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The search for clear, consistent and reliable government policies is a never-ending one. Everyone knows continuity and stability are important to a smoothly functioning economy, but to achieve regularity in governmental actions has proved to be a particularly elusive goal. Yet, I think we can all agree that shifting U.S. government policies do not present the primary threat to investment in domestic energy production or conservation.

That threat lies off our shores in the councils of OPEC or in the individual actions of one or more of its members. The Strategic Petroleum Reserve (SPR) was designed, in part, to deal with this threat by releasing volumes to offset curtailments or to temporize price spikes. It would seem a good idea to take the opportunities presented by today's alliances in the Gulf to significantly supplement this Reserve, perhaps by taking contributions to the war effort in the form of in-kind payments of oil for the SPR. That would give us greater security in future years against the disruptive effects the SPR was designed to protect against. However, that Reserve is not very helpful in dealing with the primary threat to energy-related investment, namely a rapid fall in the world price of oil down to $10 or so, such as occurred before the latest hostilities. downside price volatility destroys energy-related investment values. Its very potential retards investment in both energy producing and energy saving activities.

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The new phenomenon of volatility in the oil market, to use Jim Schlesinger's phrase, has transformed and transmuted our energy problem to an even larger one reflecting the performance of the international economy. This problem of volatility overlays the energy problem and, in some ways, may prove to be even more unmanageable. Its pernicious effect on the U.S. and other Western economies can be as great on the downside as on the upside.

The U.S., at present, has no mechanism to shield energy-related investment or our economy as a whole from rapid downside price shifts in the world oil market. Should we? Of what design? Budget Committee Chairman Leon Panetta has already introduced legislation to establish a brake against downside price volatility. Undoubtedly, there will be others. This is the truly new dimension to the energy policy debate expected to occur in this Congress. I expect it to be contentious, but it is likely to divide on ideological grounds not on regional lines or even on producer/consumer lines. Indeed, consumers and producers may even have an identity of interest in protecting against price instability threats to energy related investment although I am sure there will be those on both sides who might dispute this claim. Whatever the outcome of the debate, of this I am sure, will be the most significant energy policy decision Members will be called upon to make in this Congress.

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Thank you for the opportunity to present these musings. will be pleased to respond to your questions.

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Mr. SHARP. Thank you very much. Gentlemen, you have been very helpful. There is a tendency when we get caught up with select members of legislatures and experts talking about energy policy to think that it is an end in itself. You have wisely reminded us it is a means to other goals, namely, economic prosperity, national security, and environmental health.

Let me ask you the key issue that I think we have to confront, cuing off of Mr. Curtis' last remarks on energy pricing. I think it is good for us, the country, and the Congress that we are not reraising issues of how can we control the price and dictate given quantities of oil and natural gas, as policy in this country did for years. I think the country is far better off. The consumers are better off. And all of us are, by not revisiting that.

However, if there is anything that is clear to some of us who have had to struggle with this issue, it is that individually and in businesses and institutions, our whole economy is driven by the price question. And the greatest and quickest and most dramatic instrument that can influence the decisions that we make is the price of energy. Sometimes it takes us years to adjust to that price. So, there are a number of advocates who say that we should use the Tax Code to affect the price in one way or another. I want to ask you whether you think that we can serve all three of these goals if we were to embark on a policy of trying to establish a high price for either given sources of energy or for all energy? We can do that by import fees or there are various techniques for doing this.

But the question is, can we achieve better security, better pollution control with higher prices, or in doing that do we do a disservice to our economic prosperity? Give us any judgment as to what things you hear and see and read and believe.

Mr. YERGIN. I think, obviously, this is the issue that is, perhaps, the most emotional issue. I am sure each of you as you went back to your districts in the autumn heard a great deal about it. I think that one has to stand back and look at it. Then you say if we do have very cheap energy prices, what we are going to do is just continue to import a lot more oil and devastate not only the efforts of conservation but also domestic energy production. So, the shortterm advantages that are there end up creating longer term problems. I really am very struck and it is very counterintuitive. I mean, to ask you all when do you think we had the cheapest gasoline prices you would all say probably the 1950's and the 1960's. Indeed, the cheapest gasoline prices we have had since the second world war were 1988 to 1990 inflation adjusted. And when we really increased our imports and gasoline prices are right back there again today.

Mr. GIBBONS. I will only add a bit to that. It seems to me that price signals are clearly the most effective way for a market economy to adjust its spending patterns so that individuals optimize their return on their investments. What we lack are price signals. Now, price signals can be the actual price you pay at the marketplace. They also can be disclosures of hidden costs versus when you buy a house about how much energy is implied in that house because it has no insulation. It can be effected by leadership to raise

awareness of energy implications of investment decisions. And it can be also bolstered by regulation, by efficiency moves.

The moves that Congress has made in recent years toward minimum efficiency requirements on things help the consumer to not have to know everything about the thing he is buying. At least he knows that it has a certain minimum efficiency that is sensible in our economy today.

The thing that Charlie Curtis pointed out, I think, is very important though. That if you get regulation out of tune with price when they are not really consistent with each other, then you have a big problem.

Mr. CURTIS. I will simply echo this is the dilemma that you have as policymakers. I think that market forces and correct price signals are the most effective shapers of conduct in a market economy. If the Government is going to assume the role of altering those market forces, it takes a high responsibility that it has got the price signals right. Sometimes it has not done a very effective job at that.

But I do not doubt that there will be circumstances where your ability, even with tax policy, to change conduct by offering price signals is simply not available to you. For example, let me go back to the transportation sector point. Again, passenger cars and light duty trucks consume 40 percent of the U.S. total oil requirement. An amount equivalent to the total of current oil imports, incidentally.

Now, the ability to affect consumer choice very significantly to select fuel efficient vehicles by increasing the price of gasoline through a tax probably implies a tax so draconian as to be politically unacceptable. We would probably be talking about increasing the price of gasoline threefold.

I was impressed by a comment someone once made to me that economist do not elect Members of Congress. Consumers do. And consumers may have a lot of trouble with that type of price signal however desirable its long-term effects may be calculated to be. In that regard the Congress may have little choice if it wishes to change the efficiency of the population of passenger cars and light duty trucks to resort to governmental control policies that change fleet population or crank down on the efficiency standards.

In my statement I tried to lay out a hierarchy for sorting through governmental policies. The very last thing that you get to is this type of governmental intrusion in the market or substitution for market forces. I think you should get there only with a high degree of skepticism. But I think sometimes that is where you have to get.

Mr. SHARP. In the early 1970's there was an argument in this country. Many folks believed that we had to dramatically keep up production because our economic growth was inextricably linked to the growth in production of energy. In fact, it was a 1-to-1 ratio. For every percentage in growth of GNP, you had to have 1 percentage growth in energy supply. We learned, however, as Dr. Yergin alluded to, that we were able to get a lot more efficient so that we could get economic growth with a lot less energy growth by just simply getting more bang for our buck out of the energy dollar.

However, one of my concerns about the advocates for us seeking to set floor or higher prices, which would clearly trigger production of all kinds of energy and would clearly trigger more conservation, is that they may, in fact, damage our economic prosperity. What I do not know is whether, in fact, we enjoyed the prosperity we enjoyed over the last 5 to 7 years precisely because the energy prices were back down. We paid for that with the increased international risk of importing oil. But we clearly went to where it is cheapest. We said "we will get it where it is the most economically efficient to get it." So, we of course went abroad to get it. I do not know if you folks have any comment on that or any analysis that would suggest that we have a problem there, that our economy does depend upon, at least for the near term, essentially a cheap energy policy.

Mr. GIBBONS. I can make a brief response to that. One thing is that our energy prices have been attractively low, for instance, compared to consumer prices in Japan. Yet, Japan's economic growth has been quite steady, in fact, outstanding. We now are an economy that is increasing over time, dependent on having cheap energy to compete in the world markets. Whereas other nations because of their policies have moved their economies to much higher energy efficiency and, therefore, more resilient to price changes in energy. So, you have to be careful about this in the long term.

There is one thing that one could do however, Mr. Chairman. And that is to reestablish, if not reemphasize, the role of public and private support of research and development in ways to make energy less expensive and to use it more efficiently. If you look at the track record of the Department of Energy over the past decade, it has been pretty miserable in terms of how it has spent those research dollars in achieving those goals.

Mr. YERGIN. I wanted to reiterate the point about research and development. At least some numbers I have seen indicate that the Japanese now spend more in energy research and development than we do, which I think is a very interesting comment.

As Charlie was speaking, I found myself looking up something in this volume here. That had to do with Japan's response to the energy crisis of the 1970's and early 1980's. Japan was a country much more vulnerable it would seem because they imported all of their oil, virtually most of their energy.

Yet, if we look and said who would have been the great winners in the world economy in the 1980's, we would say Japan. And one of the basic decisions that Japan made was to use energy efficiency as a way to reform and modernize its industry. It did it very rapidly. And the Vice Minister of MITI, that was the quote I was looking up, said "that the oil crisis, although they did not think so at the time, was a kind of blessing for Japan because it forced the rapid change of Japanese industry." So, that energy conservation, energy efficiency in the way these both, my fellow witnesses have put it, is a way of enhancing the competitiveness, the overall competitiveness of American industry.

Mr. MOORHEAD. You mentioned transportation as being one of the major causes of our energy problems. It certainly is. But it seems to me that we have to make public transportation not only more reasonable in connection with the relationship of our private