Economic Report of the President

use less and produce more energy in the face of higher energyprices, but also to deal with the uncertainties of supply and price.ADJUSTING TO HIGHER ENERGY PRICESAvailable evidence suggests that the adjustment to higher energyprices is well underway. Between 1973 and the third quarter of 1980,real energy prices increased by 59 percent and the energy input perdollar of real gross national product (GNP) dropped by 19 percent.As energy prices rose, conservation of energy resources became increasinglyattractive in economic terms. Shortages and uncertainty ofsupply also induced conservation, sometimes very rapidly.While many uses of energy can be adapted relatively quickly tohigher prices, others require more time. Consider the time required,for example, for the economy to feel the full effect of a 10 percentincrease in the real price of gasoline. Studies suggest that the initialadjustment of consumers to such a higher price—perhaps by carpoolingor taking shorter recreational trips—would reduce gasoline useby only 2 percent. But over a longer period, as consumers are able tobuy more fuel-efficient vehicles, change residential locations, and thelike, the fall in gasoline use may amount to perhaps 8 percent. Thus,a major portion of the savings in energy use compelled by the substantial1979-80 increases in oil prices is still before us.Rising prices also encourage suppliers to develop new energysources. In the first 6 months of 1980, domestic oil producers drilled19 percent more wells in the United States than they did during acomparable period in 1979 and opened 15 percent more oil and gaswells than they did in the entire year of 1973. For the first time inyears, additions to proven natural gas reserves may have exceededwithdrawals. The development of nonconventional fuel sources—gasohol,solar energy, and so on—has also been occurring at a steppeduppace.ADJUSTING TO PRICE AND SUPPLY UNCERTAINTYPerhaps the biggest challenge in energy today is to minimize theeconomy's vulnerability to disruptions in the supply of oil. Disruptionscan vary both in size and duration. The ones experienced sofar, though painful to the world's economies, have been relativelysmall. But much larger ones are conceivable. There is little doubtthat a prolonged reduction in Middle Eastern oil supplies could severelydamage the U.S. economy. A recent simulation study by theCongressional Budget Office (CBO) indicated that a yearlong cutoffof oil supplies from the Persian Gulf might reduce oil supplies availableto the United States by about one-third, and output by nearly 10percent—almost $3,000 per household. Although estimates of thissort are necessarily subject to a high degree of uncertainty, the con-91