CONGRESSIONAL RECORD -- SENATE

September 25, 1969

Page 27083

OIL IMPORT PROGRAM

Mr. KENNEDY, Mr. President, the oil import program, which costs the American consumer some $6 billion a year, is currently being studied by a Cabinet task force. Five U.S. Senators have filed a submission with the task force urging abolition of the program. I believe the submission raises important questions of public policy. I ask unanimous consent that with a covering letter to Secretary of Labor Shultz, it be printed in the RECORD.

There being no objection, the items were ordered to be printed in the RECORD, as follows:

SEPTEMBER 16, 1969.

Hon. GEORGE P. SHULTZ,

Secretary of Labor,

Chairman, Cabinet Task Force on Oil Import Control.

DEAR MR. SECRETARY: Pursuant to notice in the Federal Register July 24, 1969 regarding second-round submissions to the Cabinet Task Force on Oil Import Control, we, the undersigned members of the United States Senate, attach a memorandum presenting our views on the initial submissions to the Task Force by other interested parties.

We submit our memorandum in the hope that it will assist the Task Force in formulating recommendations to the President. We urge that these recommendations be completed at the earliest possible date so that our constituents, American consumers and taxpayers, may be relieved at last of the burden they have been forced to bear for ten long years.

We and they have been encouraged by your work to date and expect that the promise of relief offered by that work will soon become a reality.

Respectfully submitted.

WILLIAM PROXMIRE. EDMUND S. MUSKIE.

SUBMISSION TO THE CABINET TASK FORCE ON ON. IMPORT CONTROL

SUMMARY AND CONCLUSIONS

The Oil Import Program is a costly departure from the concept of a free competitive market and can only be justified if it enhances our national security. The burden of proving that the program achieves this objective, and is the best method of achieving it, should rest upon those who wish to maintain the program.

Our own analysis of the submissions so far received by the Cabinet Task Force indicates that the proponents of the present program have not met their burden. Other programs which are much less costly are available to assure secure sources of oil for any conceivable emergency.

We conclude that the Task Force should recommend the abolition of the program, immediately if possible, or, at the latest within five years. Whatever timetable the Task Force adopts, it should, at a minimum, recommend the following interim measures:

(1) Immediate decontrol of Western Hemisphere oil imports to the U.S.

(2) Immediate decontrol of home heating oil (No. 2 fuel oil) imports from all sources.

(3) Immediate abolition of "historical" quotas.

(4) Commencement, if necessary, of direct federal programs to assure spare capacity.

The great mass of material submitted to the Cabinet Task Force on Oil Import Control makes a thorough analysis of each submission difficult. Therefore, we have concentrated, as we believe the Task Force should, on the submissions of those agencies charged with serving the national interest, rather than the submissions of private parties which, by and large, reflect attempts to justify the status quo or to promote parochial ends. We believe also that material received from qualified outside sources who are not special pleaders should receive special emphasis in the Task Force's deliberations.

The submissions of the Antitrust Division of the Justice Department and the Charles River Associates (C.R.A.) among others, as well as the economic data received by Senator Hart's Antitrust and Monopoly Subcommittee, demonstrate that the cost of oil import controls is enormous. Estimates vary, but perhaps the C.R.A. figure of $6.2 billion annually is as good an estimate as any. Obviously an annual expenditure of this magnitude must be subjected to careful scrutiny.

As disturbing as the total cost of the program is the fact that the cost is spread so unevenly across the nation: with the Northeast, the Middle Atlantic, the Upper Mid West, the Southeastern coastal states, the Pacific Northwest, and Hawaii bearing a disproportionate burden. In these areas, prices for fuel, such as home heating oil, are far higher than in other parts of the nation, and are kept that way because of the Oil Import Program. In addition, despite the natural advantage its ports would have in terms of access to foreign sources of oil, no new refinery capacity has been built on the East Coast since the imposition of mandatory controls in 1959. As a result, the East Coast, which uses 45 % of the nation's oil, has only 15% of the nation's refinery capacity.

These burdens should not be borne unless truly required in the interests of national security.

Thus, we must carefully examine 1) the national security objectives which are supposed to be served by the program, 2) the extent to which the program actually serves those objectives, and 3) whether the same objectives could be served by less expensive alternative programs.

Although "national security" can be defined in many ways, it is generally conceded that with regard to the Oil Import Program, the term refers to our ability to assure sufficient oil supplies for our potential military requirement. Thus, the views of the Department of Defense are particularly relevant. And, the Department's submission makes several significant points:

First: Apparently without qualms, the Department currently purchases forty percent of its own oil needs from foreign sources (97% of the oil for Vietnam comes from our supposedly least secure source -- the Middle East.) Increasing import restrictions and raising domestic production would probably not alter this situation, since U.S. refinery outputs, which are so heavily oriented to gasoline (47% in 1968), cannot meet U.S. military requirements for fuels which are below the motor gasoline range.

Second: the DOD does not believe that continuity of oil supply would be a significant problem in the aftermath of nuclear war since oil consumption and refining capacity would be so sharply reduced by the nuclear exchange. Nor do limited wars involving some of the producing nations pose a serious threat to our military capability. The foreign sources of oil are increasingly diverse and the denial of such sources is "not apt to be universal" It is most unlikely, for example, that the Caribbean will be affected by a limited war and this area has always increased supplies to the U.S. in times of crisis. It should be noted that the DOD rates Caribbean oil as secure militarily as our own Gulf Coast oil.

Third: The only serious problem in terms of oil shortages would arise in the event of a protracted conventional hostility. Even here, however, DOD states that "In the foreseeable future, partial or complete denial of foreign oil to this nation would not, to any important degree, limit our capability for military action and/or negotiations." DOD does suggest that a protracted conventional war might have a severe impact on the oil situation in Western European nations and in Japan. But clearly we should not bear the cost of assuring these nations an emergency oil supply. As the Antitrust Division submission emphasizes, it "seems inappropriate that the entire cost of allied security needs for oil should fall on the American consumer and taxpayer." There is no justification for this massive form of foreign aid to very prosperous nations.

Fourth: DOD acknowledges that "any type of extended emergency involving the United States and its allies cannot be adequately fueled by the United States alone, and therefore reliance must also be placed upon other free-world resources such as Canada and the Caribbean area.... Our national security dictates that we have in existence dependable, capable, and willing overseas sources to satisfy our petroleum needs on a global basis." Thus, DOD does not believe it is possible for us to achieve self-sufficiency in oil. Its submission argues against the policy of distorting our economy in a futile attempt to achieve such sufficiency. In fact, DOD appear to encourage development of overseas sources as essential to our own security.

The overall impression given by the DOD submission is that increased imports pose no serious threat to United States military interests. Some of those imports would obviously come from areas -- e.g. Canada and the Caribbean -- which DOD already relies on and deems completely secure. The remainder of the imports would come from diverse sources -- Middle East, North Africa, West Africa, Indonesia -- so that any denial of sources would not be "universal."

A careful analysis of the Interior Department's statistics (Table II-1) also demonstrates that there is no pressing national security justification for the present restrictions. Interior estimates that without import controls but with maximum production, domestic crude oil production in 1975 will be only 1.25 million b/d (11.3%) less than it would be if the present controls are retained. In 1980 domestic production without controls would be 3.36 million b/d (26.4%) less than production with present controls. These figures are based on a conservative estimate of the amount of low-cost Alaskan oil that will be produced in the next decade. Furthermore, not all of the projected decrease in production would be permanent; some idle facilities could be re-opened in an emergency. And, finally, much of the imported oil which would account for the decrease in domestic production would come from secure sources such as Canada and the Caribbean.

If it is determined that some special governmental effort is needed to maintain an emergency spare capacity, the Oil Import Program is not the best way to achieve this objective. As the Antitrust Division submission emphasizes, "the preservation of reserve productive capacity is (presently) maintained, if at all, by state regulatory action which is made possible by the existence of the import restrictions." These state measures are designed for a variety of purposes, "e.g. incentives for local industry development, the production of tax revenues, the protection of health and safety, the prevention of waste, and the protection of correlative property rights." They are not designed to meet national security needs. Thus, "it would appear more desirable to insure the existence of adequate reserves by methods under the direct control of the National Government."

Several possible methods of federal control have been proposed. First, the government could construct extensive storage facilities. Since imports will increase only gradually after present controls are eliminated, such facilities could be completed before there is any massive increase in imports. It should be noted that C.R.A. estimates of the annual cost, Mobil places the cost in the 45-60 cent range and Shell Oil places the cost at 64 cents. Under the C.R.A. estimate, we could store 1.2 billion barrels (the Interior Department's projected decrease in annual domestic crude production by 1980 due to removal of controls) for only about $648 million. Second, the government could subsidize or otherwise promote the research necessary to make practicable the exploitation of shale oil and oil from coal in the United States and tar sands in Canada. Third, if pro-rationing is considered the best method of assuring adequate reserves, the government could establish a national system of pro-rationing of large, efficient fields designed to achieve national security, and only national security, objectives. For example, the government could require large domestic producers to operate at 85% of maximum efficient production, which would have only a small impact on the price of U.S. oil but would assure substantial reserve capacity. Fourth, a direct payment could be made to domestic producers based on the number of feet of exploratory wells drilled.

It has been suggested that, in the short run any method of direct federal action will be as expensive as the present import control system. Even if this highly doubtful proposition were so, the direct methods would have two advantages. First, they would impose the costs of assuring adequate reserves equally on all Americans -- taxpayers or consumers -- rather than imposing disproportionate burdens on the consumers of certain regions. Second, they would permit us to make a much more accurate estimate of the costs of assuring adequate reserves.

In the long run, the advantages of direct federal action over import controls are enormous. Based on a projected seven billion barrel annual demand for oil in 1980, the cost of the present program would be approximately $10.5 billion in that year. By comparison, any alternative method is cheap. Equally important, a direct government program would, in the words of the Antitrust Division submission, "avoid the anti-competitive consequences of the present import quotas and state market demand production limitations." It would create an oil industry which "would be tougher, healthier, and more competitive, better able to provide for our needs more efficiently and at a lower cost." Obviously, this is the kind of industry which will best be able to meet our civilian and military requirements in the decades to come.

 

In light of the foregoing analysis we recommend the abolition of the Oil Import Program, immediately if possible, or, at the latest, within five years. A five-year phase-out would clearly provide sufficient time to cushion the economic dislocations in certain areas. Abolition of the program within this period would obviate the need for approval of foreign trade zones to afford relief to American consumers.

Whatever timetable the Task Force adopts, it should, at a minimum, recommend the following interim measures:

1) Immediate decontrol of imports of Western Hemisphere crude oil and refined products. DOD considers all of this oil at least as secure as U.S. Gulf Coast oil which moves to the East Coast by water. Immediate increases in imports of this lower cost oil will reduce U.S. prices and stimulate competition, thereby leading to more efficient production and operation by our domestic industry.

2) Immediate decontrol of home heating oil (No. 2 fuel oil) imports from all sources. The severe burdens which import quotas on this oil imposes on certain sections of the country makes immediate decontrol the only appropriate policy.

3) Immediate abolition of "historical" quotas. The Departments of Commerce and and Interior, and the Antitrust Division, agree there is no justification for the "historical" allocation of quotas.

4) Commencement, if necessary, of direct federal programs to assure emergence spare capacity.