OIL IMPORT CONTROLS MONDAY, MARCH 16, 1970 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MINES AND MINING OF THE COMMITTEE ON INTERIOR AND INSULAR AFFAIRS, Washington, D.C. The subcommittee met, pursuant to call, at 9:45 a.m., in room 1324, Longworth House Office Building, Hon. Ed Edmondson (chairman of the subcommittee), presiding. Mr. EDMONDSON. The subcommittee will come to order. This is the third in a series of hearings on Oil Import Controls and on the presidential policy with regard to Oil Import Controls. This morning we have a very imposing list of witnesses, representing leadership in the oil and gas and coal industry, and we are going to endeavor to hear at least four or five of these witnesses this morning. I might suggest to our staff, in the interest of cooperation with the press, that it should be possible at least to release to the press the statements of our first four witnesses, once we get the hearing underway. And I think we certainly can get through four this morning, possibly five or six. Our first witnesses this morning will sit as a panel of two, Mr. Robert E. Mead, the president of Independent Petroleum Association of America, and Mr. Robert Burch, president of the Rocky Mountain Oil & Gas Association. Mr. Mead and Mr. Burch, if you would, take the witness chairs, please. STATEMENT OF ROBERT E. MEAD, PRESIDENT, INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA; ACCOMPANIED BY ROBERT BURCH, PRESIDENT, ROCKY MOUNTAIN OIL & GAS ASSOCIATION Mr. EDMONDSON. Do you care to have any of your very competent and able staff join you? I see Dan Jones on the front row there. Dan or anybody else you would like to have with you? Mr. MEAD. Thank you, I think we will use them for research troops. Mr. EDMONDSON. All right, sir, fine. Mr. MEAD. Mr. Chairman and members of the committee. It is a privilege to testify before you today. Since I have been already introduced, I will not repeat it. I am from Dallas and chairman of the Macdonald Oil Corp., which is an independent company engaged in oil and gas production. My appearance here today is on behalf of the Independent Petroleum Association, which is a national trade association, with some 5,000 members, representing independent producers of crude oil and gas, including land and royalty owners in oil producing areas of the United States. INDEPENDENT PETROLEUM ASSOCIATION OF AMERICA, Washington, D.C., March 25, 1970. Hon. ED EDMONDSON, Chairman, Subcommittee on Mines and Mining of the Committee on Interior and Insular Affairs, Washington, D.C. DEAR MR. CHAIRMAN: Several oil and gas associations have requested that Mr. Mead's testimony on oil import controls presented on Monday, March 16, show that they support the position of the Independent Petroleum Association of America. It is therefore requested that the enclosed insert be made in the transcript of the hearing. Very truly yours, L. DAN JONES. I have been authorized to request that the record show that the following oil and gas associations support the views expressed in my testimony: 1. Bradford District Pennsylvania Oil Producers Association 2. Independent Oil and Gas Producers of California 3. Kentucky Oil and Gas Association 4. New York State Oil Producers Association 5. North Texas Oil and Gas Association 6. Ohio Oil and Gas Association 7. Oklahoma Independent Petroleum Association 8. Pennsylvania Grade Crude Oil Association It is our opinion that there are three fundamental conclusions in the Cabinet task force report that cannot be justified: First, the cost of the oil import program amounts to $5 billion per year. Second, a substantial reduction in U.S. crude oil prices and greatly increased reliance on foreign oil will not endanger national security. Third, consumers of natural gas would not be affected by reduced oil prices or increased oil imports. My testimony is directed primarily to the first conclusion. Mr. Bob Burch will testify for the association as to the impractical and dangerous aspects of the second basic conclusion. Both Mr. Burch and I will comment briefly on the third unrealistic conclusion. That the import program cost $5 billion annually, and this will increase substantially in the future. The report states, paragraph 207, that in 1969 consumers paid about $5 billion more for oil products than they would have paid in the absence of import restrictions. This, we believe, is pure theory. It rests on the questionable and dangerous assumption that foreign oil would continue to be available. at today's low prices. In view of past experience and existing conditions in the Middle East, Africa, and South America, is it reasonable to assume either that the price of foreign oil will not increase, or that foreign oil will be available to the United States at all times? We do not think so. I do not believe that practical men, looking at the realities of the political unrest in those areas of the world, would find it wise to place U.S. consumers at the mercy of foreign governments. Even on the questionable assumption that foreign oil would be available at today's low prices, however, there would be tremendous off-setting losses to the U.S. economy. The more direct and important of these offsets have been estimated on a conservative basis and are summarized as follows: 1. Loss in local and State production taxes. 2. Loss in bonuses, rentals, and royalties from Federal lands. 3. Loss in royalties to other landowners__. 4. Loss in wages to employees in domestic producing industry- Million $350 450 700 5. Loss in income to suppliers, servicing companies and other allied businesses Now, this is very difficult to estimate, and we do not know whether it is high or low. We feel that the economic rollover may be quite greater than that. As you create a depression in an industry, you reduce the amount of money that people have to spend on other consumer goods and services. 6. Loss in Federal income taxes from above reductions in activity. Total 500 2,400 200 2, 200 1,800 8, 600 Now, the balance of payments perhaps is not quite the same type of loss that the others are, but it is certainly a significant figure. These offsetting losses are documented in appendix A, attached, which I do not intend to read. In the sake of time, it is requested that the appendix be incorporated in the record. (App. A follows:) Appendix A EFFECTS OF UNRESTRICTED OIL IMPORTS ON U.S. OIL IMPORTS It is estimated that the removal of import restrictions would result in substantial reductions in domestic production and even greater increases in imports to meet increasing demands. A decrease of 3,000,000 barrels daily in U.S. crude oil production, with an increase of 4,000,000 barrels daily in imports due to increasing demand could be expected within a period of four to five years. The adverse effects of reduced domestic production and increased imports on the U.S. economy are analyzed in the following sections of this Appendix. STATE AND LOCAL PRODUCTION TAXES State and local severance, production and ad valorem taxes are levied on oil in producing states. An analysis by a recognized authority has been made of these taxes showing that they average approximately 20 cents per barrel for total U.S. crude oil production.1 Based on the above estimate that U.S. crude oil production will decline by 3,000,000 barrels daily, there would be a total reduction of 1.1 billion barrels per year. This loss in production, using the average production taxes of 20 cents per barrel, would result in a tax loss of $220 million. In addition, the remaining 6.000.000 barrels daily of domestic production would be sold at a reduction of $1.00 or more in prices. Analysis of ad valorem taxes on production shows that this reduction in price would result in an average loss in taxes of approximately 6 cents per barrel. On this basis, the 6,000,000 barrels daily of domestic production (2.2 billion barrels per year) would be subject to a tax loss of $130 million annually. The estimated loss in State and local production taxes, therefore, would be $220 million as a result of reduced production and $130 million as a result of lower prices, or a total estimated tax loss of $350 million on an annual basis. BONUSES, RENTALS, AND ROYALTIES FROM FEDERAL LANDS Oil production from Federal lands now exceeds 1.5 million barrels daily." Approximately half of this amount is produced from leases on the Outer Con 1 Percentage Depletion for Petroleum Production, by Richard J. Gonzalez, presented to the Committee on Ways and Means, House of Representatives, December 1. U.S. Department of the Interior, Geological Survey, Conservation Division. tinental Shelf. The latest figures show that the Federal Government received approximately $300 million per year in royalties from production on public lands, with $180 million in royalties from production on the Outer Continental Shelf and $120 million in royalties from production on other onshore public lands. As in the case of production on private lands, it is estimated that a reduction of $1 per barrel or more in the price of crude oil and an increase of 4,000,000 barrels per day in imports of foreign oil would result in a substantial curtailment of exploration, leasing, development and production of oil and gas on federal public lands. During the past two years, the Federal Government derived almost $1.0 billion per year from the sale of federal leases on the Outer Continental Shelf. Over a longer period of years, this revenue has averaged $200 million to $300 million per year. It is estimated that the reduced price for crude oil and the greatly increased imports would result in a loss of at least $300 million per year in lease sales on the Outer Continental Shelf that would otherwise be made. In addition, the reduction in development and production on Federal lands, both onshore and on the Continental Shelf, and the reduced price for crude oil would result in a loss of royalty payments to the Federal Government of $150 million per year. The total estimated loss in lease bonuses, rentals, and royalties on Federal lands, therefore, is estimated to be approximately $450 million per year. ROYALTIES TO OTHER LANDOWNERS Total current oil production on private and State lands average about 7,500,000 barrels daily (total U.S. production of 9,000,000 barrels daily less production of 1,500,000 barrels daily on Federal lands). This production on private and State lands totals 2.7 billion barrels on an annual basis. With royalties averaging approximately 15 percent of total production, private and State royalty owners account for about 400,000,000 barrels per year of total U.S. crude oil production. It is estimated that the reduction in total U.S. production and the increase in imports would result in a reduction of about 150,000,000 barrels per year in the royalty owners' production. At the current average crude oil price of about $3 per barrel, this would result in an estimated loss to royalty owners of $450 million per year. In addition the reduction of $1 per barrel or more in crude oil prices, when applied to the remaining royalty owners' production of 250,000,000 barrels annually, would result in a further loss of at least $250 million annually. The total loss in royalties to private landowners and royalties from State lands, therefore, is estimated to be in the order of $700 million per year. EMPLOYMENT IN THE DOMESTIC PRODUCING INDUSTRY Figures compiled by the U.S. Bureau of Labor Statistics show a total of 275,000 employees engaged in the domestic oil and gas producing industry, at an average wage of approximately $7,000 per year. Total wages paid to employees in the domestic producing industry, therefore, amount to approximately $2.0 billion on an annual basis. As shown above, it has been assumed that total domestic crude oil production would decline within a few years from about 9,000,000 barrels per day to no more than 6,000,000 barrels daily, or a reduction of one-third. Because of the reduction of $1 per barrel or more in crude oil prices, and the resulting tremendous losses in revenue to the domestic industry, there is little doubt that exploration and development activity in the United States would decline by a much greater percentage than the one-third decrease in production. A reduction in total employment in domestic exploration and development and producing operations of 25 percent to 30 percent within the next four to five years, therefore, is believed to be conservative. This would result in a loss of wages to employees in the domestic producing industry of at least $500 million per year. INCOME TO SUPPLIERS, SERVICING COMPANIES AND OTHER ALLIED BUSINESSES Data collected from industry sources, as shown in published reports of the Joint Association Cost Surveys, show that the domestic industry spends $4 Joint Association Survey (Section 2), Estimated Expenditures & Receipts of U.S. Oil and Gas Producing Industry. |