Reagan policy test: protecting US from oil import cutoff

President Reagan's free-enterprise approach to energy is about to face what many feel will be its toughest test. The administration is examining what its policy should be for dealing with any future emergency shortage of oil imports to the United States. In the process, it is pondering at what point, if ever, government intervention in the energy marketplace is warranted.

That this subject is receiving attention now may seem odd to many Americans in light of today's rosy energy picture. US crude oil imports in April were 23 percent below the level of last year; gasoline prices have stabilized; and conservation seems genuinely to have taken hold.

Still, US vulnerability to import disruptions remains high, most energy analysts agree. They see the Middle East as a region of continuing instability where "we've learned to expect the unexpected," as one analyst puts it. There is concern, too, that conservation gains may be offset by economic expansion if the President's budget and tax-cut program is enacted and works as promised. And there remains little agreement on whether domestic energy production will stabilize or decline over the next decade.

The implications of a new energy crisis is being examined now mainly because the law that has guided US responses to sudden import losses of oil since the Arab oil embargo in 1973 will expire in September. The Emergency Petroleum Allocation Act (EPAA) of 1973 allowed for broad crude oil and product allocation and price controls -- measures lifted by President Reagan in January although the legal authority to impose them remains until expiration of the law.

White House senior policy adviser Danny J. Boggs says whether the Reagan administration seeks to replace the EPAA with new legislation will be decided over the next few months. Already the Department of Energy (DOE) is being reorganized with a new assistant secretary in charge of emergency preparedness. Also at the DOE, the Office of Contingency Planning is analyzing different scenarios of oil import losses toward some new comprehensive plan for responding to future import disruptions.

Congress also is beginning to focus on the issue. The Senate Energy Committee is scheduled to hold hearings this week on energy emergency preparedness in the US, with an eye toward what new legislation might replace the EPAA.

The backdrop to all this seems to be general disenchantment with the approach the federal government has taken to past import disruptions. Many oil companies long have endorsed the notion that a competitive marketplace works best to allocate energy products evenly in a shortage. And even those who support government involvement in pricing or allocating fuel in a period of disruption are typically critical of how these measures have been implemented in the past.

That Americans found themselves in gas lines during the 1973 Arab embargo and again during the loss of imports from Iran in 1978 and '79 is widely cited as evidence of the ineffectiveness of past US price and allocation controls.

In general, energy analysts, including officials at the DOE, concede the US has never had a comprehensive plan for dealing with a sudden loss of oil imports.

"We're coming off a bad game plan, and I see no evidence yet that the Reagan administration has a better game plan," says senior economist Fred Hoffman of the Rand Corporation, a California research group.

As Congress and the Reagan administration develop a new approach to coping with any unexpected interruption in oil imports, they may well be influenced by an in-depth study on the subject recently completed by the National Petroleum Council. The council is a federal advisory agency to the secretary of energy, supported through private funding.

The council's report of last month calls for a variety of responses depending on the severity of the import disruption. For the most part, it recommends letting the marketplace, along with some government steps to force fuel switching and allow for relaxation of some environmental standards, cope with import losses up to 2 million barrels of oil a day.

With higher levels of oil shortage the report urges a "limited standby program of emergency crude oil and product distribution and product [profit] margin measures being available to the government."

The call for any government intervention is bound to be controversial particularly in the Reagan administration where a market oriented approach to energy is favored.

The most significant step the Reagan administration has taken so far toward protecting the country in the event of a sudden loss of crude imports is the accelerated filling of the strategic petroleum reserve.

The National Petroleum Council labels the measures of government intervention it recommends "fundamentally flawed." Yet it asserts that sudden major cutoffs of imported oil may be uneven in their impact on consumers in a way that cannot be rapidly corrected by market adjustments.

In theory, regional shortages would boost prices and attract supplies. But the report notes that contractual commitments may constrain refiners in less-affected regions of the country from selling oil to refiners in harder hit areas.

Ashland Oil Inc., an independent refiner, thinks the federal government should have the authority to get involved in allocating crude sooner than recommended by the National Petroleum Council. William Perrine, an executive with Ashland, suggests a system where when world spot oil prices rise suddenly to a specified level above contract prices an automatic oil-sharing plan among refiners would be triggered.

Still, others think the degree of government intervention called for in the National Petroleum Council study is excessive. Mr. Hoffman of Rand Corporation says the possibility of allocation controls is counterproductive. Private oil companies may not try to build their own emergency stocks of oil, if they have to share them during a shortage.

William Hogan, director of the Energy and Environmental Policy Center at the Kennedy School of Government at Harvard, says the focus of any new emergency preparedness plan should be on protecting the US economy. He suggests a system that would quickly rebate to consumers some of the increased revenues that would flow to the US government from higher prices and the windfall profits tax on oil. Also, he urges a tariff on imports to stem a vast transfer of wealth to foreign oil producers that might follow a loss of imports.

Mr. Hogan feels the worst alternative may be no new articulated plan for dealing with oil import disruptions. "What I'm most afraid of is that the Reagan administration will allow the EPAA to expire and put nothing in its place. . . ."