Incentive Policy and Supplies of Energy Sources

HE OCCASION for this session is the socalled energy crisis in the United States, and it is well to begin with a statement of my perception of it. As I see it, the crisis represents a present and prospective excess demand for energy, particularly for energy derived from oil and gas, which apparently cannot be eliminated without sacrifice of one or more present objectives of public policy, specifically security of fuel supply, environmental protection, and stable living costs. The crisis arises out of an increasing supply price of oil and gas from domestic sources accompanied by general and specific price regulation, oil import restrictions, and growing efforts to prevent environmental damages (e.g., from the burning of high-sulphur coal), and is complicated in the short run by very low supply and demand elasticities. If one takes seriously the objectives of security of supply and environmental protection and distinguishes between regulation of individual commodity prices and control of the general price level, as I do, then it is clear that the solution of the problem called the energy crisis involves either higher absolute and relative prices for oil and gas or the creation of artificial non-price incentives to increase the supply of or decrease the demand for these energy sources. The topic assigned to me is incentive policy on the supply side. I shall concentrate on oil and gas, discussing both price and non-price incentives. Of primary concern will be present incentive policy as it would be modified by the proposals of President Nixon in his message to the Congress of April 18, 1973 [13]. I shall try to appraise both qualitatively and quantitatively the supply effects of the President's proposals and the remaining special tax incentives affecting oil and gas production. In the message referred to, President Nixon announced three pertinent actions taken on his own authority. These were the abolition of the old quota system of limiting oil imports and the substitution of a fee-for-imports system, delay in the imposition of certain environmental protection standards that would limit the burning of high-sulphur coal, and acceleration of the rate of leasing of prospective oil and gas lands in the Federal domain on the outer continental shelf. He additionally proposed to the Congress legislation to free "new" gas in interstate commerce from price regulation, to facilitate construction of the Alaskan pipeline, to extend the investment tax credit to expenditures on exploratory drilling for oil and gas, to facilitate the siting of deepwater ports and nuclear power plants, to encourge various measures of energy demand reduction, to initiate an oil shale leasing program on a pilot basis, and to double the rate of Federal financing of research and development in the energy field. Most of these actions or proposals affect demand, call for governmental in lieu of privat action, or merely facilitate private action induc d by existing incentives. Those that do (or would) have new incentive effects are the change i the import control system, the freeing of "new" gas from price control, and the extension of the investment tax credit to exploratory d illing. It is the latter that I shall discuss, together with the remaining tax incentives affecting oil and gas production.