current legislative, regulatory, and administrative programs underlying the base case were assessed for each of the supply and demand sectors. Potential new initiatives that would reduce our vulnerability to an oil import disruption were identified and evaluated. The general conclusions drawn were these:

1. Although the policies and programs that are in place now or are being established under existing statutes are not likely to free us from dependence on imported oil until sometime in the 1990s at the earliest, there are other measures which we can take as a nation to lessen our vulnerability to an oil disruption by some substantial degree--even in the near term.

It is important to distinguish between "dependence" and "vulnerability"--although they are clearly related. Dependence on oil imports means that we normally use foreign supplies to supplement our domestic production of primary energy. Vulnerability means that drastic changes in the price or supply level of importable oil can do us serious damage.

2. Considerable reductions beyond the "base case" projections of oil imports would result from:

a) Allowing appropriate "market signals" of the true full
replacement costs of energy in its various forms to reach
U.S. producers and consumers of energy resources.
(Decontrolling domestic energy markets, for example, would
provide incentives which are needed--both for the
conservation and the production of energy.)

b)

Overcoming barriers that limit the response to such market
signals by utilities, industry, and consumers.
example would be a variety of special incentives for
conservation, making it easier for all classes of
consumers to adjust to higher energy prices.)

(An

3.

c)

Adjusting the price of imported oil to make it clear that
continued imports include a tangible "cost" to the Nation
which must be compensated for in some way. (Perhaps the
most significant example would be the imposition of a
long-run import tariff.)

Federal Government action could further lower the Nation's vulnerability to an oil import disruption through:

a)

b)

Policies to enhance energy stockpiles;

Measures to limit the increase in transfers of wealth
(from U.S. consumers to either foreign or domestic pro-
ducers) during any disruptions which might take place; and

4.

c)

Provision of market (or market-like) mechanisms which

would increase incentives to reduce demand or expand
supply during a disruption.

All oil-importing nations would benefit from steps to diversify the world's sources of oil exports. Furthermore, much is to be gained by advance negotiations between the United States and our allies to establish firmer policies in regard both to import reduction now and to plans for action in case of a supply disruption.

The level of subsidies, incentives, and price penalties implied by the policies outlined above is critical. Unless we believe such actions would assure similar long-run demand reductions by our allies, we should not select options that cost more than the world oil price plus a relatively modest "premium." Preliminary Policy and Evaluation staff analysis suggests a premium of between $4 and $10 per barrel over the normal import price, although other estimates are both lower and substantially higher. This amount should aim at reflecting the additional cost to our economy and to our national security of allowing import trends to remain as they are now. The premium is discussed in more detail on pages 24 and 25.

AN OVERVIEW OF DEPENDENCE AND VULNERABILITY

Under current policies and programs, our "best estimate" is that oil imports, which were 7.9 million barrels per day (MMBD) in 1979, will rise to about 8.3 MMBD by 1985 but then decline to perhaps 6.7 MMBD in 1990. Figures 3 and 4 show these estimates in the context of overall energy supply and end-use balances for 1985 and 1990, respectively.

The chief reason why a more dramatic rate of import reduction cannot be foreseen under present circumstances is that a steadily rising population and gross national product (GNP) must be reconciled with domestic production of oil that is still dropping--despite the recent increases in drilling activity related to gradual price decontrol. Fortunately, the United States has been successful in recent years in "delinking" the rate of growth of energy consumption from that of GNP, sharply reducing the roughly one-for-one ratio that prevailed generally between the end of World War II and the 1973 011 Embargo. Otherwise, reliance on imports would be even harder to dampen.

Specifically, our "best estimate" is that:

The U.S. economy will become much more energy efficient.
Annual growth in real GNP of between 2.5 and 3 percent can be
achieved during the 1980s while total energy consumption rises
by only slightly more than 1 percent per year.

FIGURE 3

By 1990, energy use per household will decrease by 18 percent;
energy use per commercial square-foot will decrease by 35 per-
cent; energy use per unit of industrial output will decrease by
19 percent; and auto-fleet fuel efficiency will increase to
34 mpg without further government regulation.

Use of coal will increase above that in 1979 by nearly

60 percent (to 11.6 MMBDOE), and by 1990 nuclear power output will nearly triple (to 3.5 MMBDOE); but

Total U.S. production of petroleum (including Alaskan and offshore) in 1990 is projected to decrease by approximately 20 percent.

In the longer term (1.e., after 1990), alternative energy sources spurred by today's research and development may provide for substantially reduced dependence on foreign oil; but between now and then it is difficult to cope with the erosion of domestic output in oil. Even at current and projected high prices, imported oil appears to be substantially less costly than most of our other near-term alternatives. Thus, our vulnerability to overseas supply disruptions can be expected to continue--all other things being equal.

Of course these projections are subject to great uncertainty. There could be changes in world oil prices (particularly in OPEC pricing behavior), which might alter the picture for better or worse. There might be new modifications to the character or rate of GNP growth. Technological breakthroughs could also occur unexpectedly (as they sometimes have in the past) in energy production or energy saving. Indeed, our more optimistic projection shows oil imports falling below 4 million barrels per day by 1990 (see Table 1 in the section of the report summarizing the Base Case Forecasts). Nevertheless, the "best estimate" projections--which have as much chance of being low as being high--indicate a higher level of 1990 imports--6.7 MMBD. These "best estimate" projections are consistent with the energy projections of many other government, industry, and consulting groups. Thus, the wisest policy course would seem to be to assume that--unless added initiatives are undertaken--the United States will continue to import oil at close to today's level for the next 5 years, and that our situation will improve only modestly by 1990.

What are the possible consequences? At this time, our dependence on imported oil makes us vulnerable in two ways: (1) 011-exporting countries can exercise market power to force prices higher than they would be otherwise; and (2) The world oil market might be affected at any time by a precipitous drop in supply--either through disruptions internal to one country (e.g. Iran) or the Persian Gulf area (e.g. the Iraq/Iran War) or through threats of disruptions by the oil-exporting nations.