CONGRESSIONAL RECORD -- SENATE
December 12, 1969
Page 38667
NEW ENGLAND OIL IMPORT PROGRAM
Mr. MUSKIE. Mr. President, it has been a year and a half since the port authority of the State of Maine applied for a foreign trade zone at Portland, Maine, with a sub-zone at Machiasport. That application has stirred up controversy because the port authority intends to operate the Machiasport sub-zone to encourage the construction of one or more oil refineries. The purpose of the Machiasport plan is to develop new domestic refining, capacity, particularly for home heating oil and residual fuel oil.
Residual fuel imports into the United State have increased from 800,000 barrels per day in 1964 to 1,220,000 barrels per day in 1968. The reasons for this rise can be attributed to a rapid increase in demand. At the same time, U.S. refineries have reduced their production of heavy fuel. Residual fuel is an unwanted product for U.S. refineries.
There is evidence that home heating oil is becoming an unwanted product. Refineries prefer to make diesel oil, jet fuel, and gasoline because these products are more profitable than home heating oil, and far more profitable than residual fuel. Foreign trade zone refineries specializing in the output of heavy fuel and home heating oil could thus serve to increase the domestic output of these fuels, as well as bring relief to hard pressed New England consumers.
The controversy that flared over Machiasport started out as a controversy affecting New England. The oil industry fought our efforts to bring an oil refinery to New England. This fight eventually led to the creation of the Cabinet Task Force on Oil Import Policy. Secretary of Labor Shultz was appointed chairman of the task force, and he promptly engaged a staff of competent economists and lawyers.
As a result of the questions raised by the task force about the existing oil import program, the controversy surrounding Machiasport has spread across the Nation. More and more consumer States have come to realize the cost of the burden imposed by the oil import program.
Mr. President, this is no longer a New England fight. In recent weeks, 26 Senators representing 16 different States have spoken in opposition to the oil import quota system. Seventy-eight Members of the House of Representatives have added their opposition. Two weeks ago, a group of Governors and their representatives representing 16 States, met with Secretary Shultz to ask for relief from the high prices imposed by the present quota system. That delegation was led by the Honorable Kenneth M. Curtis, Governor of Maine.
In reviewing the events of recent weeks, it seems clear that the voice of the consumer has been heard. I would hope that those responsible for framing our new oil policy weigh very carefully any course of action which is not responsive to that clear voice.
Mr. BROOKE. Mr. President, on December 3, the junior Senator from Maine (Mr. MUSKIE) called to the attention of the Presidential task force on the mandatory oil import program a most incisive paper suggesting a solution to the inequities of our present quota system. This paper expands upon a proposal offered to the Secretary of Defense by several members of the Senate Armed Services Committee calling for a more aggressive use of foreign trade zones as part of our Nation's oil import program. I am hopeful that the members of this task force will carefully consider these points when they make their recommendations to the President.
It is absolutely clear that the present import quota system is no longer acceptable. It is, by one reasonable estimate, costing our Nation $5.4 billion annually. New Englanders are forced, through unreasonably high fuel oil prices, to pay $540 million of this total cost. We are paying 10 percent of the total cost of this program at a time when we have only 6 percent of the Nation's population. It is obvious that we are paying more than our fair share of the cost of the quota program. If, as its supporters claim, the basis for the program is national security, then the entire Nation should bear the burden equally.
The New England heating oil problem can be solved, but only through special action. Reliance on some adjustment in crude oil prices or crude oil tariffs on import levels will simply not do the job. The reason is simple: Regardless of the tariff or import level set for crude, continuing improvements in refining technology, such as hydro-cracking, will enable U.S. refiners to make increasing quantities of gasoline, jet fuel, and other products at the expense of home heating oil.
There simply will not be enough heating oil produced in our country over the next decade to meet demands; unless substantial new imports or substantial new supplies from domestic refiners in trade zones are made available, the price of home heating oil will continue to escalate as supply is reduced in the face of rising demand. It might be noted that industry projections show that there will be an absolute decline in the total production of home heating oil in the next decade -- not a percentage decline, rather a decline in the actual number of barrels produced. In brief, there is no other way to meet the heating oil problem than to provide more heating oil. The "trickle-down theory," advanced by some, will not work.
Further, the solution must result in lower prices to the consumer. Not only will a lower price for heating oil serve to equalize the burden of the import program, but it will be a major step forward in President Nixon's fight against inflation, which I strongly support.
The people of New England have waited a long time for relief. They have put their faith and confidence in the proceedings of this task force. The facts of our heating oil crisis have been presented clearly and forcefully by the New England Governors Council for Economic Development, and the Senators and Congressmen of our region. I feel confident that our case has been well made.
Knowing President Nixon's commitment to the fight against inflation, his commitment to the consumers of our Nation, and his desire to assure that the burden of any Federal action be borne equally by all parts of the Nation, I am very hopeful that he will recommend changes in the oil import program to meet the needs of New England.
I ask unanimous consent that a letter and the paper from the junior Senator from Maine, and an article published in the Oil and Gas Journal be printed in the RECORD.
There being no objection, the items were ordered to be printed in the RECORD, as follows:
DECEMBER 3, 1969.
Hon. GEORGE P. SHULTZ,
Secretary of Labor,
Washington, D.C.
DEAR MR. SECRETARY: It has come to my attention that the President's Task Force on Oil Import Controls has under consideration a plan to replace the current oil import quota system with a tariff system.
I am concerned about the high costs of heating oil in New England. I am not sure that the tariff system that you are suggesting will result in a reduction in heating oil prices. We must assume that importers of foreign crude oil that pay a tariff on the oil will produce petroleum products that have the highest price return. Heating oil is not in this category. As a result. we will either have higher prices for heating oil or less heating oil.
In this regard, I have been given a paper that discusses this problem and offers a solution involving the use of foreign trade zones. The author points out that it would be possible to provide an incentive for companies to produce heating oil by combining an oil tariff system with refineries located in foreign trade zones.
I am sending this paper to you for your information and consideration.
With best wishes, I am Sincerely,
EDMUND S. MUSKIE,
U.S. Senator.
HEATING OIL SUPPLY FORECAST THROUGH 1980
According to a comprehensive forecast of the oil industry's refining plans for the next decade published in the November 10, 1969, issue of the oil & Gas Journal, the volume of home heating oil manufactured in U.S. refineries is due to decline over the next ten years. Specifically, the Oil & Gas Journal article (attached) shows that middle distillates (diesel oil and home heating oil) which now account for 21% of refinery runs in the U.S., will decline to 15 % by 1980. At the same time, total refining capacity will grow from 12.1 million barrels per day to 18.5 million barrels per day. So that there will be a slight volume gain in middle distillates, despite the sharp reduction in percentage yield. It should be noted, however, that diesel oil, which accounts for about one-third of total middle distillates, has been growing at an annual rate of 4.5 to 5% per year for the last several years, and this trend is expected to continue.
Thus, if one projects diesel oil growth at a compound annual rate of 5% between 1970 and 1980, the volume of home heating oil left in the middle distillate pool in 1980 will be, in absolute terms, smaller than the volume of home heating oil produced today.
The reason for the decline in home heating oil production is economic. Refiners generally expect gasoline (which is due to grow from 48% to 52%) and jet fuel (which is due to grow from 8% to 13%) to be more profitable products than home heating oil.
There are only three ways to rectify this situation and insure that there will be adequate supplies of home heating oil for the wide band of consuming states stretching across the northern half of this nation:
1. If heating oil prices are increased sharply, domestic refiners will be induced to produce more heating oil, thus altering the industry's projections. This is an unpalatable alternative.
2. If the tariff level on foreign sources of home heating oil is set low enough, imports would be encouraged to fill the gap between demand and domestic home heating oil production.
This alternative is far more preferable than the first, since a low enough tariff not only will insure that adequate supplies will be available, but also will cause consumer prices to be reduced to more reasonable levels. It should be noted, however, that this alternative would encourage continuation of an already existing trend -- the construction of additional refining capacity off-shore. We would be, in short, continuing to export our refining capacity.
3. Additional domestic home heating oil refining capacity could be encouraged through the use of Foreign Trade Zones. Zone refiners could be exempt from the new national security tariff on foreign products on the condition that such refineries specialize in the production of home heating oil and heavy fuel oil rather than gasoline and jet fuel. This alternative is clearly the most preferable because it guarantees adequate supplies of home heating oil at low prices and reduces the East Coast and Defense Department dependence of foreign sources of heavy fuel.
[From Oil & Gas Journal, Nov. 10, 1969]
FORECAST FOR THE SEVENTIES -- REFINING
(By D. H. Stormont)
United States refineries will need to step up their construction activities if they are to keep pace with the big boost in demand foreseen in the next decade.
The 21 million b/d demand for petroleum products in 1980 requires a domestic refining capacity of about 18.5 million b/cd. This is some 6.4 million b/cd above the expected crude capacity at the close of this year. Keeping pace thus will require building at the rate of 610,000 bbl/year.
And this is just for the additional crude capacity that will be needed. To match output with changes in product demand, older plants will have to undergo modernization. Still other building will be carried out for the purpose of replacing two or more smaller plants with one big one in order to obtain the benefits of size.
All of this should add up to almost 3 million b/d of new refining capacity under construction at all times, based on the normal 3-year period between start of design and completion of the project.
The average refinery will thus be larger in 1980 than that of today, making it more difficult for smaller refiners to compete. But as long as local supplies of crude exist, or there are small markets too distant to justify pipeline shipments into the area, major companies will still be operating some relatively small plants. And independent refiners will still be around, in heavily populated areas as well as in rural areas.
The bulk of the building during the next decade will be on the Gulf Coast. The huge new oil reserves that will be developed on the North Slope will give greater impetus to building elsewhere, however. Both Atlantic Richfield and Humble already are talking about new plants on the East Coast, and these probably will be much farther south than Maine sites now under discussion.
New pipelines into the Great Lakes area, either directly from Alaskan fields or for transporting Canadian crude now moving in the Pacific Northwest will assure a steady growth in refining capacity there. The continued shift in population to the West Coast also assures much additional capacity there.
Insofar as refining technology is concerned, no major innovations are anticipated. Catalytic cracking will continue to be the major tool for producing motor-fuel components, even though hydro-cracking will take over some of the load. If limits are placed on the olefin content of motor fuels, cat reforming, hydro-cracking, and the newer hydro-refining processes will come into greater prominence than will be reflected here.
Other features of 1980 refineries, other than their larger average size, will stem from the better catalysis available then, instrumentation that permits closer control, and still longer on stream periods. Use of improved metals which better withstand high temperatures and pressures will make the latter possible.
As to catalysts, much of the research today is directed toward developing materials which can be used more like a rifle and less like a shotgun. In processes involving cracking reactions, such new catalysts not only will make for higher yields but will give the refiner greater flexibility.
The improvements won't be limited to catalysts with cracking functions. Extensive research with zeolitic types will pay off in better desulfurizing, alkylation, and hydrogenation catalysts. The recent development in reforming catalysts, involving use of rhenium or a similar metal which has promoting and stabilizing effects on the platinum, likewise could extend to other applications.
In the overall downstream processing scheme, hydro-processing will probably be used so extensively that processing gains will almost equal losses and fuel needs. In other words, distillate yields will approach 100% of the volume of crude charged to the refinery.
This big boost in hydro-processing, particularly for olefin and aromatics saturation, is anticipated despite little hope for hydrogen costs much lower than those of today. As more and more hydrogen finds its way into refinery waste-gas streams, however, cryogenic units will find wider use for recovering the hydrogen. Thus while methane reforming costs may show little decline, recovery of the hydrogen from off-gases can help reduce overall costs.
The need to add new crude capacity in the next decade is apparent (see chart). U.S. demand will move up to 21 million b/d from the 14.4 million b/d level anticipated for next year. When allowance is made for imports, natural-gas liquids, the anticipated, drop in residual yields, and for a processing gain of more than 500,000 b/d, supplying this demand will require crude runs of about 17 million b/cd. In terms of refining capacity, about 18.5 million b/cd will be required in 1980 as compared to the 12.1 million b/cd estimated for the start of 1970.
There is little excess capacity today -- and thus that new capacity will be needed at a rate of about 600.000 bbl/ year.
In 1964, when refiners still felt the effects of their overbuilding spree some 4 years earlier, the average plant was operated at the rate of 87%. By 1966 it was operating at 91% of capacity, and for the past 2 years 91.7% has been used. Bureau of Mines figures for the first 7 months of 1969 show a slightly higher utilization than in 1968, thus the average for this year should be about 92%.
This level probably is close to the maximum desirable for a yearly average. For while 92% may seem on the low side, it results in a utilization of about 96% during cold months -- as was the case last February. A fire, strike, hurricane, or other disaster at only a few larger refineries could readily result in shortages. The 18.5 million b/cd capacity projected for 1980 is based on 92% utilization.
New plants under way. and those to be built in the next 10 years will be designed for different product patterns than most of today's refineries. Residual and mid-barrel heating fuels are losing out to motor fuel and turbine fuel (see chart). Thus, older plants that have not already adjusted yields in pace with this trend will have to do so if they are to remain competitive.
Light fuels -- motor fuel and turbine fuel -- will be the big gainers in the next decade. On top of the gain registered in the past 5 years. they are expected to move up to about 65 % in 1980. The 9 % gain may not seem like much of a switch in yield patterns. But translated into barrels of gasoline and jet fuels it means an additional 1.5 million bbl of these fuels in 1980. Most new plants will be designed to convert some 70-80 % of the crude charge into motor and jet fuels.
In terms of output, U.S. refineries will be turning out about 11 million b/d of these light fuels at that time. Demand estimates for jet fuels vary but a commercial demand of 1.6 million b/d – almost 1 million b/d above current levels -- seems likely. Armed Services needs can't be fixed but they have been running more than 600,000 b/d. Of this amount about 380,000 was from U.S. plants. Thus jet-fuel needs could easily exceed 2.1 million b/d in 1980.
Motor fuels are projected to grow at about 4 %/year. Output of these fuels, excluding that coming from natural-gas liquids, will be about 8.8 million b/d in 1980. As a percent of crude, this will represent a yield of 52%.
The growth in light-fuels yields will be at the expense of the middle and bottom of the barrel.
The former will decline to about 15% from the present level of 21%. This will be principally due to increased pressure from natural gas in home heating. In terms of daily refinery output, this will represent a slight gain to about 2.5 million b/d.
The drive for cleaner air, plus the relative low-selling prices received for residual fuels, will result in yields declining to 3% from the present level of 6%. This will represent a slight decline in daily production.
Actually daily demand for residual fuel oil is expected to climb by several hundred thousand barrels -- as oil takes over some of coal's demand. But this will be supplied by imported materials. U.S. refiners will continue to grind almost all their residual materials into lighter products.
The other category will probably account for about the same percentage yield as at this time.
Growth in the importance of petrochemical feed stocks, which now account for about 5% of the crude barrel, will be largely responsible.
The new grass-roots refineries of Mobil at Joliet; Atlantic Richfield at Cherry Point, Wash.; Gulf near New Orleans; and Union at Chicago -- all of which are to have crude capacities ranging from 100,000 to 160,000 -- will be of the fuels type. Details of their product slates are not available but it's not likely they will match the light-fuels capability of Humble's new Benicia, Calif., refinery. This 78.000 b/d plant is producing more than 90% yield of gasoline, jet fuel, and diesel fuel. The only other major product is coke.
While not emphasizing chemicals production to the extent of some newer European refineries, petrochemicals are receiving added attention at many U.S. plants. This particularly applies to olefins production.
The trend toward use of heavier feed stocks, as Shell will do at its Houston refinery and Commonwealth is to do at Puerto Rico, are steps toward the refiner supplying higher percentages of propylene and butylenes.
Increasingly large volumes of isobutane as a by-product of hydro-cracking also make for more chemicals from refineries. A thermal cracker that uses isobutane as feed was recently completed by Coastal States at its Houston refinery.
Processing routes chosen for individual refineries are influenced by type of crude, likes and dislikes of the refiner as to processes, and what the refiner individually regards as the most promising markets. As to the latter the choice may be to use the olefins for chemicals instead of as an alkylate feed, or to put aromatics into motor fuels rather than to separate them out as chemical feeds.
Some generalization can be made, however, as to the process to be used.
Catalytic cracking, at least for the bulk of the '70's, will continue to be the favored tool for producing motor fuels. On a fresh-feed basis, it is now applied to about one-third of the total refinery feed in 1970 refineries cat cracking will probably be equivalent to 40 to 50% of a plant's crude capacity. Thus some 2.5-3.1 million b/d of new cat-cracking capacity is likely.
Catalytic reforming now is applied to almost 21% of refinery capacity. Applying this ratio to the anticipated 6.4 million b/d of new refining capacity translates into 1.3 million b/d of new refining capacity.
Hydrocracking, because of its newness, can't be projected in the same manner. Opinions vary from company to company but it ultimately may be applied to some 15-20% of the crude charge.
The amount of this new capacity probably will be in the range of 1 to 1.25 million b/d.
Other hydroprocessing steps now are applied to about one-third of the crude charge. The outlook is for at least 2.2 million b/d of new hydroprocessing to accompany the new crude capacity.
Alkylation and isomerization, both relatively high cost approaches to antiknock components, will likely become much more popular before the decade is over. Should the lead content of motor fuels be reduced, alkylation capacity built will be well above the approximately 400,000 b/d that would normally be expected.
Coking will continue to be the most favored of the thermal processing routes. It still must be looked upon as a low-cost means of disposing of residual oils, but there are some developments which may make it a more economic tool, too. Among these are new routes for converting coke into carbon black, for converting it into activated carbon, and the new demand for needle coke in the form of carbon shapes to be used in spacecraft and other applications.
Actually, all of the capacities quoted should prove to be on the low side. The main reason is that they fail to take into consideration current trends, as well as units that will be installed in conjunction with modernization projects.
Cat cracking, for example, has experienced little capacity gain for the past several years -- while the benefits of the new zeolitic catalyst were being absorbed. These catalysts are now in use in almost all units where it is economically feasible to do so.
As is the cast in some newer refineries, and the goal in some modernization projects in older plants, cat cracking is to be applied to a wider portion of the crude barrel. Included are deep-cut vacuum gas oils, coker gas oils which have first undergone olefin and aromatics hydrogenation, and the bottoms fractions from hydrocrackers.
The new Rhenium catalysts may slow down growth of catalytic reforming for a couple of years, as refiners cash in on the longer life, higher antiknock values, increased hydrogen yields, and other advantages they offer. The long-range outlook, however, will be for catalytic reforming to become an even greater source of octanes.
There is little question as to the steps refiners will have to take insofar as residual fuels are concerned. Tightening air-pollution ordinances require either they produce a low-sulfur product or no residual fuel at all.
The ready availability of large quantities of low-sulfur resid from Caribbean and other foreign refineries will probably result in the U.S. becoming almost totally dependent upon imports.
Low-sulfur North African resids are being blended with Venezuelan and other high-sulfur resids at delivered Eastern seaboard prices well below those domestic refineries can post. Unless some development in catalysts occurs that makes it economically feasible to directly hydrocrack highmetals resids, U.S. refiners will fill an increasingly small portion of what is expected to be a growing market.
The laws have yet to be written and passed, but the odds favor stricter limits on motorfuel composition. Lead content readily could be lowered by the late '70's. It's also entirely possible for volatility to be lowered and for the olefin content to be reduced.
None of these pose a problem from the know-how viewpoint. But they do lead to much higher capital costs and more operating expenses.
THE ROLE OF FOREIGN TRADE ZONES IN AN OIL TARIFF SYSTEM
SUMMARY
Inherently, oil refineries in Foreign Trade Zones are not compatible with the oil import quota system since they require special exemptions from the normal rules of the game. Zone refineries are far more compatible with a tariff system and should be used in combination with the proposed new national security tariff system to achieve the following objectives:
1. Construction of heavy fuel oil refining capacity in the U.S. to end the East Coast's almost total reliance on foreign sources of residual fuel and the U.S. Navy's complete dependence on foreign heavy fuel sources.
2. To promote and expand home heating oil refining capacity on U.S. soil to assure adequate supplies at reasonable prices of this product.
Administratively, Zones could be established very simply by exempting them from the proposed new national security tariff on refined products and then allowing oil operations to take place in Zones under the already existing Foreign Trade Zones law and regulations. Rules governing oil refineries in Zones can and should apply on a non-discriminatory basis to all companies -- there need be no special treatment. Each oil company can decide, depending upon its own product demand pattern, whether to build additional gasoline-oriented refining capacity outside a Zone under the new tariff system or build a heavy fuel oil refinery inside a Zone. This nation needs both types of refineries and our new oil import policy should be structured so that both types are built here at home.
HISTORY OF TRADE ZONES UNDER QUOTA PROGRAM
Under a 1965 Presidential proclamation oil refining operations in Foreign Trade Zones were made subject to specific approval by the Secretary of Interior under rules and regulations to be issued by him. Official regulations were needed since oil imported into the U.S. customs territory were limited in volume by the Mandatory Oil Import Control Program.
Inherently, Zone refineries were not compatible to the import quota system since they required official exceptions from the normal rules of the game. During the last days of the Johnson administration, two alternative sets of regulations governing Zone refineries were issued by Secretary Udall for comment. Neither of these proposed sets of rules were ever issued as formal regulations. A regulation permitting imports of foreign crude oil into Zones was issued for District V -- the West Coast area including Hawaii on January 20, 1968. Basically, that regulation permitted imports into the Zone but did not cover the question of exporting products from the Zone into the customs territory of the United States.
PROPOSED TARIFF SYSTEM
The proposed preferential tariff system now under study by the Task Force has many positive features. If the tariff levels are set low enough, there should be a decline in unnecessarily high oil prices which have severely penalized industrial and individual consumers. A preferential tariff system should also bring about a more rational refinery structure, with many new plants located closer to markets rather than clustered around domestic producing centers. Similarly, a tariff system, if liberal enough, should weed out high cost inefficient domestic production yet leave enough incentive for exploration of promising structures both here at home, in Alaska, Canada, and Venezuela. In sum, a preferential tariff system is a step in the right direction.
SPECIFIC PROBLEM AREAS UNDER THE TARIFF SYSTEM
There are two specific problem areas, however, that will not automatically be improved under the proposed tariff system:
1. Heavy fuel oil production. Refineries specializing in low sulfur fuel oil are currently being built offshore the U.S. resulting (1) in an outflow of capital detrimental to our balance of payments, and (2) creating a dangerous dependence on foreign supplies of heavy fuel oil by the U.S. military.
Clearly, if a U.S. refiner has to pay say $1 per barrel, to import crude oil under the proposed tariff system, that refiner will not want to make any residual fuel because such fuel will have to compete with foreign source residual fuel bearing a tariff of only $.05 per barrel.
2. Home heating oil production. Adequate supplies of home heating oil at reasonable prices are an absolute necessity to the consuming public in the Northeast, yet under the existing import program shortages and threats of shortages have been persistent. The tight supply situation characteristic of the home heating oil market has been caused in large part by the development of sophisticated new refining techniques such as hydrocracking. These refining processes enable a refiner to produce a higher volume of gasoline and jet fuel from a given barrel of crude oil.
Heating oil production, as a consequence, has declined as a percentage of refinery runs because it is less valuable to the refiner than the higher value alternative products. Only a sharp upward spiral in heating oil prices will induce a refiner to produce more home heating oil. And, of course, it has been just such a persistent upward trend in home heating oil prices which has characterized the market place over the last six years.
Nor is there any reason to suspect that this trend will change under the newly proposed tariff system. There is, and will continue to be, a structural disequilibrium in the refining sector of the industry reflecting the economic attractiveness of products like gasoline compared to lower value products such as home heating oil.
Under the tariff system a refiner paying a relatively high tariff, say, $1 per barrel, to import crude oil, is going to want to continue manufacturing as high as possible a percentage of gasoline and as low as possible percentage of home heating oil. Only further price increases in home heating oil will change this equation and that is not a palatable alternative.
It is understood that under the proposed tariff system product imports will be limited by subjecting them to a tariff equal to the sum of the new national security crude oil tariff plus the normal tariff currently applicable to refined product imports. In the case of home heating oil if the lower preferential tariff favoring Western Hemisphere crude oil were set at say $.70 per barrel, then the tariff to be applied to imports of Western Hemisphere home heating oil would be $.80 per barrel (the $.70 crude oil tariff plus the current $.10 refined home heating oil tariff).
Currently, a tariff level on home heating oil imports of about $.80 per barrel would encourage such imports and would result in considerable consumer savings as prices were reduced domestically to reflect this incremental supply source. We would expect prices to fall between $.50,$.60 per barrel generating a consumer savings of approximately $275 million to $340 million annually.
As beneficial as these results would be, if nothing else is done there will be a positive incentive created to build more refinery capacity offshore rather than here at home. In short, we shall be still exporting our refining capacity and the jobs and industrial development associated with such capacity.
FOREIGN TRADE ZONE IN A TARIFF SYSTEM
Refineries operating in Foreign Trade Zones could be useful vehicles to encourage production of heavy fuel oil and home heating oil here at home. Zones are basically far more compatible with a tariff system than with a quota system and it is believed that properly supervised Zone refineries within the general tariff system would contribute to our security objectives, encourage the production of low pollutant, low sulfur heavy fuel and home heating oil and assist in solving the economic problems of depressed areas in certain sections of the country, particularly in the Southeast, New England, the Pacific Far West and Hawaii.
HOW ZONES COULD WORK IN A TARIFF SYSTEM
The following relatively simple steps would be all that is necessary to encourage Zone refineries:
1. Foreign Trade Zones Board, the interdepartmental group responsible for approving Zone applications, could establish guidelines requiring Zone refineries to produce certain minimum quantities of heavy fuel oil and home heating oil, say 45% and 35% respectively. It could also require that gasoline output at least in East Coast Zone refineries should not exceed say 10-15% of refinery output.
2. The Foreign Trade Zones Board in line with the general thrust of new tariff proposals favoring the Western Hemisphere, could require that Zone refineries use, say 60% Western Hemisphere crude oil supplies.
3. Zones could be exempted from the new national security tariff on refined products. This could be done by making the new higher refined product tariffs applicable only to refineries physically located outside the U.S.
4. With the above guidelines in operation, all that has to be done to make Zone refineries attractive is to repeal the 1965 Proclamation which took oil operations out of Zones and made oil a special case. In other words, allow oil to be handled like any other product in a Zone. No new rules or regulations would be required. The present regulations governing all manufacturing operations except for oil, already provide that a Zone operator can import raw material free of duty. Any exports from the Zones to foreign countries similarly are free of duty. When an operator exports products into the U.S. customs territory, he has an option of paying either the applicable raw material tariff or the tariff on finished products. The current tariff level on home heating oil is 10.5¢ per barrel and on gasoline about 53c per barrel. Since both of these tariff levels are lower than the assumed new crude oil tariff, say $.70-$1.00 per barrel, the Zone operator would obviously opt to pay the product tariffs.
The tariff differential favoring zones would provide an incentive for some companies to undertake construction of the kind of refinery needed both from a defense standpoint and in areas such as New England where the oil demand pattern is heavy weighted toward heavy fuel and home heating oil rather than gasoline.
All of the above suggested rules can and should apply on a non-discriminatory basis to all refineries. There would be no need for special treatment. Each oil company may then decide, depending upon its own product demand pattern whether to pay the new crude oil tariff and build a gasoline oriented refinery outside a Zone or pay the lower product tariff and build a heavy fuel oil refinery inside a Zone.
Mr. McINTYRE. Mr. President, 1 year ago this week, Secretary of Commerce C. R. Smith dealt a cruel blow to the hopes of all New Englanders for lower home heating oil costs. Smith, as Chairman of the Federal Trade Zones Board, announced on December 13, 1968, that Maine's application for a foreign trade zone at Machiasport was too important a matter for an outgoing administration to deal with, and that he planned, therefore, to take no action on it.
Smith's announcement was a real shock to me at the time. I had been assured repeatedly in the preceding month that a decision on Machiasport would be forthcoming before the year's end.
More important, and as I indicated at the time, Smith had no authority to make the decision he did. It was true, as he suggested, that Maine's application had important implications for the long range future of the oil import control program. But this program -- then as now -- was under the direction of the Department of the Interior. The Foreign Trade Zones Board, on which Smith's authority rested, had no discretion to consider peripherally related matters. The Board's enabling legislation clearly states -- and Federal court decisions have held -- that a foreign trade zone "shall" be granted to any qualified applicant.
My response at the time was to convene hearings of my Small Business Subcommittee to investigate this roadblock in the way of Maine's application. These hearings were successful in getting consideration of the application under way once again. For a while it looked as though action might be taken before the Johnson administration left office. Slowly, almost inexorably, time slipped away, however, without anything happening. I was then informed, some months after President Johnson left office, that he had given an order to kill the application.
In the months since, the Nixon administration has also continued to stall. It, too, has used the excuse that an overall review of the oil import program has to be completed before a decision on Machiasport can be made.
Last spring, President Nixon promised that this review would be completed and a decision on Machiasport made "before the snow flies in New England again." Judging by recent weather reports from New England, the President has failed to deliver on this promise.
Press reports in recent weeks, indicate, however, that a decision may yet be forthcoming before Christmas. It has been a long, hard and frustrating year, but these reports now indicate that it may still prove worthwhile. The administration, it seems, has tentatively decided to scrap the present quota system for a tariff arrangement which would greatly increase the amount of low-cost foreign oil available for import into the United States. It will indeed be a happy holiday season for all New Englanders if the hopes presaged by these press reports are in fact borne out.
They will be borne out only if a liberalization of the oil import program is accompanied by the increased use of foreign trade zones. As I pointed out in a recent letter to Secretary of Defense Laird:
By their nature, refineries located in foreign trade zones require Federal approval. Thus the Federal government is in a position to impose the terms under which such zone refineries can operate. The Government could spell out conditions which would enable them to achieve national foreign policy, defense, and economic objectives.
The important role which foreign trade zones will have to play in any viable oil import program has been reinforced by information brought to my attention in recent days. An article in the November 10 issue of the Oil and Gas Journal discusses the likely trends in our domestic oil refining capacity. It points out that the economic incentives on which non-zone refineries operate are such that a decreasing percentage of this yield will be devoted in the future to petroleum products in the mid-distillate range. This is of great urgency to us in New England since home heating oil is the largest single product in that range. The implication is clear: if market forces are left to themselves, sufficient oil to heat our homes will be produced in the future only at increasingly higher prices.
Foreign trade zones may be the only viable solution to this problem. The Government can so regulate the refineries in these zones as to give them incentives to produce the required amount of home heating oil.
Thus, on this first anniversary of Commerce Secretary Smith's cruel blow to our hopes for Machiasport, I remain optimistic that something will be done. As the article to which I have referred indicated, the need, if anything, is even greater than it was then.
Mr. President, I have joined the Senator from Massachusetts (Mr. BROOKE) in asking unanimous consent that the article published in the Oil and Gas Journal be printed in the RECORD.
Mr. PASTORE. Mr. President, we are close to a decision on oil import policy. Soon President Nixon will act on the recommendations of his Cabinet task force on oil import control. The submissions, letters, and telegrams have been presented by the hundreds for the record, many meetings have been held with supporters and opponents of the present program, and thousands of words have been written on this complicated subject. In spite of all the complications and all the arguments back and forth, the issue that concerns my State, my region, and, in fact, the whole Nation remains clear. It is a simple one -- whether the burden of this program is to be borne by all the people, whether it is to be borne equally by all citizens and all States and all regions.
For 10 years, this has not been true. We in New England have borne far and away the heaviest burden, the heaviest cost of this program. We, who consume so many petroleum products, and are the highest consumers of heating oil, have been forced, by this massive program of Government control, to pay the highest prices in the Nation. The Office of Emergency Preparedness confirmed this fact in a compelling study issued only a few weeks ago. But we have known it all along, and we have said it all along; and we now demand action, answers, and relief.
The facts are: the per capita cost of the oil import program -- in higher prices for gasoline, heating oil, and other petroleum products -- is more than $25 per person per year. That is the national average, and it means that every family of four has $100 taken out of his pocket each year to benefit the big oil companies.
But what is the story in New England?
I should like to run down the list of annual per capita costs:
Rhode Island, $35; Connecticut. $3i.79; Massachusetts, $37.50: Vermont, $48.98; New Hampshire. $42.09; and Maine. $44.23.
In every State in New England, we pay not just a little bit more, but a great deal more than the national average; and when this is multiplied by 4 to measure the burden on the average family, it can be seen what I am talking about.
The people of Rhode Island pay 40 percent more -- I repeat, 40 percent more -- for basic products such as gasoline and heating oil. This is wrong, and something must be done about it. And something can be done about it.
All we are asking for is simple justice and simple equity. All we are seeking is a simple solution that will provide us with more heating oil at lower prices.
The people of New England have waited too long for an answer to their problems. A year ago this week, we were, by unilateral decision of the Secretary of Commerce, denied our chance for quick approval of a proposal to build a refinery in a foreign trade zone at Machiasport, Maine.
We hope that our long wait is at an end and that our proposals for relief will be accepted and approved and put into effect as a result of the study of the Cabinet task force on oil import control. A simple and direct way of solving the heating oil problem would be to provide substantial, assured allocations for the importation of low-cost home heating oil to independent deepwater terminal operators. Such a solution would combat the continuing inflationary spiral in the price of home heating oil and strengthen the competitive position of independent deepwater terminal operators, who must compete with the powerful, entrenched major oil companies.
Mr. President, I ask unanimous consent that a telegram sent to the Cabinet task force this week, relating to the impact of a tariff system on independent deepwater terminal operators, be printed in the RECORD.
To repeat: The President can provide the answer. He can do so by providing substantial additional amounts of home heating oil at reasonable prices. There is nothing difficult about this answer, and I hope he will act soon.
I can assure the Senate that we have fought too long and fought too hard, and this battle is too important, to quit now. We are in this to win, and, Mr. President, I think we will.
There being no objection, the telegram was ordered to be printed in the RECORD, as follows:
DECEMBER 9, 1969.
Hon. GEORGE P. SHULTZ,
Chairman, Cabinet Task Force on Oil Import Control,
Washington, D.C.:
In your consideration of tariff system as substitute for present quotas, we urge recognition of the following facts:
(a) High tariffs on finished product imports (heating oil) would provide no relief for independent deepwater terminal operators or for consumers, as access to reasonably priced overseas supplies would be very limited or non-existent.
(b) A tariff system for crude, with no provision for additional imports of heating oil. would create even more serious situation than at present. Reasons: Regardless of tariff level set for crude. continuing improvement in refining technology will enable U.S. refiners to make increasing quantities of gasoline. jet fuel and other products, and smaller quantities of home heating oil. Refiners will make more heating oil only if its price rises to level of jet fuel and gasoline.
(c) In sum, if under new program, independents are denied regular access to overseas supplies of heating oil at reasonable prices, and U.S. refiners continue reduction in heating oil output, independent deepwater terminal operators will face the same problems of high prices and competitive inequity vis-a-vis majors set forth in our Submissions to Task Force of July 15 and August 15. And our chances for survival will be dim.
ARTHUR T. SOULE,
President, Independent Fuel Terminal Operators Association.