May 12, 1969
Page 12059
FOREIGN TRADE ZONE IN MAINE
Mr. MUSKIE. Mr. President, much has been written about the attempt to establish a foreign trade zone in Maine, the proposal to construct an oil refinery in the trade zone, and the request by Occidental Oil Co., for changes in the oil import regulations.
Those who oppose the refinery have claimed that a refinery constructed in a trade zone for the purpose of refining foreign oil would not be in the best interests of the national security. They argue that a removal of oil import controls would hinder domestic exploration for oil.
We who are in favor of the trade zone, construction of the refinery, and changes in the oil import regulations have, over the past few months, been presenting the facts as they are, using the results of our own investigations and research, as well as the work of others. For this reason, I ask unanimous consent to have printed in the RECORD an excellent article published in the National Observer of Monday, May 5, 1969.
It is apparent that a great deal of study and work has been done by the authors to get the whole story on the Machiasport problem. They present an excellent history of the oil import program.
The authors point out that the quota program has done what it was supposed to do, guarantee the domestic producers high prices for their oil, about 65 percent higher than the world price. The article describes in detail the need for cheap oil to provide cheap power to New England. It answers the questions raised concerning the use of the American-flag tankers for the transport of oil. It explains the reason for the high costs of oil products in New England as compared with other sections of the United States. This article is the first of several that the National Observer will publish that will explore the oil industry in depth. I recommend it as interesting, as well as informative, reading for all Senators.
There being no objection, the article was ordered to be printed in the RECORD' as follows:
VERY HIGH STAKES MAKE VERY ANXIOUS PLAYERS – WHY THE MACHIASPORT DEAL AND TAXPAYERS SHAKE UP AN INDUSTRY
(NOTE-The Oil industry occupies a unique position in America – a position that is at once colorful, contradictory, and increasingly controversial. Its influence – political and social, as well as economic – is powerfully pervasive, as evidenced in recent public conflicts over production controls, import quotas, industry tax shelters, and bitter behind-the-scenes feuding over a startling new project proposed for Machiasport, Maine.
(This is the first of several articles that explore first-hand and in depth the industry's singular position and prerogatives. The material was prepared by staff writers August Gribbin, Michael Malloy, Patrick Young, and senior editor Edwin A. Roberts, Jr. The reporting and research was done in Washington, D.C.; New York City; Machiasport and Augusta, Maine; New Orleans and Baton Rouge, La.; and Dallas, Longview, Houston, and Austin, Texas.)
The American oil industry, which registered more than $60 billion in sales in 1968, is the giant of giants in the business community. But it is an anxious giant, clanking about in several suits of armor and thus conspicuously protected from many of the rigors that are the spice and spark of enterprise.
But it soon may be stripped of its mail and a gauntlet or two. There is mounting evidence that Congress, reacting to customer and taxpayer indignation, will divest the industry of some of its distinctive assortment of protections. These protections can be listed under three headings: the oil-import quota system, state regulation of domestic production, and an unequaled variety of tax advantages.
The challenge to the industry is advancing on two fronts. One is a congressional review of the import-quota system, a review given important impetus by the proposal of Occidental Petroleum Corp., Los Angeles, to erect a huge refinery, using foreign oil, at Machiasport near the northeast tip of Maine. The other is the Government effort to reduce the multiple tax loopholes that, in size and sum, have been the particular privilege of the oil industry.
THE MOST POWERFUL BUSINESS LOBBY
The industry, for its part, is fighting any trimming of its advantages. The oil and natural gas lobby is the most powerful business lobby in Washington, and the industry counts scores of congressmen and Federal officials as its surrogates in the halls of Government. The oil companies have traditionally based their case for preferential treatment on the proposition that the nation's security requires a prosperous domestic oil industry, and a prosperous oil industry – so it is argued – is dependent upon tax incentives for exploration and import controls to save the United States from becoming dependent upon oil from politically unstable countries.
Those are the issues in their most elemental form. But underlying the general arguments on both sides is the frenetic history of the oil business. And out of this history has grown a huge, contorted industrial mechanism, prodigiously complex in the working of its parts and complicated still further by its tight meshing with the gears of government. It is a Chinese puzzle whose pieces are strewn throughout a labyrinth of law.
And behind the forests of oil derricks, the pipelines and giant tankers, the vast refineries and tank farms, the corporate edifices and millions of gasoline pumps – behind all the familiar hardware of this basic industry – lies the biggest gambling game ever devised by man, a game in which $1,000,000 is a token wager, a game that can determine the health and wealth of many nations.
Very high stakes make very anxious players, so it's not surprising that the companies that take the risks look about for all the protection possible. One way of protecting the price of domestic oil is to keep all but a trickle of foreign oil out of the country. This the industry has successfully done since 1959 when mandatory oil import quotas went into effect. Today this protectionist program is endangered. President Nixon has promised to decide by autumn of this year whether the Administration will support the revolutionary proposal called "Machiasport."
FAVORED BY A FEW WEALTHY FAMILIES
Machiasport, the town, is typically Maine. With a population of 1,370, it consists of a couple of stores, a rayon mill, a lumber mill, some piers for lobster boats, a cluster of neat but weathered houses, and rocky fields that roll down to the sea. Although it is far to the northeast of Maine's principal seashore communities. Machiasport has long been known to and favored by a few wealthy families who maintain summer estates in the vicinity.
It is the kind of rural community that had been most notable for its remoteness and obscurity. But the politics of oil have suddenly thrust the village into the national spotlight, and the technology of oil may turn Machiasport into a hub of industry. Machiasport is blessed with a remarkable harbor; it is 140 feet deep at mean low tide, meaning it could accommodate the largest ships in the world, including the new 300,000-ton super tankers.
But why build an oil refinery in a piney little village so far from the buyers of oil products?
Because the plan involves an ingenious way of blowing a hole in the import-quota dike.
Aided by Kenneth Curtis, the 39-year-old governor of Maine, and enthusiastically abetted by the entire New England congressional delegation, Occidental Petroleum is hoping to build at Machiasport the largest crude oil refinery of its kind. The plant capacity would be 300,000 barrels a day. Its daily production would include some 90,000 barrels of home-heating fuel; 10,000 barrels of gasoline; 75,000 barrels of residual fuel used by heavy industry, especially for the generation of electricity; 30,000 barrels of jet fuel for the military; and 10,000 barrels of special Navy fuel.
Occidental would bring in crude oil from its wells in Libya. Therein lies the heart of the Machiasport controversy, and it is a controversy in which not only Occidental, but Maine and the entire nation have an important stake.
Under present law, no U.S. company is permitted to ship into the United States any oil produced in a foreign country, even if the company pumped the oil out of the ground and owns every drop of it, unless the company has been granted a special quota by the U.S. Interior Department. This restriction is contained in what is commonly known as the U.S. oil import-quota system.
The system is now under wide attack, not only because it forces Americans to pay artificially high prices for oil products, but because it is wrenched by so many exceptions, special provisions, and amendments that it no longer can be viewed as a coherent program.
The Secretary of the Interior, using figures developed by the Oil Import Administration in his department, decides every six months how much foreign crude, refined, and partially refined oils can come into the United States. The total generally hovers around 761,000 barrels a day, and it represents 12.2 per cent of the projected U.S. domestic production – excluding oil from Mexico, which is considered a special exception, and oil from Canada, which is also considered a special exception, and that oil from Venezuela entering the United States via Hawaiian refineries, which represents still another special exception.
DIVVYING UP THE QUOTA
The Secretary divides the 761,000 barrels a day among the 150 companies that now qualify for quotas. Some companies get bigger quotas than others. The amount of oil a company is permitted to import depends on a so-called historic quota, and also on the company's refinery production capacity as well as on a complicated "sliding scale" formula.
When a company that had not been on the import list is given a quota, every other company on the list must contribute a fraction of its share to help make up the newcomer's allotment. Since every barrel of foreign oil in a company's quota is worth $1.25 cash – the difference between the foreign and domestic price – companies already on the list are not anxious to share the largess with newcomers.
The "historic quota" criterion, like almost everything else about the oil business, merits explanation.
At the end of World War II, American industry returned to peacetime production of automobiles, and many new homes were equipped with oil instead of coal furnaces. The market for oil in the United States quickly expanded and the price of oil zoomed. With demand outrunning supply, the oil industry began vast exploration and development programs. By the early 1950s, the situation was reversed; the companies were producing more oil than they could sell.
While U.S. oilmen were moving from a position of shortage to surplus, oilmen in other countries – in South America and the Middle East – were doing the same thing. The international companies, realizing the United States presented the best market for oil, cut prices and began exporting their less-expensive oil into the United States on a large scale.
Domestic producers were furious. Responding to pressure from the oil lobby, President Eisenhower acted. He acted not only to mollify American oil interests but also to assure the nation the oil it might need in a military emergency. If the United States used so much cheap foreign oil that discovery and exploitation of U.S. oil fields dwindled, the country might become largely dependent on foreign sources for its military fuel. Given the political instability of most of the foreign nations that produce oil, reliance on foreign crude could endanger American security.
In 1955, a Cabinet-level committee much like the one recently established by President Nixon recommended that the President limit oil imports to about their 1954 level For two years the Eisenhower Administration urged the seven major international companies to limit their imports.
They didn't, and they didn't because it is not in the nature of businessmen to intentionally eschew easy and obvious profit opportunities.
So, in 1957, Mr. Eisenhower set up the Voluntary Import Control Program. He assumed the power to take this action from the National Security Amendment of the Trade Agreement Extension Act of 1955. This is one of the reasons import quotas are so often discussed in the context of national security.
The voluntary program provided for limiting imports of oil and refined oil products to 12 per cent of domestic production. The 12 per cent limit applied to the East and Midwest, known as U.S. Districts I-IV. There are five such districts in the nation, with District V including Arizona, Nevada, California, Oregon, Washington, Alaska, and Hawaii.
CALCULATING DISTRICT V'S QUOTA
The District V states traditionally have been unable to get enough domestic oil for their needs, so in those states the quota restrictions were made more flexible than those applying to Eastern and Midwestern states. They were based on estimates of District V's demand in relation to available domestic supply. That's essentially the way the District V quota is calculated today.
The total amount of quota oil allowed into the United States was to be allocated to "established" importers, meaning the seven major oil importing companies, which, in order of size, are: Standard 0il (New Jersey), Royal Dutch Shell, Mobil 0il, Texaco, Gulf 0il, Standard 0il (California), and British Petroleum.
The program also provided for the addition of newcomers to the ranks and specified, just as the present mandatory program does, that the seven established companies’ quotas would be reduced to accommodate allotments to newcomers.
The voluntary program had a fatal flaw. It was voluntary. While the established importers complied with its provisions, smaller companies disregarded them. Imports continued to rise. In March 1959, the Mandatory Oil Import Quota Program was enacted.
In the past decade the quota program has worked. It has guaranteed domestic producers high prices for oil pumped from U.S. reserves; domestic crude oil prices, in fact, are the highest in the world – about 60 per cent higher than world prices. This arrangement has successfully protected domestic producers from foreign competition, but the cost to the American economy has been staggering. An economist with the Senate Antitrust and Monopoly subcommittee estimates that cost at $7.2 billion annually. Oil industry spokesman say the cost is "only" $2.1 billion. Independent economists put the figure somewhere in between, but usually closer to the higher estimate.
The industry argument is that the extra billions American consumers and businesses pay for oil products represent part of the cost of national security. Where would the nation be, they ask, if domestic facilities were to lie idle because of a flood of cheap foreign oil? Where would the nation's oil come from in a crisis that cut off access to the fields of the Middle East?
Critics of the present system respond with their own rhetorical questions. Is it wise for the United States to use up its own reserves when it could save them while buying far cheaper oil from abroad? And if national security is indeed the issue the industry spokesmen say it is, is there not some more efficient way to guarantee the United States a ready supply of oil in an emergency?
Another element has recently been introduced into the debate. There is evidence that the discovery of major oil fields in northern Alaska will expand U.S. reserves to the point where it is unlikely this country will run out of oil in this century – or the next century. Then, too, there is the new technology that could make economic the processing of huge, domestic oil shale deposits. And what of the likelihood that atomic energy will eventually replace oil as an industrial power source? And what of the current experimentation with automobiles powered by other than internal combustion engines?
These questions are part of the general argument. The particular argument hinges upon Occidental's attempt to obtain an import quota of 100,000 barrels of oil daily to feed its projected facility at Machiasport.
Companies already on the import list are naturally hostile to the idea. They note that 100,000 barrels is equal to almost 20 per cent of the quotas presently allocated to all other companies. They contend the Occidental plan would destroy the import quota system, ruin the domestic oil industry, and unfairly present Occidental with a windfall variously estimated at between $35,000,000 to $65,000,000.
When opponents speak of the "Occidental Deal" or the "Machiasport Deal," however, they are referring to much more than a big import-quota application. They are referring to a series of maneuvers that resemble a brilliant chess attack, the kind of master plan that has been associated with the oil industry since the halcyon days of John D. Rockefeller.
Here is the grand strategy:
Maine's Governor Curtis has energetically sought new industry for his state, which badly needs an economic boost. Maine's roads are poor; its school system is inferior; its services minimal.
Governor Curtis says Maine has the highest incidence of poverty in New England. Per capita income figures calculated for 1966 show that Maine residents earn an average of $2,438 annually, compared with the New England average of $3,223. The low-income cycle is particularly pernicious because the state lacks cheap electrical power. Residual oil, rather than water power, turns its electricity-producing turbines. Industry does not usually seek out new plant sites in areas where power costs are high.
A MASTERFUL PROMOTER
Governor Curtis called in John K. Evans to help find a way to get Maine moving. Mr. Evans, who was formerly an executive with Royal Dutch Shell, is an expert in international oil operations. And he is a masterful promoter. It was Mr. Evans who devised the imaginative Machiasport project, although it soon became too big for him to handle, and in July 1968 he turned the plan over to Occidental, no doubt for a satisfactory consideration.
The main purpose of the Machiasport deal is to reduce power costs in the state and thereby attract new industry. Since the state depends on oil for electrical power, it must get cheap oil to reduce power rates. Since oil itself is a basic industry and raw material, it seemed reasonable that if Maine could tap a big supply of cheap oil, it might signal the beginning of a state-wide boom.
The oil for the Machiasport refinery could not come from the United States because U.S. oil is the most expensive in the world. Maine, furthermore, is almost as far from domestic sources of supply as it is from foreign wells that produce cheaper oil and transport it less expensively in foreign ships.
By law, U.S. oil must be carried in American-flag tankers. Thus, the oil for Maine had to originate outside the United States if the grand strategy were to work.
The planners knew they could eventually get a quota for foreign oil; any petroleum company with a refinery can manage that. But the quota system is so designed that the large refineries get proportionately less oil than the smaller ones. The quota system serves as a special protective device for the smaller operators.
Maine – and Occidental – had to find a way around the import-quota system, because that system wouldn't allow nearly enough foreign oil to enter Machiasport to make the facility practicable.
Occidental not only wants to bring in huge quantities of foreign oil; it wants to bring it to Machiasport in the holds of huge foreign tankers that are almost three times the size of the largest American tanker. Economies thus would be spread throughout the whole arrangement.
Even America's relatively small 100,000-ton tankers can't sail into most U.S. harbors because they draw nearly 90 feet of water. The bigger foreign tankers, in service and on the drawing boards, require still greater depths. The need for an extremely deep harbor was clear.
Files of the Army Corps of Engineers and the Coast Guard provided a likely answer: Machiasport. The water around the tiny spit of land on which the village stands, at more
than 140 feet deep, is deep enough to handle anything afloat or on the drawing boards. What's more, Machiasport and a few other New England ports are the only ones in the nation offering at least two-mile turn-around room, which the super tankers need. Machiasport, in fact, has a four-mile turn-around area.
THE BIG PROBLEM
Machiasport's natural endowments solved one problem. But the greater problem was, and is, the import-quota system. Bow to get around that?
By setting up a free trade zone in the state of Maine.
A free trade zone is a technical term applied to a geographic area of the country that has been specifically exempted from certain import laws. Though physically a part of the United States, customs laws don't apply in these zones. Importers can bring in raw materials or other goods into a free trade zone, process them, store them, manipulate them, and export them without paying a nickel in import duty. Products shipped from the zone into the rest of the United States, however, are subject to regular customs charges.
Until 1965, oil could be shipped into a free trade zone in the manner of any other commodity. In that year, however, President Johnson issued a proclamation requiring petroleum importers to obtain a license from the Interior Secretary before importing foreign oil into a free trade zone.
It might be noted here that during the years the late Sam Rayburn was Speaker of the House, and when Lyndon B. Johnson, another Texan, was Majority Leader of the Senate and later President, the domestic oil industry had two of its most devoted friends in positions of surpassing power.
Maine's first move was to apply to have a section of the state declared a free trade zone. It then had to apply for a license to import foreign oil into the zone. This the state has done, requesting that the Portland area be designated a free trade zone with Machiasport declared a "subzone" having the same privileges.
The decision on the free-trade-zone application will be made officially by the Foreign Trade Board, composed of the secretaries of Commerce, Treasury, and the Army. In fact, however, the final decision will be made by President Nixon.
Maine supports its case with several arguments.
The plan, it is argued, would enhance national security because the new refinery would add to the nation's oil-processing facilities; moreover, the refinery would be built in a part of the nation where no refineries now exist, thus dispersing the facilities of a vital industry.
The nation's balance-of-payments problems would not be aggravated because Occidental would build a refinery in the United States that it will build abroad if the trade zone application is denied.
The Machiasport refinery would contribute to a lessening of air pollution in the Eastern United States. Libyan oil is lower in sulphur content than domestic cruder, and the emission of sulphur from burning residual oil is a major cause of air pollution.
Area consumers would save money on gasoline and heating fuel. Occidental has agreed to sell its gasoline in the "unbranded market" at approximately 2.5 cents per gallon below major company prices. Company officials say this will save gasoline customers $4,000,000 a year and heating- fuel customers $22,000,000 a year. This is an important aspect of the plan to New Englanders who pay high heating-fuel rates throughout their long, cold winters.
Occidental would also provide the military with lower-cost petroleum products.
The plan would provide the nation with a new deep-water port, which it may need for military and commercial purposes.
U.S. tanker trade would be stimulated because, though Occidental would haul its raw material in foreign ships, the company would export some of its products in American vessels.
If the plan is approved, Occidental has agreed to finance in New England a new, nonprofit oceanographic research and development foundation.
The project would provide 350 jobs immediately and would attract industry to a depressed area.
While the Machiasport deal would be good for New England, better for Maine, and entirely superb for Occidental, the rest of the oil industry is dead set against it. Leading the way in a propaganda campaign to counter the Maine-Occidental propaganda campaign are three giant oil companies – Humble, the marketing subsidiary of Jersey Standard, Gulf, and Shell. Too, if all the Democratic and Republican congressmen from New England are for Machiasport, the Texas and Louisiana delegations are strongly opposed to it.
One of Machiasport's most avid supporters is Massachusetts Sen. Edward M. Kennedy, perhaps the second most influential politician in the nation. Aligned with him and the rest of the New England delegation are the governors of the six New England states. Machiasport represents one of the few times since 1620 that practically everybody in New England is in agreement on an issue.
Squabbling between the New England and Texas-Louisiana factions began as soon as the proposal was announced and it's still raging. Last February, President Nixon declared he was personally assuming responsibility for all decisions relating to oil. On March 26 he named a Cabinet-level committee to review the nation's oil-import policy. The committee, headed by Labor Secretary George Shultz, expects to finish its survey by October. Some time after that the President plans to make a decision about Machiasport.
What little opposition exists in New England has been localized and minute. Bernard Cheney, an insurance adjuster, was asked what he thought of the Machiasport plan as he stepped from a bank on Center Street in the nearby village of Machias.
"I don't like it. I don't think it can solve the economic problems of Washington County (in which Machiasport is located). It won't create enough jobs. Even if it did we've got people around here who wouldn't work if you gave them $500 a week.
"But the biggest objection is that they want to build the refinery on the most beautiful section of the coast. Don't you realize that this country around here is one of the last places you can go to get away from the pollution and gook of the cities. You look forward to your kids coming back to escape from the city and bringing the grandchildren to a place with some beauty. Why it's like getting $1,000,000 to get out in your car and drive around this county. Now they're going to bring pollution here."
Fear of pollution – of both air and water – is uppermost in the minds of all local opponents of the plan. Even many who favor it do so with mixed feelings. Says lawyer Wesley Vose: "I can see that the refinery and the other industries it will attract will be an excellent source of jobs and tax revenue. But it's bound to change the community and most of us like it the way it is. Still I'm for the proposal. We need it."
Charles Kilton, manager of the sardine cannery in Machiasport, remarks: "I've always thought it was a good idea. Sure the refinery will hurt our cannery. It will bring changes. But we've got to have help. We've got to have better roads. Where's the money going to come from? The people around here are afraid of strangers coming in. I say let 'em come."
The poverty, or near-poverty, of many Maine residents is not the apparent kind. It is not the poverty of filthy, crumbling city slums. Nor is it the wretched hopelessness of barefoot mountain folk. It is rather an absence of amenities in old, rickety – but clean – houses that have known too many Maine winters. Most important of all, most poor people in rural Maine do not consider themselves poor. And they possess the Yankee knack of making do. Poverty is not always a matter of money; sometimes it is a matter of attitude.
One opinion widely held throughout New England is that New Englanders are forced to pay too high a price for home heating fuel. Seventy per cent of the residents of the six states heat their homes with oil. They use more than 900,000 barrels of oil a day, 21 per cent of the heating oil used by the entire nation. Since 1964, the price of that fuel has risen an average of a half-cent a gallon a year – at a cost to New Englanders of an additional $20,000,000.
Heating oil costs more in Boston, some 50 to 80 cents more a barrel, than it does in Chicago, Milwaukee, or Detroit, which also have long, frigid winters.
The cost of heating their homes is a particular irritant to New Englanders, and it is a major reason why most people in the area favor the Machiasport plan. There are smaller irritants, too, that contribute to a general feeling of dissatisfaction with the curious workings of the oil industry.
Governor Curtis says that people living in Portland resent the fact that though a major oil pipe line runs through Portland carrying oil from that city to Montreal, the price of heating oil in Montreal is 3.59 cents a gallon less than it is in Portland. The harbor at Montreal is too shallow to accommodate ocean-going tankers, so oil bound for the Canadian city is brought into Portland, the second biggest (after Philadelphia) oil port on the East Coast, and immediately transshipped to Montreal. But it's foreign oil that pours through those pipes and Portlanders aren't allowed to tap any of it.
The Machiasport proposal raised so many questions about the import-quota system that the Senate Antitrust and Monopoly subcommittee began hearings on March 11 with a view to recommending changes in the present policy. The subcommittee, an offshoot of the Senate Judiciary Committee, is headed by Sen. Philip Hart, Michigan Democrat. Eighteen economists and educators appeared before the senators, and almost all of them were extremely critical of the quota system. In fact, Senator Hart observed during the hearings that his subcommittee had been unable to find any economist not connected with the oil industry who was willing to argue in favor of the present system.
The most telling points made by the expert witnesses were these:
The import-quota system is the "capstone" of a network of regulations that greatly benefit the oil industry and keep the price of U.S. petroleum products artificially high.
The cost of U.S. oil is so high that domestic prices could be reduced by more than 30 per cent and still permit 95 per cent of the oil produced in this country to be sold at a profit.
The import-quota system no longer makes a significant contribution to national security. It may, in fact, jeopardize national security because it forces the United States to drain its own reserves – reserves that might be more valuable as a wartime asset.
CREATING A CARTEL
The quota system preserves what Walter Adams, acting president of Michigan State University, calls a "Government-created, supported, and subsidized cartel." He said the Federal Government "does for the oil companies what they could not legally do for themselves." He means that Government policies have the effect of fixing prices, something the companies could not do on their own with impunity.
The present system keeps the most efficient wells from operating at capacity while encouraging the development and operation of the least efficient wells. If the restrictions on imports were moved, the per-barrel price of oil would drop from $3 to $2 and 5.4 per cent of domestic production would be lost. The most efficient companies would expand their production facilities and the marginal operators would be forced out of the market. The marginal operators contribute a small fraction to total production.
The witnesses before Senator Hart's subcommittee rarely equivocated; although their language was properly polite, the force of their arguments bespoke a barely muted anger.
At one point, Senator Hart asked Prof. Henry Steele of the University of Houston if he meant that the Government was subsidizing 95 per cent of domestic production just to safeguard 5 per cent of the oil operators. "Yes," said Professor Steele, "and it doesn't make sense."
Prof. Paul T. Homan, an economist with Resources for the Future, Inc., a nonprofit research organization, declared:
"We are under the impression that those responsible for adopting the allocation system never regarded it as having any importance for meeting the national security objects of the import program. . . . We are not aware that those responsible for framing the allocation system engaged in a serious economic analysis of the effects of the alternatives open to them.... It might be thought rather remarkable that a program affecting such a wide range of economic interests should be developed in a sort of intellectual economic void."
Professor Adams of Michigan State University explained some of the effects of the quota system that keep domestic oil prices high. He noted that Japanese manufacturers can buy Iranian heavy crude (residual fuel) at $1.35 a barrel. The same oil could be shipped to the U.S. East Coast at a delivered price of $2.10 before tariffs. U.S. industrialists, however, must pay $3.42 per barrel. That's a difference of $1.32 before tariffs and $1.22 including tariffs.
PASSED ALONG TO CONSUMER
Professor Adams concludes: "Such a differential obviously could not exist except for the penalties imposed on U.S. manufacturers by the import quota program. Major American chemical companies – du Pont, Union Carbide, Dow, etc. – have estimated that domestic oil prices on the East Coast average $1.25 per barrel more than elsewhere in the world; this amounts to 3 cents a gallon, or 60 per cent above the world price."
The higher price U.S. chemical companies must pay for raw materials, of course, is passed along to the American consumer. And the American consumer buys all manner of products that are derived from petroleum.
Major petroleum derivatives include carbon black, synthesis gas, methane, propane, toluene, and benzene. And from those chemicals come tires, plastics, fertilizers, explosives, shower curtains, pharmaceuticals, rayon, nylon, fumigants, synthetic rubber, lacquer solvents, windows, paint resins, polyesters, and dyes, among other products.
There is general agreement by many in the economic community that prices on these consumer goods would be lower if the price of domestic crude oil were not pegged by the Federal Government at a relatively high level. The manufacturers' costs, in any case, would be importantly reduced.
One witness before the Senate subcommittee told a reporter after testifying: "I would prefer not to sound unscholarly in public, but it does not take much economic sophistication to come to the conclusion that the oil import-quota system is an exercise in insanity."
None of the witnesses urged that the system be scrapped at once; that would throw the domestic market into chaos. Critics urge instead that the quota program be eliminated gradually.
The oil industry is aware it has on its hands its toughest fight in years. Its old prerogatives are being called into question all at the same time, and there is some doubt that even the powerful oil lobby and its well-situated friends in Government can sweep back the tide of change.
The major oil companies have declined to be drawn out on their position in the import-quota controversy. This reluctance is due partly to the traditional secrecy that the companies attach to their operations and policies for fear of providing information that might be of use to competitors. Too, industry spokesmen in coming months will themselves be testifying before the Senate Antitrust and Monopoly subcommittee and they prefer not to tip their hand.
But the industry position can be summarized this way: The present quota system is imperfect, but a devil known is better than a devil unknown. Import quotas enhance national security by assuring the viability of the domestic industry in the event an international crisis should close off America's access to foreign sources. Elimination of the quota system would work an extreme hardship on the economies of oil-producing regions in the United States. And such elimination would adversely affect the nation's balance of payments.
Nowhere does the oil industry have more friends than in those agencies of the Interior Department that are charged with overseeing various aspects of industry operations. This is so whether the issue is oil spills off U.S. shores or the import-quota system.
Ralph W. Snyder, a key official of the Oil Import Administration, has reacted to the controversy over quotas with two suggestions. Mr. Snyder is unconcerned that the high cost of oil forces consumers to pay much more than necessary for oil products. He is concerned about national security, and he believes that even with the present quota system the nation is still too dependent upon foreign oil. And, even though the recent oil strike in Alaska promises to change the whole chart of world oil reserves, he is distressed at what he says is the low level of exploration in the United States.
Mr. Snyder would not only retain the import controls, he would supplement them. He would, for instance, offer U.S. offshore oil producers in the Gulf of Mexico the option of withholding up to 30 per cent of their permitted production for a period of two years in exchange for a crude-oil import allocation exactly equaling the amount of oil they agree not to produce. At the end of two years, the offshore wells would be put back in production for one year to test and verify their production rates. After a year of normal operation, the producer would be free to reduce production and qualify for an increased import quota again.
Mr. Snyder's second suggestion is similar. To encourage domestic oil exploration and well development, he would give operators who find and develop new fields the alternative of withholding up to 50 per cent of their domestic production for a period of one or two years in exchange for an import quota equal to the amount of domestic oil withheld.
Almost all independent economists, however, believe that national security would be better served by gradually abandoning the quota system. How likely is it, they ask, that all foreign oil would be denied the United States by a localized war in some part of the world. Western Europe would indeed suffer if war in the Middle East halted oil shipments from there. But the United States has at least a 12-year supply, and when the new Alaska fields are developed and when it becomes economic to extract oil from shale rock, the United States will have enough oil of its own to last for many generations.
And if the worst comes to the very worst, how much of an oil reserve will the United States require in a global, thermonuclear war? Such a war is not likely to last 12 days, much less 12 years.
A top executive, moreover, of one of the biggest international oil companies, who refuses to have the statement attributed to him or his company, says that the major oil companies are ambivalent in their attitude toward the import-quota system.
NATIONAL SECURITY
"Obviously we want to optimize the return to the shareholders," he says, implying that retention of the quota system would help assure that end. But he thinks the ostensible rationale for the system has eroded: "Since quotas were put on, changes in the program have made it bear less and less relation to national security. The world is different today than it was 10 years ago [when the quotas were made mandatory]."
The international companies are reluctant to discuss the controversy with the press. British Petroleum, for instance, which recently bought Sinclair's East Coast marketing operation, declined comment on the grounds that it might appear to be trying to influence the Senate hearings. Royal Dutch Shell also decided to withhold comment.
The international companies have good reason to straddle the fence about import quotas. The "foreign" oil barred from the United States is oil produced by U.S. companies on foreign soil. It's their oil that's being kept out of the nation, but, because they are domestic producers too, it's their oil that is being overpriced in the U.S. market. All the major international companies have recorded record profits in recent years. Standard Oil (New Jersey), the world's largest oil company, boosted earnings in 1968 to $1.3 billion, or $122,000,000 more than in 1967.
From an industry point of view, the present quota system is just fine, even for the international companies that have a big stake in foreign oil.
But the industry is well aware that in its current form the quota system is, in the opinion of many, an unfair and unnecessary burden on American consumers and businessmen. And nothing could revamp the system so simply and suddenly as approval of the Machiasport plan.
Maine's Governor Curtis is optimistic. "They've been delaying us to death down in Washington," he says. "But we're going to win something for sure, for the thing that gives our request and our argument credibility is merit."
Oil import quotas, however, are only one of the protections that have enveloped the industry in a cocoon of extraordinary privilege. The others are state-enforced controls on domestic production, which have the effect of further supporting high prices, and the many tax advantages, of which the 27.5 per cent depletion allowance is only the best known.
Machiasport and the quota system represent but an introduction to the biggest and most complicated of all business stories.