Economic Report of the President

to distribute rationing coupons and the banking system to accountfor them.An even more important drawback is the plan's adverse impact onefficiency. Its allocation and price control aspects may already havehad the effect of discouraging private parties from taking self-protectivemeasures, since they would deny those who invest in emergencyfuel stocks or fuel flexibility the benefits of that investment. Theplan's intended reliance on historic patterns of fuel use in making allocationswould reduce flexibility by preventing users from switchingto more abundant fuels because they had not previously used thosefuels in substantial quantities.Finally, the plan emphasizes a reduction in gasoline use in theevent of a disruption. Gasoline alone, however, could not absorb thebrunt of a major emergency. If a complete cutoff of oil supplies fromthe Persian Gulf were handled by reducing the amount of oil refinedinto gasoline, the availability of gasoline in the United States wouldbe reduced by over 75 percent.Thus, the present strategy for dealing with a major disruption is athree-way compromise between the administrative problems of implementingan emergency plan, the allocation deficiencies of such aplan, and the need to deal effectively with the severe macroeconomicconsequences of a major disruption.One alternative plan would be to let uncontrolled market pricesapportion available supplies. Such a plan would eliminate the problemsof bureaucratic administration, but it would expose the economyto the consequences which might result from the building of fuelinventories at peak prices when the Nation's interests would beserved by drawing inventories down. Such hoarding, as well as othercomplications, might occur because the problems of rapidly communicatingmarket information during uncertain supply conditionswould make it difficult for the market to cope with a large disruption.Furthermore, public declarations that the market would be permittedto operate without constraint during a large disruption would belikely to lack credibility, since the market has not been permitted toact freely during previous relatively small disruptions. Private partiesare likely to assume that the government will also intervene during amajor disruption, and they may modify their own actions accordingly.For example, given their political visibility and small numbers, theNation's oil producers and distributors might pass up the opportunityto maximize short-run profit and engage instead in their own formof product allocation. Thus, the choice might not be between amarket solution and government allocation, but between public andprivate allocation plans.96