at 12 percent rate of return. This would be the cost to the Government. The plants would be operated by private industry and the operating costs would be private costs, not Government costs.

It is anticipated that by 1974 private industry would start investing their own money in similar plants, the first of which would come on stream in 1976, and that by 1980 production from these plants would be about 900,000 barrels per day. A guaranteed subsidy of $0.98 per barrel from plants utilizing present technology would be necessary to induce industry to invest. Plants utilizing improved technology would require only $0.12 a barrel subsidy.

If the improved technology is incorporated into the plants coming on stream in 1978 (Case II) the cost to the Government per barrel of oil produced in 1980 will be $0.51. If the improved technology is not introduced until 1979 (Case I), the cost to the Government in 1980 will be $0.68 per barrel of oil from shale. The above summary is supported in detail in the attached paper, "Estimated Cost and Producing Capacity of a Government Assisted Shale Oil Industry, 1970-1980.”

STEEL TANK STORAGE

The cost of building and maintaining in steel tank storage, a 6 or 12 month supply of crude oil would be 98¢ per barrel per year.

Two-thirds of the cost is attributable to the cost of building steel tanks of various sizes with accessory equipment capable of storing a 6 or 12 month supply of crude oil deliverable at a rate of 6 million barrels daily in 1980, 5 million barrels daily in 1975. The investment in material and labor would cost out at 66¢ per barrel per year based on a capital recovery factor of 20 years at a rate of return of 12 percent.

The carrying costs on the approximately 1.1 billion barrels of crude oil for strategic storage accounts for approximately one-fourth of the total unit cost, 24¢ per barrel per year. The cost is based on a crude oil price of $2.00 per barrel and a 12 percent rate of return.

The unit cost of operating the strategic crude oil stored in steel tanks as a working inventory amounts to 8¢ per barrel per year, or slightly more than 8 percent of the total cost.

The assumption and procedures part of the attached report indicates that the use of steel tanks is feasible and discusses the factors which influence storage capacity costs, exclusive of crude oil costs. In addition, the costs do not include any significant change in the supply distribution system inasmuch as the strategic storage system could be integrated to a great extent in the current storage pattern.

OIL FROM COAL

Synthetic crude oil from coal can be produced for sale f.o.b. plant, employing existing technology and allowing credits for byproducts (fuel oil, ammonium sulfate, and sulfuric acid) for an estimated $3.35 per barrel. This selling price is based on various assumption and allows the producing firms a rate of return of 12 percent over a 20-year amortization period. Total capital expenditures for a 100,000 barrel per day plant, the optimum size operation from the standpoint of efficiency, production costs, siting, and other factors, is estimated at $400 million exclusive of coal mines and refining facilities for processing the crude into finished products. Delivered coal costs, which generally represent about 35 percent of plant operating costs, are estimated at $3.50 per ton. The coal conversion plant is expected to operate 330 days each year and annual requirements of raw materials and utilities would approximate 11.5 million tons of coal, 21,384 million gallons, or 65,256 acre feet, of raw water, and 1,584 million Kwhr of electric power. Approximately 350,000 tons of steel products, including an undetermined amount of stainless and special alloy steel, are required for each plant. Manpower requirements for each coal conversion plant, including the steam-power plant, would amount to roughly 290 production workers and 30 supervisory and administrative personnel.

A synthetic liquid fuel industry geared to produce 1.0 million barrels of synthetic crude oil per day would need 10-100,000 barrels per day plants and 30 large coal mines which combined would represent total capital expenditures of $4 to $5 billion. Annual coal requirements would amount to approximately 115 million tons or about 21 percent of the 1968 production of bituminous coal. Steel products needed to equip the mines would amount to more than 300,000 short tons. Manpower requirements to operate the mines could range between 9,200 and 12,600 workers depending on type of mining employed. Roughly 80 percent of the workers

would be skilled or personnel having had specialized training or experience in operating the highly mechanized equipment used in modern coal mines. The first coal conversion plant could be placed in operation by January 1, 1975, and all other 9 plants would be in operation or under construction by January 1, 1980. For a 500,000 bbl/day capacity, 1,825 million barrels of reserves must be found. Case I was calculated on the basis of fully supporting an exploration industry one half the size of the average recent U.S. industry. This "average U.S. industry" has found reserves, including new discoveries, secondary recovery, and extensions of existing fields, at the rate of 3,300 million barrels per year for the past nine years. It is assumed that this same industry size could attain an average finding rate of 3,650 million barrels per year. An industry cost rise of 3% per year is typical of the recent past, and has been throughout the series. Thus, for year t, the cash outlay is: (finding cost per barrel in t-1) (1825) (1.03), for year t+1 the outlay is (finding cost per barrel in t) (1825) (1.03), etc.

For each case, two years is the lag between the year of discovery and full production capability. Two years after initiation of exploration, and each year thereafter, until two years after the cessation of exploration, 500,000 bbl/day is added to excess capacity. No attempt is made to distribute the discovery rate according to historical finding patterns; a uniform finding rate of 1,825 million barrels of producible reserves per year is assumed. Per barrel of capacity costs ($.80/bbl at 3.5 million bbl/day, and $.95 at 5 million bbl/day in Case 1; $1.56/bbl at 3.5 million bbl/day, and $1.64/bbl at 5 million bbl/day in Case II) are calculated by distributing the total cash outlay over producible reserves. This is merely a device used to determine per barrel costs and does not take into consideration the initial rate of production, possible field life, the rate of decline in production, or any other factors which may influence ultimate total cost.

SUBSIDIZE OIL EXPLORATION

The estimated approximate costs of finding crude oil. on a per barrel of reserves found basis, are available in a study completed for the Bureau of Land Management by Foster Associates of Washington, D.C. The same reserve finding cost was used in both examples, Case I-the straight subsidy, and Case IIsubsidy plus large field incentive. The basic cost was constructed, from Foster data, by dividing costs between high and low cost areas of exploration. Continental U.S. exploration costs were taken as typical for low cost areas, and offshore exploration costs were considered as typical of high cost areas. The basic finding cost was weighted 80% low cost and 20% high cost. As no reliable far north cost data are available, offshore costs were used for all high costs. If far north exploration increases sharply, the high cost share of basic finding cost may be understated to the extent that far north work is more costly per barrel of reserves found than offshore exploration. The basic cost calculated from Foster data, $.934bbl. in 1967, includes all preliminary costs: scouting, geological and geophysical exploration, rental fees, and all drilling costs-both successful and dry hole, but not lease acquisition costs.

On the basis of 10:1 reserve to production ratio, for at least the first year's production, ten barrels of producible reserves must be found for each barrel of first year capacity. That is, for a one million barrel per day capacity for at least one year, ten times 365 million, or 3,650 million, barrels of reserves must be found.

THE COST OF THE OIL IMPORT QUOTA PROGRAM: A RECONCILIATION OF THE ADELMAN, BLAIR, CHARLES RIVER ASSOCIATES, AND U.S. DEPARTMENT OF THE INTERIOR ESTIMATES

Both Adelman and Blair have taken the cost of the import quota program as the cost to the consumer. Blair's estimate of an annual cost to the consumer of $7.2 billion is merely an updating of Adelman's 1962 estimate of $4 billion. Both used the East Coast value of an import ticket as the basic savings per barrel on imported oil. Both used domestic consumption of crude oil and natural gas liquids less consumption of residual oil as the basic quantity consumed.

For Adelman, the savings per barrel and the quantity consumed for 1962 were $1.25 and 9.4 million barrels per day, respectively. Blair updated these figures to $1.75 and 11.85 million barrels as of 1968. $.09 was subtracted from savings per

1 Adelman, M. A., "Efficiency of Resource Use in Crude Petroleum," Southern Economic Journal, October 1964.

barrel to account for pipeline charges 450 miles inland from the East Coast. (The author assumes one-half of the domestic market would be taken over by imports upon the removal of import quotas. One-half of domestic consumption takes place within 450 miles of the East Coast.) The respective savings per barrel were thus reduced to $1.16 and $1.66. The two cost numbers can thus be reconciled by noting that Blair assumes a $.50 greater cost on each of Adelman's 9.4 million barrels per day plus $1.66 on 2.45 million barrels per day more of consumption. Charles River Associates

2

The Charles River Associates' (CRA) estimate of the cost to the consumer as of 1968 was $6.2 billion. This differed from the Adelman and Blair estimates because different numbers were used and because the concept and methodology were somewhat different. Like Adelman, CRA used $1.25 per barrel as the basic savings from using imported rather than domestic oil and natural gas liquids. CRA, however, did not deduct pipeline charges. Also, CRA used a consumption rate of 12.3 million barrels per day excluding residual fuel. On an annual basis, 12.3×365 days=4.5 billion barrels per year for CRA and 9.4×365=3.431 billion barrels per year for Adelman. CRA assumes $.09/bbl. more savings on Adelman's 3.341 which equals $.3 billion. CRA would also assume an additional $1.25 on 1.1 billion barrels a year more consumption=$1.3 billion or a total difference because of the numbers used of $1.6 billion. Add this to Adelman's $4 billion and we have $5.6 billion.

The remaining difference of $.6 billion is due to a different conceptual analysis. Adelman and Blair take as the cost (saving) to the consumer, the difference between the domestic and world price per barrel of oil times total domestic consumption in the year of analysis. This, however, does not take account of what domestic consumption might be if consumers had been able to purchase oil at the lower world price over the years of the import quota program. The AdelmanBlair analysis does not account for the possibility that consumers may have consumed more oil in 1968 (or 1962) simply because of a lower price of oil. That is, they assumed a price elasticity of demand for oil of zero. Thus, they do not consider, as part of the cost of the import quota program, the value of the additional oil consumers did not consume at the higher price, maintained by the import quota program, but would have consumed if the price were at the lower world price. The CRA report estimated this cost to be about $.6 billion in 1968. This, in turn, was based upon a long-run price elasticity of demand for oil of 0.5. Department of the Interior

In volume 1, part two of the Interior Department's submission to the Cabinet Task Force on Oil Import Control, the Department presented estimates of expected domestic production, consumption, and imports of oil and natural gas liquids in 1975 and 1980, both with and without the oil import quota program. Because of the uncertainties inherent in making six to eleven year forecasts of the effects of structural economic changes (the elimination of the quota program as of 1969), a maximum and minimum estimate of expected domestic oil and natural gas liquids production was made for each of the target years. Table 1, following, presents these estimates.

TABLE 1.-1975 AND 1980 ESTIMATES OF DEMAND, SUPPLY AND IMPORTS OF CRUDE OIL AND NATURAL GAS

1 Includes 365,000,000 barrels per year from Alaska in 1975 and 730,000,000 barrels per year in 1980.

* Includes 526,000,000 barrels of residual fuel in 1975 and 64,000,000 barrels in 1980.

2 Charles River Associates, Inc., An Analytical Framework for Evaluating the Oil Import Quota Program, July 15, 1969.

A Report by the U.S. Department of the Interior to the Cabinet Task Force on Oil Import Control, July 15, 1969, volume 1, parts 2 and 3.

46-365-70-12

In part three, of the same volume, the Department also presented estimates of the cost of the oil import quota program to consumers of oil products, in 1975 and 1980, if the program is continued in its present form. The estimated costs to consumers were put at $2.2 billion in 1975 and $3.5 billion in 1980.

Calculations of these costs have assumed that under unrestricted imports, net raw material cost savings to U.S. integrated oil companies would be reflected in lower consumer prices. Integrated companies would retain present levels of net profit. Much of the economic rent which appears to accrue to the producing sector of the industry under the quota program is absorbed in the transportation, refining and marketing sectors.

Hence, the saving to consumers upon removal of import controls would be less than it would be under the assumption that the full value of the economie rent is reflected in the prices of products under the existing quota program.

Volumes of crude oil used in this calculation assumes the removal of import controls in 1969. Within five years, intermediate adjustments (in known fields) should have been largely accomplished, but adjustments in crude oil production (finding) and in refinery location would have been only partially completed. Thus, this calculation represents an intermediate rather than “equilibrium” cost estimate.

CRA, in its submission to the Task Force, developed an analytical methodology suitable for determining the magnitude of the cost to the consumer, transfers to producers and refiners, and costs to the nation. The application of this methodology, to the data in table 1, yields estimate of the cost to the consumer, nation, and transfer payments depending upon the expected domestic production capabilities if the import quota program were eliminated in 1969. These estimates are shown in table 2. If production could proceed according to maximum expectations without the import quota program, then the cost to the consumer of not eliminating the program in 1969 would reach $7.13 billion in 1975 and $8.13 billion by 1980. These consumer cost estimates are based upon the specific assumption that the prices of petroleum products, under the quota program, reflect the full value of the economic rent.

The cost to the nation (resource cost) is less than the cost to consumers, to the extent that the cost to consumers includes transfer payments (economic rent) to domestic producers and refiners. The cost to the nation in resources is equal to the extra cost of producing domestically what could be produced more cheaply in foreign countries and imported to the United States.* Also, the loss of additional consumption which could take place at the lower world prices must be added as part of the cost to the nation. Finally, the inefficient use of resource due to prorationing, which could not continue to exist without the import quota program, must be included in the cost to the nation.

Again, with maximum expectations of production table 2 shows that the cost to the nation would equal $0.77 billion in 1975 and $2.12 billion by 1980. Also, under the same estimate of domestic production capabilities, transfer payments from consumers to producers would increase from $5.65 billion in 1975 to $5.70 billion in 1980 while transfer payments from consumers to refiner will rise from $0.98 billion to $1.03 billion over the same period. Similar estimates are given in the second column under each year for a situation where domestic production would be capable of achieving only minimum expected levels without the import control program.

TABLE 2.-VALUES OF COST BREAKDOWN DEPENDING UPON ASSUMED DOMESTIC PRODUCTION CAPABILITIES WITH NO IMPORT QUOTA PROGRAM

*See the appendix for a more detailed presentation of this and other points.

1. The quantities of oil and natural gas liquids consumed in 1975 and 1980 will be equal to those quantities given in Table 1, above.

2. Under free-trade, the domestic price of crude oil would equal the foreign price at $2.00 per barrel now and in 1975 and 1980.

3. The weighted average cost to U.S. consumers of the oil import program will remain at its current level of $1.30 per barrel.

4. The effective domestic equilibrium price is $3.30 per barrel ($1.30+$2.00= $3.30) and will remain at this level if the import quota program continues.

5. Prorationing could not exist in its present form under a free-trade situation.

6. Elimination of prorationing would reduce production costs an average of $0.40 per barrel.

7. Domestic production would fall off rapidly at a price less than $1.00 per barrel with prorationing in effect and $0.60 a barrel without prorationing ($1.00$0.40 $0.60).

As the purpose of this analysis is to revise the cost estimates inherent in the quantity estimates given in Table 1, the quantity estimates are taken as given. The Charles Rivers methodology is applied to these quantity estimates in order to provide a more thorough estimate of the cost of the import quota program as of 1975 and 1980.

The assumption that the world price of oil will not rise above $2.00 per barrel is based upon a nearly perfectly elastic supply of Middle East and North African oil as shown by Paul Bradley, even with large increases in the demand for it. The fact that the world price is currently below $2.00 per barrel, delivered to the U.S., provides a margin of added conservatism in the second assumption above.

The assumption of a per barrel weighted average cost, to the consumer, of $1.30 for the oil import quota program as of 1969 was arrived at through the use of fairly rigorous techniques. This was done to avoid the possibility of over estimating the program cost by merely taking the value of an import ticket at the East Coast and multiplying it by annual U.S. consumption to arrive at the total annual cost to the consumer. Instead, the weighted average difference between the price of domestic oil consumed, in each of the Petroleum Administration For Defense Districts I-V, and the price of imported oil delivered to the same District location was used as the cost of the oil import program. In fact, the cost of the program was under estimated somewhat. This is so because transportation charges were not applied to domestic oil unless a significant portion of the oil shipped into a District came from a relatively few domestic sources. For example, 55% of the oil going into District II from outside of

Bradley, Paul G., The Economics of Crude Petroleum Production, Amsterdam, North Holland Press, 1968.