ECONOMIC

DEVELOPMENT OF LOW-COST ENERGY FOR THE FUTUREThroughout the 1960's the United States employed quantitative restrictionson petroleum imports to limit dependence on foreign sources of supply.However, the availability of imported petroleum at a price below the domesticprice led to a weakening of the import restrictions and in 1973 toabandonment of the quota system altogether. As a result, imports have provideda rapidly expanding share of the domestic market.The energy crisis that occurred in late 1973 as a result of the embargo bysome of the oil-exporting countries alerted the Nation to the risk of dependingon imports for a commodity that is vital to our economic well-being, andthe supply of which is largely controlled by a few countries. Reductions in oilshipments to the United States and a sharp rise in the price of imported oilhave caused substantial economic disruption. Had these events occurredlater, when the United States was projected to be even more dependent onimported petroleum, the loss of jobs and the effect on incomes might havebeen far greater.Oil imports may become more readily available, and the price may decline.However, the possibility of a subsequent sharp price rise or supply curtailmentmakes it risky for the United States to remain heavily dependent onimports to supply domestic needs.The Nation has the capability to become self-sufficient in energy production.This capability will, however, require substantial capital investmentand large expenditure on research and development. The private sectorwill be willing to make the needed investment only if there is a reasonableassurance that returns will be adequate to justify the commitment of resourcesto long-term investments.In response to this situation, the President has announced Project Independence,a program to develop the capability for self-sufficiency in energyproduction by 1980. The choice of policies to implement Project Independenceshould be made largely on economic grounds. Because energy can beexpected to cost more in the 1980's than it did in 1972, important changes inproduction methods, in the composition of output, and in consumption willoccur. These changes will develop most rapidly, and with the least cost tosociety, if relative prices are allowed to allocate resources and to influenceproduction decisions. There are many uncertainties regarding which of thenew energy technologies will prove to be economic. By relying on the marketmechanism to guide production decisions, we can avoid becoming lockedinto production methods and energy sources that prove to be uneconomic.A major component of Project Independence is a program of Governmentfundedresearch and development to accelerate the development of technologiesthat will ensure an adequate supply of low-cost energy for the future.Although the private sector will continue to undertake most of the energyresearch and development, there is a need for a more active Governmentrole. In part this is because the returns from expenditure on research anddevelopment will be heavily influenced by Federal policies regarding en-36