you will have to allocate the income. Whether it is green paper or white paper, you will have to allocate the income.

The work that I have seen on this indicates that has been very little serious thinking about how those billions, or perhaps hundreds of billions should equitably be allocated among the population. I think that this is a very serious issue and needs also to be addressed.

Ms. RIVLIN. I, too, fail to see what more information could be acquired. It would be awfully nice to know more about elasticities, but it is not obvious how we find out, except by having more disasters.

Also it seems to me that we should distinguish the question of stockpiling from the question of allocation afterward. The stock piling issues are fairly straightforward. To go back to our earlier discussion, we probably ought to do everything.

On the allocation, as has been pointed out, we don't have a bad system at the moment for dealing with minor disruptions. They could be supplemented by a standby additional rebate system in case of a major price rise, and you have a lot of inflow into the windfall profit tax. We could have a standby system for allocating that more quickly. It doesn't just go out through the normal entitlement programs as rapidly as it would need to.