billion to $5 billion per year in exploration and drilling activities and more than $2 billion annually in producing operations. Most of the exploration and development expenditures are for steel tubular goods, other supplies and equipment, payments to drilling contractors and other servicing companies and businesses that are allied to the individuals, partnerships and corporations engaged in the domestic petroleum producing industry.

A reduction of 3,000,000 barrels daily in domestic crude oil production (1.1 billion barrels annually) would result in a loss of gross revenue to the domestic industry of more than $3 billion per year based on the current average price of about $3 per barrel. A reduction of $1 per barrel or more in crude oil prices, when applied to the remaining production of 6,000,000 barrels daily (2.2 billion barrels per year) would result in a further loss of gross revenue to the domestic producing industry of more than $2 billion per year.

Obviously, a total loss of $5 billion per year in gross revenue to the domestic industry from U.S. crude oil production would necessarily result in substantial curtailment of expenditures by the industry, particuarly for exploration and development activities. On a conservative basis, it is estimated that the loss in income to suppliers, servicing companies and other allied businesses would be at least $2.4 billion on an annual basis.

FEDERAL INCOME TAXES

Preceding estimates show a loss of $500 million in wages to employees in the domestic producing industry. The loss of Federal income taxes that would accompany this loss in wages is estimated at $75 million on an annual basis (about 15 percent of the total loss in wages).

In addition, the above estimates show a loss of $2.4 billion or more in income to suppliers, servicing companies and other allied businesses resulting primarily from decreased expenditures for exploration and development activities by the domestic producing indsutry. Government statistics show that an average of approximately 5 percent of gross revenues received by all U.S. corporations is paid in Federal income taxes. On this basis, the loss in income to suppliers, servicing companies and other allied businesses would result in a loss of at least $125 million in Federal income taxes. The total loss in Federal income taxes from the reduction in U.S. oil production and crude oil prices is estimated conservatively at least $200 million on an annual basis.

U.S. BALANCE OF PAYMENTS

The assumptions set forth in the introduction to this memorandum include an increase of 4,000,000 barrels daily in imports of foreign oil, or a total of about 1.5 billion barrels on an annual basis. The adverse effect of this increase in oil imports in the U.S. balance of trade would be in the order of $4 billion yearly. This would be partially offset by an increase in the inflow of dollars returned to the U.S. from increased foreign operations, dividends and increased purchases from the United States.

It is estimated that the net adverse effect on the U.S. balance of payments would be in the order of $2.2 billion per year.

INCREASED COST TO NATURAL GAS CONSUMERS

Removal of import restrictions on oil would have serious, disruptive and costly effects on the consumers of natural gas.

The Chairman of the Federal Power Commission stated, "Because unrestricted imports would probably lead to higher prices of natural gas to the extent that price incentive will be necessary to restore the gas exploration which would be lost as the result of relaxing the Oil Imoprt Program, the resulting detriment to the gas consumers may substantially offset estimated savings to oil consumers. The fundamental analysis of the Task Force report relates to the effect of relaxing oil import controls on the domestic oil industry without fully considering the impact of its action on the gas industry representing one-half of the petroleum energy complex."

That oil and gas production is one industry is demonstrated by the fact that exploration, development and production of natural gas and oil are not practicably separable. One-fourth of natural gas production is produced in conjunction with oil production. Twenty-two and a half percent of natural gas

reserves are classified as associated and dissolved with oil. The companies and individuals that produce most of the oil also produce most of the gas. In 1968 the regulated pipeline and distribution companies produced only 8.1 percent of the natural gas transported through their systems. (Task Force Report, pg. 370.) Therefore, the companies and individuals engaged in the production of oil account for more than 90 percent of natural gas sold in interstate commerce.

If domestic supplies of gas are not forthcoming, these additional supplies will have to come from increased imports and other supplementary sources. The Chairman, Federal Power Commission stated, "With present technology, costs per million Btu appear to be about 50 cents for synthetic gas from coal and 60 cents for liquefied natural gas imported by ship. The delivered wholesale price of gas in major consuming areas ranges from 20 cents per million Btu near producing centers to 25-35 cents at more distant locations. Domestic natural gas undersells imported LNG and synthetic gas from coal by about 25 cents per million Btu or 50 percent."

If domestic gas supply in relation to demand decreases as the result of less oil exploration due to unrestricted oil imports, the resultant increase in gas prices to induce domestic supply was estimated at from 8.8 cents to 17.6 cents per Mcf by the Chairman of the Federal Power Commission; which means that existing import controls confer annual benefits to the gas consumers at current levels of gas consumption of $1.8 to $3.5 billion.

It can be seen that these offsetting losses to the U.S. consuming public substantially exceed any alleged direct savings to oil consumers from the theoretical and illusory benefits of unrestricted oil imports. In effect, the mandatory oil import program results in a net gainnot loss to the U.S. economy of more than $3 billion per year.

The report, as well as the testimony of Secretary Shultz before the Senate Subcommittee on Antitrust and Monopoly on March 3 and General Lincoln's testimony before this committee on March 9, reflect an erroneous conclusion that oil prices are unduly high and that the conservation laws of the producing States have contributed to these high prices.

The facts refute this conclusion..

The price of domestic crude oil, for the past 80 years, has followed the same general trend as the wholesale price level for all commodities. Neither proration which was inaugurated in the mid-1930's nor the establishment of the limitation on imports in 1959 resulted in increased crude oil prices in relation to the general level of prices for all commodities.

The consistency of this relationship is graphically shown on the following chart entitled "Wholesale price trends: crude oil versus all commodities."

Furthermore, the record of performance shows that the conservation laws of the producing States have resulted in both a lower and more stable price for crude oil in the United States.

The record convincingly disproves the widespread misunderstanding that the conservation laws of the producing States result in higher prices.

The conservation laws have served the consuming public with lower prices for the following reasons:

1. Unregulated production can result in abnormal price variations, as the inherent lag between discovery and production tends to create cycles of oversupply and distress prices followed by the threat of shortages and higher prices. Premature abandonment of reserves and inefficient operations in distress price periods result in reduced supply, a waste to society and higher prices in the long run.

2. Regulations affecting drilling operations and well spacing result in increased efficiency and reduced costs which, in a competitive market,

Source of data: U.S. Bureau of Mines and U.S. Bureau of Labor Statistics.

are reflected in lower prices. The wide spacing of wells under today's efficient practices, with one well per 40 or even 80 acres, is in sharp contrast to the methods of 30 to 40 years ago, when such fields as Signal Hill, in California and east Texas, were developed by thousands of unnecessary wells in close proximity.

3. Regulations to prevent physical waste and to produce within maximum efficient rates increase ultimate recovery and reduce costs. It is an established fact that conservation has increased greatly the ultimate recovery of U.S. petroleum resources which, in itself and axiomatically, results in lower long-term prices.

4. Some States have market demand statutes for setting allowable production within and below maximum efficient rates. The imposition of production restrictions under such statutes has made possible the maintenance of reserve productive capacity which has been of direct benefit to the United States and its allies in a number of serious international emergencies since the end of World War II. Such reserve capacity is also essential to this industry because of the wide seasonal variation in demand for petroleum products.

5. Production restrictions to demand are essential to prevent aboveground waste, and have not usually been applicable to wells in fields of low output, since such wells and fields must be produced continuously at capacity to prevent premature abandonment and loss of

reserves.

This record for the past 80 years further shows that the real price of crude oil has declined under (1) Conservation laws and (2) import controls. The second chart entitled "U.S. Price of Crude Oil" graphically shows this declining trend expressed in constant 1958 dollars. In the 40-year period prior to proration and import controls, the average price of crude oil per barrel expressed in constant 1958 dollars was $2.88.

And the next 25-year period under conservation but no port controls it declined to $2.77.

In the past 11 years under both conservation and import controls, it went down to $2.39.

This is all expressed in constant 1958 dollars.

Thus it can be seen that contrary to widespread misunderstanding prices have been lower, rather than higher, under conservation laws and import controls.

In addition, it should be noted that crude oil prices during the past decade have not increased as much as other commodities. If all prices had followed the crude oil price record, there would be no problem of inflation today, as shown by the following comparison:

I am not going to read this price list since you have it before you. Mr. EDMONDSON. Without objection, it will be made a part of the record.

The domestic petroleum producing industry produces more energy in the form of natural gas than in the form of crude oil. The latest Bureau of Mines report shows that domestic natural gas production represented 53 percent and crude oil production represented 47 percent of total energy produced by the domestic industry in 1969.

Analysis of the combined output of the domestic industry demonstrates the efficiency of the industry in providing the consuming public with low cost energy. The average price of crude oil and natural gas combined in 1969 was about $1.90 per barrel equivalent, as compared with over $2 per barrel for the lowest cost imported oil.

Since more than one-half of the domestic petroleum producing industry's production is in the form of natural gas, it becomes obvious that the task force's disregard of the increased cost to gas consumers that would result from unrestricted oil imports is a glaring oversight in the calculation of total costs to the consuming public.

Removal of import restrictions on oil would have serious, disruptive and costly effects on the consumers of natural gas.

The Chairman of the Federal Power Commision stated:

Because unrestricted imports would probably lead to higher prices of natural gas to the extent that price incentive will be necessary to restore the gas exploration which would be lost as the result of relaxing the Oil Import Program, the resulting detriment to the gas consumers may substantially offset estimated savings to oil consumers. The fundamental analysis of the Task Force report relates to the effect of relaxing oil import controls on the domestic oil industry without fully considering the impact of its action on the gas industry representing one-half of the petroleum energy complex.

That oil and gas production is one industry is demonstrated by the fact that exploration, development, and production of natural gas and oil are not practicably separable. One-fourth of natural gas production is produced in conjunction with oil production; 2212 percent of natural gas reserves are classified as associated and dissolved with oil. The companies and individuals that produce most of the oil also produce most of the gas. In 1968 the regulated pipeline and distribution companies produced only 8.1 percent of the natural gas transported through their systems (task force report, p. 370). Therefore, the companies and individuals engaged in the production of oil account for more than 90 percent of natural gas sold in interstate commerce. If domestic supplies of gas are not forthcoming these additional supplies will have to come from increased imports and other supplementary sources. The Chairman, Federal Power Commission, stated:

With present technology, costs per million B.t.u. appear to be about 50 cents for synthetic gas from coal and 60 cents for liquefied natural gas imported by ship. The delivered wholesale price of gas in major consuming areas ranges from 20 cents per million B.t.u. near producing centers to 25-35 cents at more distant locations. Domestic natural gas undersells imported LNG and synthetic gas from coal by about 25 cents per million B.t.u. or 50 percent.

If domestic gas supply in relation to demand decreases as the result of less oil exploration due to unrestricted oil imports, the resultant increase in gas prices to induce domestic supply was estimated at from 8.8 to 17.6 cents per thousand cubic feet by the Chairman of the Federal Power Commission; which means that existing import controls confer annual benefits to the gas consumers at current levels of gas consumption of $1.8 to $3.5 billion.