Economic Report of the President

Price and allocation controls only redistribute some of the adverse effectsof the disruption away from politically favored groups, thereforemaking matters worse for other groups. In the aggregate, price andallocation controls would exacerbate the adverse effects of the disruption.Standby controls, even if never implemented, are harmful becausethey increase the perceived likelihood that controls will be imposedand thereby deter private preparedness. This is why the Presidentvetoed the standby controls legislation in March 1982.Present policies also reflect a recognition that firms may have insufficientincentives to prepare for energy supply disruptions, in substantialpart because of past government policy. Previous price andallocation controls had the effect of penalizing those who had preparedfor disruptions and subsidizing those who had not. Because ofgovernmental responses to energy supply disruptions in the past, andthe recent congressional proposal to establish standby price and allocationcontrols, firms must regard as substantial the likelihood thatcontrols would be imposed once again, despite this Administration'sfirm commitment to avoid such policies. This expectation discouragesboth those who expect to benefit from controls and those whoexpect to have their supplies appropriated from preparing sufficientlyfor a disruption beforehand.In recognition of this perverse effect of past policy, the Administrationis striving to build up crude oil stocks in the Strategic PetroleumReserve (SPR) at an efficient rate. Built up to only slightly more than100 million barrels from 1977 until early 1981, the SPR now containsover 290 million barrels and is growing steadily toward.the plannedlevel of 750 million barrels. The SPR is intended to supplement, notsubstitute for, private sector stocks; accordingly, it would be usedonly in the event of a severe disruption. Once a decision was made touse SPR crude oil, it would be sold at market-clearing prices towhomever wished to purchase it. The Strategic Petroleum ReservePlan submitted to the Congress in December 1982 contains a provisionallowing the Secretary of Energy to reserve for special groupsfaced with extraordinary circumstances up to 10 percent of a givenperiod's drawdown; oil allocated under this provision would bepriced at the level established in the most recent competitive auctionof SPR crude oil. This provision is not intended as a subsidy for particulargroups. The policy of this Administration to fill the SPR at asteady rate will move energy security preparedness in the UnitedStates toward a more optimal level. To the extent that the availabilityof SPR crude oil, combined with other energy policies and programs,enables future Administrations to resist pressures for price and allo-107