Opening the Debate

"The question is whether we go skittering off the edge of the cliff in a blind way or whether we start to make the adjustments now. The purpose of the President's program is to start adjusting now for what will inevitably happen in the future. "

In that measured, dispassionate manner, James R. Schlesinger, who is President Carter's Mr. Energy, spelled out the Administration's approach to the nation's looming energy crisis. He was speaking to members of Time Inc.'s third energy conference. The timing could hardly have been more propitious. Only two weeks before President Carter's self-imposed deadline for the announcement of a comprehensive energy program, 88 leaders from the Government and virtually every energy industry and interest group gathered in Williamsburg, Va. The speeches and discussions provided a unique preview of the debate that Carter's policy address on April 20 will inevitably touch off.

Appropriately, the keynote speaker was Schlesinger (TIME cover, April 4), the cerebral administrator par excellence, to whom Carter entrusted the assignment of formulating a comprehensive plan for submission to Congress within 100 days of the Inauguration.

"We have a classic Malthusian case of exponential growth against a finite source," explained Schlesinger. "On the demand side, we have the additional problem that increasingly our energy system generates waste, a high degree of inefficiency. On the supply side of the problem, we have the additional embarrassment that we have become unduly dependent on foreign sources. Some other nations also are highly dependent on foreign sources, but it is a special problem for the great stabilizing power of the West, which requires a high degree of economic and political invulnerability."

Sometimes rapping the lectern for emphasis, Schlesinger continued: "Since World War II, we have had a phenomenal rate of malusage so that in each decade--the '50s and the '60s--the world consumed more than had been used up in all previous human history. Oil production should peak out around the world in the early 1990s. The world, which is now consuming about 60 million bbl. a day, faces a limit on production somewhere around 75 million or 80 million bbl. a day. That means in five years' time we may have chewed up most of the possibility of further expansion of oil production."

Turning to details of the presidential package, Schlesinger said that it dealt with two time frames: the next ten years and beyond. For the next decade, he said, the U.S. will rely mainly on strict conservation and the two "bridging fuels," coal and conventionally produced nuclear energy. "We are going to have to make do with what we have," he declared. "There will be no fusion reactor, no breeder reactor, there will be no solar-electric energy, only those fuels currently available will generally be around." Schlesinger candidly explained the Administration's decision to de-emphasize breeder research as a concession to the environmentalists. He defended it as the sort of trade-off necessary in order to organize a national consensus in support of Carter's program.

After the first decade, new energy technology, including perhaps even the breeder reactor, will begin to take up the slack caused by depletion of domestic natural gas and oil supplies. Reassuring his audience, composed largely of industry leaders, Schlesinger said that the President's energy plan was by no means a no-growth, no-win proposition. "No comprehensive energy plan should be designed to bring about conservation at the expense of income, output and employment," he said. "So the first axiom of any comprehensive energy plan must be the maintenance of jobs, the expansion of the economy, the growth of productivity." In coping with the crisis, Schlesinger added, "we have a hidden asset: our past prodigality, wastefulness and squandering. Given that base, we have lots of opportunities to save, and we shall be saving in the transportation market, the residential market, and to a considerable extent in the industrial market."

Still, cautioned Schlesinger, "we face a change in American habits; that means constraint, curtailment. That is uncomfortable. Everybody will have to make some kind of sacrifice. We will not, however, be required to reduce the American standard of living. We are going to go on with suburbanized homes; we will have individualized transportation in the form of a motorcar. Both will have to be far more fuel efficient in the future than they have been in the past."

But even more than that, Schlesinger views the energy crisis as a blessing in disguise, a beneficial testing of the nation's spirit and ability to cope. In his estimation, the crisis, if handled properly, will provide the opportunity for the American people to recapture the old virtues of sacrifice and a sense of shared destiny.

The 2 1/2-day conference was divided into five three-hour working sessions, each dealing with a specific aspect of the energy crisis. A speaker led off each session, followed by three or four panelists.

Then came sometimes sharp question-and-answer periods.

The five topics, with a quick summary of the consensus on each, and highlights of the discussion:

OVERALL OUTLOOK. In a word, gloomy. The U.S. will exhaust its oil and natural-gas resources within the next 30 or 40 years. Decontrol of prices might spur more U.S. production, but Democrats in Congress would probably block it. Unless American imports of crude are quickly curbed, the U.S. will be taking oil away from its allies. And the sums needed for development of alternate sources of energy are immense.

The lead-off speaker was the Senate's most powerful voice on energy, Democrat Henry M. (Scoop) Jackson of Washington. He opposed full decontrol of petroleum prices because "I don't think we should let our price policy be based on decisions by OPEC." Aware that many oil-industry listeners would prefer an acceptance of OPEC'S higher levels, he added with a smile: "I think we are going to have a real fight over prices."

The fight began immediately. In the question session, Fred Hartley, president of California-based Union Oil, spoke up.

Hartley: Today you are telling us to produce more old oil and find more new oil. Where the hell can we expect to get the cash flow from when we are using up oil reserves and trying to replace them at costs greater than what we are getting for our oil?

Jackson: You want a guaranteed price?

Hartley: We want a price, sir, that in the event of World War III, and if the Middle East situation changes completely and suddenly, oil is back to $3 a bbl....

Jackson: Do you want a guaranteed price?

Hartley: We want a price, sir, that gives us protection--Jackson: You want...

Hartley: Please let me finish--a price recognizing that the world economic crisis is such that there is no security in the energy area. There are forces afoot that no businessman or even the U.S. Government has been able to contend with.

Jackson remained unmoved.

M.I.T. Professor Henry D. Jacoby warned that despite Jackson's objections, economic forces would drive up the price of oil sharply long before the U.S. actually depletes its reserves. "We are not going to run out of oil," he said. "It's just going to get prohibitively expensive to run the economy on it." Walter Levy, the pre-eminent international oil adviser, added that, as shortages become more severe, the U.S. could be placed in the politically perilous position of bidding against its own allies for oil. "There can be no Energy Fortress America," said Levy. "We may be successful [in outbidding allies], but we would not survive."

Levy, who advises oil companies and governments throughout the world, calculated that by 1985 the 24-member Organization for Economic Cooperation and Development club of industrialized nations will incur at least $270 billion in debts to pay for oil imports. Of the world's 140 oil-importing countries, only ten will be able to help themselves much by selling industrial and consumer goods to the OPEC nations. The less-developed countries will soon exhaust their already strained credit. Levy warned that the world must set up effective machinery to offset the one-sided transfer of wealth or face eventual economic chaos. "Financing can no longer be handled with mirrors," he said.

Chase Manhattan Bank's chief energy economist John G. Winger figured that during the decade that began in '75, the oil industry in the non-Communist world will require $1.4 trillion for new plant and equipment. Yet oil profits, after a spurt in 1973-74, have fallen to 4.7% of revenue, far too low to generate needed capital. Winger estimates that if inflation continues at its present rate, the oil companies by 1985 will be forced to charge $43.25 per bbl. to generate the sums needed for expansion. Such a huge oil price rise would force up prices of many other goods, speed inflation still more and force yet higher fuel rates.

INCENTIVES AND ROADBLOCKS. The U.S. can produce more energy--but only at far higher costs. Present efforts are being stymied by uncertainty about future Government policy, environmentalist objections and multilayered bureaucracies whose licensing procedures are needlessly timeconsuming.

"Up to now our Government's approach to energy problems has been largely characterized by indifference, indecision and delay," complained Donald L. Bower, president of Chevron U.S.A. But, he added, "there are measures our nation can undertake to slow and later reverse its increasing dependency on foreign energy." He stressed the need for additional discoveries and the widespread application of methods, such as pumping solvent chemicals into depleted wells, to get more oil out of older fields. "By 1985 more than 40% of total domestic production must come from new discoveries or enhanced recovery projects." Bower was pessimistic about the outlook for domestic natural gas. By 1981, he thinks, falling natural-gas supplies will be capable of filling only about one-fifth of the nation's energy demand, v. almost one-third in the early 1970s.

As Bower sees it, the biggest roadblock to increasing production is Government price-control policy that "discourages the formation of the capital necessary to expand supplies, inhibits sensible planning and encourages wasteful consumption." Roadblock No. 2: Endless delays in the leasing of federal oil land, notably on the outer continental shelf, less than 5% of which has been let to oil explorers. Roadblock No. 3: The day-today uncertainty of Government regulation. State and federal rules are likely to change as often as every six months, making it virtually impossible to plan for long-term capital investments. Roadblock No. 4: Congressional threats to break up the oil companies. Though Bower predicted that pending divestiture bills will fail, he cautioned that such attacks distract the oil companies from the essential task of developing greater resources.

Edwin Phelps, president of Peabody Coal Co., said that last year the coal industry could have mined 60 million or 70 million tons more than the 660 million that it did produce. Phelps was confident that under the proper conditions, the industry can meet the President's goal of doubling coal production within ten years. "But," he cautioned, "it is going to take all the underground coal, all the surface-mined coal, all the coal in the East, the Midwest and the West."

"Unquestionably, coal and uranium must be the dominant fuels for electricity generation well into the next century," declared Clyde A. Lilly Jr., president of Birmingham, Ala.-based Southern Company Services, Inc. He predicted that electricity would become an ever more vital form of power. "The electric commuter car," he said, "is almost certain to play an important role in the future."

Like the other energy industries, public utilities are also being strangled by what Lilly termed "regulatory overkill." He pleaded for simplified procedures for the licensing of power-generating nuclear reactors. Because of myriad environmental and other requirements, it now takes up to eleven years to complete a U.S. nuclear power station. The Japanese do it in 3 1/2.

CASE FOR CONSERVATION. Simply because the U.S. uses so much energy, it can also save a lot. But conservation is often very expensive, especially when large plants must be converted to different fuels or "retrofitted" with more efficient equipment. There also are limits beyond which conservation would become a debilitating brake on the nation's economic activity.

Reviewing his company's conservation attempts, J. Robert Ferguson Jr., executive vice president of U.S. Steel, conceded that Big Steel in the past had used then cheap energy in order to conserve scarce capital funds. "The result is that we've had to go back and re-examine what we've been doing."

The effort has not been entirely encouraging. It is possible, explained Ferguson, to "retrofit" old steelmaking machinery with modern energy-conserving equipment, but the cost is "horrendous." Said he: "Every buck we spend on conversion for our fuel sources and for environmental control will not be available for new plants, new supplies or new jobs."

Biologist Barry Commoner offered a startling critique and a hotly disputed solution. "The efficiency with which we are using energy and capital is falling drastically," he said; since World War II the U.S. has "displaced labor with energy that runs machines that capital has bought" and done social damage in the process. For example, the petrochemical industry, he charged, produces goods that replace natural products and often have only marginal social,benefit. Plastic for heart valves, he said, is a socially valuable product; swizzle sticks are not.

Commoner regards the conventional kind of conservation as a short-term measure "to see that there are no holes in the bucket carrying energy to industry and homes." For the longer term, he advocates a reorganization of the entire economy to make it both more fuel efficient and responsible: "I think we have to introduce the concept of social governance of the production process; we need to find some way for society to determine directly what to produce and how."

George Shultz, former Secretary of the Treasury who is now president of the Bechtel Corp., challenged from the floor.

Shultz: Why, Mr. Commoner, should we all live by your standard of judgment of the relative value of various products when we have a means that allows us to give everyone a chance to express their judgments by the way they spend their own money in the market? Your concept of social governance would decide what products to produce with our resources by an essentially political process with the decisions made in Washington by politicians and bureaucrats.

Commoner: If the marketplace worked, everyone would have a chance to say whether they wanted swizzle sticks or not. But it hasn't worked. When you buy that cheaper shirt made by petrochemicals, no one puts a tag on it saying this costs employment, pollutes the.air, uses energy in ways that are inefficient. No signals are given about the full-scale long-term social consequence of decisions made by the entrepreneurs.

Shrugging off Commoner's comments, Shultz felt that his opponent's arguments had only confirmed his central point: that the market mechanism will work--if only the Government permits it to. It was, after all, the federal underpricing of natural gas and oil that gave the petrochemical industry its edge over older industries to begin with.

Eastern Air Lines President and Chairman Frank Borman, who commanded the U.S.'s first mission around the moon, exhorted his fellow executives to be even more conservation minded. "I am the only one here," he said, "who had the opportunity of viewing the world from 240,000 miles out in space, and I know how small it looks." As an industry at the mercy of both soaring fuel costs (kerosene, which cost 8-c- to 10-c- per gal. in the late 1960s, may rise to 70-c- in the mid-1980s) and scarce capital for new equipment, the airlines must conserve or face ruin. Under Borman's prodding, Eastern has increased its passengers 10.4% while reducing fuel consumption 7.5%. Among the methods: cutting the number of flights, adding seats, and flying at lower speeds. Improvements in subsonic aircraft and engine design promise even greater savings. The energy crisis makes supersonic development hopelessly uneconomic. The Concorde SST uses five times as much fuel per passenger as the 747.

SAPPING ENERGY. The U.S. has developed a hodgepodge energy system in which various fuels have competed in wasteful price cutting. Industry and Government have behaved as bitter enemies. In a dawning era of scarcity, new partnerships must be formed, both between competitors within the energy industry and between industry and Government. Is it possible? Maybe.

Thornton Bradshaw, president of Atlantic Richfield, directed his barbed wit against the Executive Branch's energy efforts. So far, he said, that branch has accomplished little other than creating needless jobs and promulgating senseless regulations. Said Bradshaw: "There is a basic rule: any regulation must be followed by another regulation that tries to overcome the problems raised by the first."

Unlike the vast majority of his oil-industry colleagues, Bradshaw remains convinced that free enterprise alone cannot cope with the energy crisis. Says he: "The signals provided by the free enterprise system must be supplemented by governmental signals. Government must set the goals as well as the incentives and disincentives." Bradshaw would even accept Government price setting--but only on one product, crude oil, with the condition that the tag should reflect replacement costs.

Speaking for organized labor, Paul Hall, president of the Seafarers' International Union, tore into the big U.S. oil companies for hiring low-wage foreign crews to man their flag-of-convenience tankers. "In this big country of ours, you don't have any friends," he thundered. "You are the national goats." Yale Professor Paul MacAvoy had much the same message for the federal agencies created during the past few years to deal with growing energy problems. In MacAvoy's opinion, these agencies have only confused and compounded the difficulties. One main charge: projects funded by the Energy Research and Development Administration are "tipped toward exotic, costly and far-in-the-future projects." MacAvoy hopes that the creation of a Department of Energy would put research emphasis where, in his view, it belongs--on cleaning up coal and rendering nuclear power less potentially dangerous.

ENERGIZING THE PUBLIC. The American public is not yet fully convinced that a genuine energy crisis exists--but an awareness is rapidly growing. Even environmentalists are beginning to grasp the need for finding and developing new energy sources. To enlist public support in coping with the crisis, Government and industry alike must be open and candid.

Schlesinger was the keynote speaker at the final session. After his address, Pollster Daniel Yankelovich, whose attache case was crammed with the latest pulse readings on energy questions, said: "The broad outline of the program he presented seemed to me to be consonant with what we understand about public attitudes." Energy, declared Panelist Yankelovich, now ranks along with crime and high taxes as a major public concern. Concluded Yankelovich: "If there is creative policy leadership, the public will be willing to bite the bullet."

John Gardner, retiring chairman of Common Cause, provided a checklist on how to make the bullet more palatable. His ideas: give the public all the relevant information; don't try to con the people. Be sure that sacrifices are generally shared. Beware of allowing situations to drift into major crises in hopes of galvanizing public opinion. A crisis can indeed do that, but it is a weapon that cannot be aimed.

Illinois Republican John Anderson, who may serve on the House Select Committee on Energy, warned that inflation could easily develop into the most serious obstacle for a comprehensive energy plan. In his opinion, the public will reject any energy program that threatens to erode still further the purchasing power of their already inflation-stricken salaries.

On that mixed chord of caution and confidence ended Time Inc.'s Energy Conference '77. For the U.S. at large, the crucial debate over energy is only now beginning. There is, sadly, a substantial chance for blunders that could undermine the nation's economic strength and paralyze its political leadership in the world. There is also the unashamedly optimistic vision suggested by Schlesinger that the U.S. energy adversity will help to create a new "social compact" among diverse and disaffected groups.

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