ECONOMIC

United States on oil imports, OPEC could more confidently reduce crudeoil output and raise the price.Near the close of 1973 the Federal Energy Office projected that the reductionof oil imports into the United States during the first quarter of1974 would result in a deficit of 2.7 million barrels per day, or 14 percent oftotal U.S. petroleum consumption. The deficit was projected to increase to17 percent by the fourth quarter if the import curtailment continued. Thisprojection does not adjust for the effects of higher prices on domestic demandand production. In addition, the projection assumes that there will beno leakage in the embargo and no increases in oil imports from countriesnot participating in the embargo. For these reasons, the projected deficitoverstates the amount by which petroleum use must be reduced throughnonprice conservation measures.RECOVERY FROM THE CRISISThe disruption generated by the unexpected reduction of oil imports hasboth a supply and a demand aspect. On the supply side the country hasabundant energy resources for the long run, although at costs that aresubstantially above past levels. But in the short run there are constraints onthe rate at which exploitation of these resources can be accelerated. Someincreased oil and natural gas production can be obtained from existing fields,but large increases require development of new fields. There is a long gestationperiod for new investment in most energy-producing industries. New oiland gas fields do not begin to produce for at least a year and are not fullydeveloped for several years. Pipelines, refineries, and nuclear reactors alltake time to build. As a result the economy has less flexibility to expandenergy production in the short run than over a longer period.There is a comparable short-run inflexibility on the demand side. Mostenergy is used as a production input in conjunction with some item of capitalequipment: for example, in a furnace to produce heat and in an automobileto produce passenger miles. To a large extent equipment design determinesthe energy requirements per unit of output. In some cases thereis scope for reducing energy use per unit of output, but usually only to alimited extent. By increasing load factors in airline flights, for instance, thesame number of passenger miles can be obtained with less jet fuel, althoughthe inconvenience may be greater. In other cases, as in the use of clothesdryers or air conditioners, the energy-output ratio cannot be changed.The Nation's capital stock was built during a period when energy priceswere low and were expected to remain so. In view of the prices that are likelyduring the next few years, much of the capital stock is inappropriatelydesigned. To obtain a major reduction in energy use without a decrease inoutput, we must replace the stock of capital with machines and equipmentthat use energy more efficiently.A distinction should be made, however, between industrial output andhousehold output. The latter refers to the services provided by the use118