Sidebilder
PDF
ePub
[merged small][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][ocr errors][merged small][merged small][merged small][merged small][merged small][merged small][merged small][merged small]

Figure 1-a, which follows, is an example of what Figure 1 would look like if we assume prorationing would no longer be in effect as of 1975. From column 1 of table 1, we see that 1975 demand will be 5.98 billion barrels per year if the quota program is continued. Just as before, this demand is assumed to exist at a domestic price of $3.30 per barrel and is plotted as such in Figure 1-a. From the same column in table 1, domestic production is given at 4.72 billion barrels per year which is also plotted at a price of $3.30 per barrel in Figure 1-a. Column 2 of table 1 shows that if the program were eliminated in 1969, demand in 1975 would be 6.03 billion barrels. From the previous assumptions, we know that. without the program, the domestic price would equal the world price of $2.00 per barrel. Thus, we have the demand curve (same as in Figure 1) going through the two points determined by a price of $3.30 and quantity of 5.98 billion barrels for one point and a price of $2.00 and quantity of 6.03 billion barrels for the second point. This gives us the demand curve D, in Figure 1-a. If domestic production were to proceed according to minimum production capabilities without the quota program, then column 2 of table 1 indicates domestic production would be 3.21 billion barrels producible at a price of $2.00 per barrel in 1975. Under the new assumption that prorationing would not exist in 1975 with the quota program in effect and certainly would not exist if the program were eliminated in 1969, we know that the two points, given by a price of $3.30 and production of 4.72 billion barrels and a price of $2.00 and production of 3.21 billion barrels, would lie on the same domestic supply curve. This curve is shown as S in The cost to the consumer remains the same as in the previous analysis because the demand curve is the same and therefore, so is the sum of the value of Areas I, II. III, and IV, minus the value of residual fuel imports. The cost to the nation, however, is reduced because we no longer have the wasted resources due to inefficiencies caused by prorationing. The cost to the nation of producing domestically what could be produced more cheaply abroad (Area II) plus the consumer surplus foregone (Area IV) then becomes the total cost to the nation. In Figure 1-a. the value of these two areas is $1.02 billion as opposed to a $2.26 billion cost to the nation given in table 2 which is based on Figure 1. Transfer payments

[merged small][merged small][merged small][merged small][merged small][merged small][merged small][ocr errors][merged small][merged small][ocr errors][merged small][merged small][merged small][merged small][merged small]

from consumers to producers equals the value of Area I and transfer payments to refiners equals the value of Area III minus the value of residual fuel imports. While only Figure 1 has been redone (Figure 1-a) to provide an example of how the method of computing costs changes when the prorationing assumption is changed, table 4 presents all of the new cost estimates for 1975 and 1980 depending upon the assumed domestic production capabilities. Thus, table 4 is merely table 2 only without the assumption that the current inefficiencies due to prorationing will continue to be in existence by 1975 if the quota program is continued.

TABLE 4.-VALUES OF COST BREAKDOWN DEPENDING UPON ASSUMED DOMESTIC PRODUCTION CAPABILITIES WITH NO IMPORT QUOTA PROGRAM 1

[blocks in formation]

Finally, we can think of the import quota program as an instrument for purchasing additional national security. The additional national security purchased equals the difference between :

1. The quantity of oil which would be produced domestically if there were no program and the domestic price of oil equaled the world price of $2.00 per barrel and

2. The quantity of oil produced domestically under the protection of the quota program and a domestic price of oil of $3.30 per barrel.

The additional quantities of domestic production purchased will vary with the assumption made about the existence of prorationing in 1975 and 1980 with a quota program in effect as well as with the assumption made about domestic production capability in 1975 and 1980 if the quota program is eliminated in 1969. Table 5 presents the additional quantities of domestic production made possible by an import quota program which establishes a domestic price of $3.30 per barrel while the world price is $2.00 per barrel. The first row of quantities is derived from Figures 1-4 while the second row can be derived either from table 1 or Figures 1-a through 4-a, of which only 1-a (above) is given. In both cases, however, the quantities shown in table 5 are simply the difference between domestic production available at a price of $2.00 per barrel and domestic production available at a price of $3.30 per barrel. For example, if prorationing would not be effective by 1975, under a quota program, and domestic production would meet only minimum production capabilities if the quota program were dropped in 1969, then the import quota program would allow us to produce 1.51 billion more barrels of oil in 1975 than would have been produced domestically if the quota program were eliminated in 1969. This is obtained from table 1 by subtracting 3.21 billion barrels (domestic production at a price of $2.00 per barrel) from 4.72 billion barrels (domestic production at $3.30 per barrel).

TABLE 5.-ADDITIONAL DOMESTIC PRODUCTION PURCHASED WITH IMPORT QUOTA PROGRAM DEPENDING UPON EXISTENCE OF PRORATIONING AND UPON DOMESTIC PRODUCTION CAPABILITY

[blocks in formation]

To arrive at the cost per barrel of these additional quantities purchased via the import quota program, it is simply a matter of dividing the quantities shown in table 5 into the various costs shown in tables 2 and 4. The results are shown in table 6 on a cost to the nation basis only.

The first row of table 5 is used with table 2 costs and the second row of table 5 is used with table 4 costs. For example, 0.7 billion barrels (table 5) is shown to be the additional quantity which would be purchased by a quota program in 1975 under the assumptions that prorationing would have the same effect in 1975 as it does today if the program continued, and production capability could be maintained at its maximum expected level even if the program were eliminated in 1969. Dividing .7 billion barrels into a cost to the nation of $0.77 billion (table 2, column 1) gives a cost per barrel to the nation of $1.10 (column 1. row 1, table 6). The 2.17 billion barrels given under column 2, row 1, table 5 would be divided into the cost to the nation given in column 2, table 2 to arrive at the per barrel costs of $1.04 shown in column 2, row 1 of table 6. Finally, the second row of table 5 would be used with the cost to the nation items in table 4 to arrive at the per barrel costs shown in row 2 of table 6. Thus, 51 billion barrels (row 2, column 1, table 5) is divided into the cost to the nation given in column 1, table 4 to get the per barrel cost to the nation shown in row 2, column 1 of table 6. 1.51 billion barrels (column 2, row 2, table 5) is divided into the cost to the nation given in column 2 of table 4 to get $0.67 shown in row 2, column 2 of table 6.

TABLE 6.-COST TO THE NATION OF OIL PURCHASED BY THE IMPORT QUOTA PROGRAM DEPENDING UPON THE EXISTENCE OF PRORATIONING AND UPON DOMESTIC PRODUCTION CAPABILITIES

[blocks in formation]

APPRAISAL

FACT PAPER A-1. COST TO THE CONSUMER (R. HOMET)

The consumer cost computed in the fact paper assumes that consumer prices of oil products are determined by the price of the most expensive crude oils which refiners buy. If import controls were removed, oil product prices in the United States would be reduced in proportion to crude oil prices, and U.S. consumers would thereby save $5.6 billion a year in 1975. If Interior projections of supply demand and prices were applied to the fact paper's assumptions, the estimated consumer cost would be more than $7 billion.

In its submittal to the Cabinet Task Force, Interior rejected this assumption because it was not considered to reflect the actual cost and price structures of the integrated oil industry. We assumed instead that integrated companies would reduce consumer product prices by an amount equal to the savings in their raw material costs. This would be the savings which would be realized from substituting foreign crude oil from purchased domestic crude and from imports quota received through exchanges. This value is estimated at $2.2 billion in 1975.

INTERIOR STAFF POSITION

"Cost" estimates must be used with full understanding of the significance and limitations of the assumptions upon which they are based.

The resource cost (cost to the nation), not the consumer cost of oil import controls, should be used in comparing the oil import program with alternative programs for assuring national security in oil. The resource cost represents the value of resources which would be freed for alternative programs if oil import controls were removed. We estimate the resource cost to be $1.02 billion in 1975. If alternative programs were justified on the basis of the consumer cost of import controls, more of the nation's resources would be required for those alternatives, and the value of the national product would be reduced accordingly. The considerable discussion of "cost" of import controls appears to be obscuring the real question-"What would be the cost to the United States, in terms of consumers losing secure supplies of energy products, if security in energy is jeopardized?”

The costs associated with unrestricted reliance on foreign energy sources are largely intangible but nonetheless real. Because extended interruption of energy supply would be intolerable our military power would need to be expanded to ensure freedom of the seas. Dependence on Middle East and North African oil sources would demand that amiable relationships be maintained with Arab nations even at the possible cost of a reassessment of our Middle East policies with consequent diplomatic concessions. In other areas, too, international diplomatic and military options involving energy and energy sources would be sharply curtailed, narrowing the gap between inevitable limited emergencies and ultimate nuclear warfare.

Moreover, most estimates of costs of import controls, including those of the Interior staff, includes cost items which could be saved independent of any import policy. The Jones Act, for example, requires the use of United States tankers and crews in the coastwise transport of petroleum. The resource cost of the Jones Act, as applied to petroleum, is estimated at $150 million to $200 million a year. The "consumer cost" is considerably more, probably twice the resource cost. Repeal of the Jones Act would save the consumer this amount even if import controls are retained.

FACT PAPER B-1. COST TO THE CONSUMER (SUPERSEDES A-1)

Summary:

"APPROXIMATE" COST SAVINGS TO CONSUMERS FROM REMOVAL OF OIL IMPORTS QUOTAS

[blocks in formation]

The analysis in the paper centers on the cost of oil import controls to the consumer of oil. The basic estimates, above, therefore do not include allowances for costs and benefits which accrue to other parts of the economy. These include the effect of oil import restrictions on lease bonuses and royalties paid to the Federal Government; supplies and prices of natural gas; levels of U.S. oil consumption; U.S. balance of payments; social funds associated with special import allocations; and world crude oil prices. The paper estimates that a $0.15 rise in world oil prices would reduce the consumer cost of existing quotas $632 million; a $0.15 price decline would increase consumer costs by a like amount.

The paper differentiates between consumer costs and resource costs, noting that the difference between them represent transfers from consumers to landowners. It emphasizes consumer costs because "we do not sanction the transfer of value from one group of citizens to others in the absence of clear public policy justification."

APPRAISAL

The consumer cost computed in the fact paper assumes that consumer prices of oil products are determined by the price of the most expensive crude oils which refiners buy. If import controls were removed, oil product prices in the United States would be reduced in proportion to crude oil prices, and U.S. consumers would thereby save $6 billion a year in 1975. If Interior projections of supply demand and prices were applied to the fact paper's assumptions, the estimated consumer cost would be more than $7 billion.

In its submittal to the Cabinet Task Force, Interior rejected the assumption because it was not considered to reflect the actual cost and price structures of the integrated oil industry. We assumed instead that integrated companies would reduce consumer product prices by an amount equal to the savings in their raw material costs. This would be the savings which would be realized from substituting foreign crude oil from purchased domestic crude and from imports quota received through exchanges. This value is estimated at $2.2 billion in 1975.

INTERIOR STAFF POSITION

The resource cost (cost to the nation), not the consumer cost of oil import controls, more of the nation's resources would be required for those alternatives, programs for assuring national security in oil. The resource cost represents the value of resources which would be freed for alternative programs if oil import controls were removed. We estimate the resource cost to be $1.02 billion in 1975. If alternative programs were justified on the basis of the consumer cost of import controls, more of the nation's resources would be required for those alternatives, and the value of the national product would be reduced accordingly.

REPORT THE ESTIMATED COST OF CRUDE OIL STORAGE IN SALT DOMES

(By T. M. Garland, J. A. West, A. J. Warner)

SUMMARY

The cost of building and maintaining in salt dome storage, a 6 or 12 month strategic supply of crude oil would be 39 cents per barrel per year.

The largest component in the cost of a salt dome storage system would be the six or twelve month supply of crude oil deliverable at a rate of 5 or 6 million barrels daily plus an additional 5 percent, estimated to be unrecoverable from the salt dome storage. Based on crude oil cost of $2.00 per barrel and a 12 percent rate of return, the estimated cost of a barrel of stored crude oil would be 25 cents per barrel per year, slightly less than two-thirds of the salt dome storage unit cost.

Approximately one third of the cost of the program, 13 cents per barrel per year, is attributable to the cost of leaching the storage capacity and maintaining an oil recovery system in the salt dome storage units, each having a capacity of 5.25 million barrels of oil. A 25 year useful life plus a 12% rate of return was used in the capital recovery calculation.

The cost of operating the salt dome storage system amounts to about one cent per barrel per year, or approximately 3 percent of the total cost. Since the oil stored in salt domes would not be a working inventory, the operating cost is low.

« ForrigeFortsett »