of North Slope oil would be $1.25 per barrel. Using a more realistic set of premises, the cost of North Slope crude oil could be as high as $2.75 per barrel. We concluded that without more accurate information, which will not be available for several years, the wellhead cost of North Slope crude oil probably lies somewhere between $1.25 and $2.75 per barrel. A copy of supporting data is included as Attachment III.

To continue to use a low cost figure for North Slope crude oil in the face of conclusive proof to the contrary is irresponsible.

Realistic costs for the exploration and production of North Slope crude oil in the hostile Artic environment coupled with extremely high transportation costs out of the Artic area prove conclusively that North Slope crude oil cannot compete with Middle Eastern crude oil in world markets.

JONES ACT MODIFICATIONS

We recommend that the "Jones Act" be modified to allow foreign flag ships, under U.S. control in times of a national emergency, to move goods between or among the continental United States and Alaska, Hawaii, and possessions. The "Jones Act" has resulted in the U.S. consumer subsidizing the U.S. merchant marine fleet. With the development of North Slope crude oil, considerable additional subsidy will be paid by U.S. consumers. The "Jones Act" modification we recommend would result in lower cost to the consumer without endangering our national security in times of emergency. Further comments on the "Jones Act" modification are included as Attachment IV.

COST OF IMPORT PROGRAM

Much has been written about the "cost" of the import program. We have seen costs quoted from zero dollars up to $5 billion. Unfortunately these figures are often quoted, remembered, and requoted without reference to what they represent. The two costs which are most often quoted are "cost to the consumer" and "cost to the nation." Cost to the consumer is the increased price paid by the consumer based on the difference between domestic and world oil prices. Cost to the nation is the additional cost to produce oil in the United States versus foreign sources.

People who advocate replacing a quota system with a tariff system, and reducing the price of domestic crude oil, quote the cost to the consumer figure to support their position. They overlook two very important points when arguing for a tariff system on this basis.

First, there would be a substantial loss in tax revenues by all levels of government.

Second, it is the cost to the nation and not cost to the consumer which is the accurate measure of the additional cost paid by the U.S. to ensure national security. Russell E. Train, Chairman of the President's Council on Environmental Quality, has made this point and we quote:

"There has ben a great deal of confusion as to the meaning of the figures that have been used to describe the cost of the current oil import control program. Basically, two kinds of costs have claimed most of the attention.

"There is first, the cost to the consumer of the present program. This is measured by the increased price the consumer of oil products must pay because of the existence of an oil security program

"The cost of the program to the nation, often called the resource costs, measures the additional economic resources of labor, materials, equipment, and capital required to produce additional oil in the United States or to provide other forms of emergency oil supplies to the United States . . . This is a net cost to the economy that cannot be made to disappear by passing it around from one sector to another . .

"In the nature of the case, there is a large difference between these two cost figures due to the large element of transfer payments between various parts of the economy. Costs of the present program to consumers have been estimated as high as $7 billion based on 1975 use rates, compared with resource cost of about $1 billion annually. But it is this lower figure-the net cost to the nation after all the transfers from one American pocket to another have been wrung out-that is the true measurement of the premium we are paying to have a reliable oil supply in support of our national security. It appears quite modest in comparision with some of the other cost elements of our national security."

The cost figures used to develop cost to the consumer and nation consider only values directly associated with the oil industry and no related factors, such as natural gas. A study by Stanford Research Institute found there is no net cost of the program to consumers, because of offsetting factors, including an inevitable rise in the price of gas due to increased shortages since 25% to 30% is produced incidentally with the production of domestic crude oil.

REPORT OF CABINET TASK FORCE

Finally, we wish to comment briefly on the report prepared by the Cabinet Task Force on Oil Import Control. We have carefully reviewed every submission and rebuttal received by the Task Force and have carefully studied the report which it prepared.

A specific example of concern to us is the estimate of the future maximum supply available to the United States from domestic and Canadian sources with reductions in the price of domestic crude oil. The Task Force apparently selected the highest estimates which were made for these supply sources and not the most likely estimates as supplied in various submissions to the Task Force. The selection of maximum range production figures from estimates of North American crude oil productive capacity from yet undiscovered reservoirs under adverse economic environments grossly understates the risk of a tariff program to the nation and the consumer.

It appears to us that the Task Force had preconceived thoughts on the subject of import controls and executed careful selectivity when choosing information, whether valid or not, which supported their preconceived notion.

ATTACHMENT I

SUMMARY OF IMPORT PROGRAM MODIFICATIONS

The Mandatory Oil Import Program has been established under Presidential Proclamation 3279, as amended, and regulations to implement the program have been issued from time to time by the Secretary of Interior.

In our opinion the program has been instituted and implemented in such a manner as to serve the objective to restrict the importation of crude oil, finished products and unfinished oils, currently about 21% of demand, and has resulted in the domestic petroleum industry remaining viable and making the required contribution to national security.

We are firmly convinced that an oil import program should be continued and that oil imports should be restricted to a level which will encourage the development of a strong and viable domestic oil industry. To do any less would be gambling with vital national security. Such a program should be firm and sufficiently stable to encourage the large capital risk requirements of a growing industry, but should be flexible enough to permit adjustment to changing conditions without loss of confidence by the industry in long-term objectives.

The present program offers the best base upon which to build the desired type of program. However, in order to strengthen the program in its administrative and equitable aspects, there are several modifications of the program which may be implemented in a revised proclamation and regulations which we would recommend. These modifications, in general form only, are as follows:

ESTABLISHMENT OF LEVEL OF IMPORTS

At the present time the overall level of crude oil imports for a given period is established in Districts I-IV as 12.2% of the estimated production of crude oil and natural gas liquids in such districts. The overall level of imports for District V is established as an amount equal to the difference between the total demand and the total domestic production, both of which are estimated by the Bureau of Mines. However, the following imports are authorized over and above the levels so established:

(1) The excess of Canadian imports above the estimated imports from Canada. (2) Approximately 38,000 B/D of finished products shipped to Districts I-IV from Puerto Rico under Section 15 (a) and (b) of the Regulations (the Common. wealth historical).

(3) Imports in bond, including jet fuel.

(4) Imports to be processed into low-sulfur residual in Districts I-IV under Section 26 of the Regulations, and

(5) All residual oil to be used as fuel and not to be further processed except by mechanical blending.

In our opinion there will be no valid reason for treating District V differently from Districts I-IV in the future and we recommend that all districts be included under the same system for establishing the overall level of imports. However, we recommend that the importation of residual fuel oil be handled in the present manner provided by the Regulations.

In setting the overall level of imports, other than residual fuel oil, we do not believe that such level should be set on the basis of estimated production but should be set on the basis of the difference between the estimated demand of crude oil and natural gas liquids as feedstocks for refineries and petrochemical plants and other uses and the estimated domestic supply of crude oil and natural gas liquids. In establishing the estimated domestic supply, today's relationship between sustained producing capacity and reserve producing capacity should be retained at substantially the present ratios.

In order to promote stability in the producing segment of the industry and to allow for long range planning by the industry as a whole, we would further recommend that the overall level of imports be established in advance for at least three one-year periods, with the first year firm and the following years subject to changes depending upon supply and demand estimates based on more current information.

The estimates of demand and supply for the three one-year periods should be made by the Bureau of Mines and furnished to the Oil Import Administration who should then give public notice of the estimates and propose an overall level of imports for the indicated periods. The public notice should be given to allow at least 30 days for public comment and hearing on the proposals and in time sufficient to permit the definite establishment of the overall level at least six (6) months prior to the effective date of the first firm period.

Such a system would provide for more flexibility in establishing the level of crude oil imports and could take account of changing circumstances, especially increases or decreases in domestic production. However, we recommend that any system adopted should be thoroughly reviewed at least once each decade.

INDIVIDUAL ALLOCATIONS TO IMPORT INTO DISTRICTS I-V

Once the overall level of imports has been established, the problem of allocating to individuals the right to import should be dealt with equitably.

In our opinion the individual allocations to import crude oil into Districts I-V should be granted to refineries and petrochemical plants based upon their inputs in proportion to the overall level of allowed imports. No distinction should be made between a refinery and a petrochemical plant. However, before the allocations are granted on the input basis, the rights of certain individuals to ship products into the United States under existing permanent allocations should be recognized. So also, a certain portion of the overall imports should be reserved for allocation to "starters" under Section 25 of the Regulations and by the Appeals Board as in the past.

Our proposal will eliminate the sliding scale, separate allocations to the petrochemical industry, and historic crude oil and finished product imports. Our proposal will also eliminate the right to import overland Canadian and Mexican oil without a quota ticket.

DEFINITION OF REFINERY AND PETROCHEMICAL PLANT INPUTS

In order to place refiners and petrochemical plans on the same basis insofar as inputs are concerned, to the present definition of "refinery inputs" there should be added the following:

oils."

“Liquefied gases which are converted into other finished products or unfinished since under the present definitions "liquefied gases" charged to a refinery are not allowed as refinery inputs, but liquefied gases charged to a petrochemical plant are allowed as petrochemical plant inputs.

Likewise, since under our recommendations quotas for overland imports will be necessary, the definitions of refinery inputs and petrochemical plant inputs should be changed so that such overland imports actually charged to a refinery

or petrochemical plant are included inputs. Synthetic feedstocks should be included as crude oil in the definition of refinery inputs, so that if and when such feedstocks are available they should be on parity with crude oil.

SPECIAL HANDLING OF SMALL REFINERS AND NORTHERN TIER REFINERS

Our recommendations include the elimination of the sliding scale. There is no reason why the import program should be used to benefit any segment of the refining industry over any other segment. Thus, the small refinery segment of the industry has substantially the same profit level as the large refiner segment, but the sliding scale is responsible for subsidizing the small refiner who is in direct competition with the large refiner. Elimination of the sliding scale in making individual allocations will also eliminate the scramble to spin off small refineries to independent companies so that the small refinery may take advantage of the sliding scale.

Our recommendations also include the provision that overland imports be allowed only with the use of a quota. This would eliminate the uncertainty of the amount of oil that comes in quota free from Canada and Mexico. Historically, the amount of Canadian oil to be imported has always been underestimated which has led to replacement of available domestic production. Likewise, allowing Canadian oil to come into the U.S. without a quota has economically benefited the northern tier refiner to the disadvantage of refiners who rely on domestic production. This situation could lead to unnecessary concentration of refinery capacity along the Canadian Border.

However, we recognize that the use of the sliding scale by the small refiners and the free access to Canadian oil by the northern tier refiners have placed both groups in the position of economically relying upon the continuation of the program in its present form. Therefore, we would recommend a definitive phasing out of these portions of the program within 3-5 years in order to allow such groups to adjust economically to the recommended program.

WESTERN HEMISPHERE PREFERENCES

Our recommendations include the provision that in order to import from any foreign country, whether by overland means or not, a quota ticket must be used. However, we recognize that Canadian, Mexican and other Western Hemisphere oil is considered a more secure source of supply than other parts of the world. Therefore, an essential part of our recommendation would also include the provision that all holders of individual allocations be required to import a portion of their allocation from a Western Hemisphere source. This percentage should be established for each allocation period and would be subject to modification in light of changing circumstances. The Oil Import Administration should establish this percentage at the same time and in the same manner as it establishes the overall level of imports under the procedure referred to above.

IMPORT-FOR-EXPORT

We recommend the establishment of a system whereby if a barrel of domestically produced crude oil or other controlled product, except residual fuel oil, is exported, the exporter whether a refiner or petrochemical producer, be allowed to import one barrel of crude oil to replace it.

In the event North Slope oil is produced in large volumes, this type of program could greatly aid in the economic utilization of such oil by providing greater flexibility by movement in foreign flag vessels, which should be committed to the U.S. in time of emergency, as well as in American flag vessels. It would allow such oil to be marketed in a variety of areas, including Japan and possibly Europe. It will permit a minimum of disruption of the traditional flow of oil into and within the U.S., and will relieve the industry of the need to expend vast amounts of capital for new transportation facilities merely to utilize North Slope oil in the U.S.

Such a system would also encourage the retention and expansion of refinery and petrochemical facilities in the U.S. which would serve both the U.S. and international markets. For example, a northern U.S. refinery or petrochemical plant could serve both Canadian and U.S. markets and Alaskan facilities could serve both Japan and U.S. markets at a more economical advantage than exists today.

46-365-70- 48

The import tickets allowed for exports would be over and above import tickets allocated under the basic system recommended, inasmuch as such import-forexport tickets would not interfere with national security aspects of the program.

OIL IMPORT ADMINISTRATION

The Oil Import Administration has operated most effectively in administering the program when it is considered that the staff has been so small. However, because of the small staff the Oil Import Administration has not been able to police and enforce the regulations adequately. The auditing of refinery and petrochemical plant inputs will become a more important function to insure equitable allocations based on such inputs. Therefore, we recommend that the staff of the Oil Import Administration be increased so that the burden of proper administration of the program will not fall on inadequate numbers of personnel.

ATTACHMENT II

Mr. J. J. SIMMONS, III,

PHILLIPS PETROLEUM Co., Washington, D.C., March 20, 1970.

Administrator, Oil Imports Administration, U.S. Department of the Interior, Washington, D.C.

DEAR SIR: Phillips Petroleum Company submits this letter as comments on the proposed amendment of Oil Import Regulation 1 (Revision 5) which revises Section 23 relating to Canadian overland imports into Districts I-IV.

Our basic position concerning the importation of Canadian crude oil was described in our submission to the "Cabinet Task Force on Oil Import Control". Excerpts from such submission are:

In all Districts I-V, we recommend that the overall level of imports "be set on the basis of the difference between the estimated demand of crude oil and natural gas liquids as feedstock for refineries and petrochemical plants and other uses and the estimated domestic supply of crude oil and natural gas liquids. In establishing the estimated domestic supply, today's relationship between sustained producing capacity and reserve producing capacity should be retained at substantially the present ratios."

"Our recommendations also include the provision that overland imports be allowed only with the use of a quota. This would eliminate the uncertainty of the amount of oil that comes in quota free from Canada and Mexico. Historically, the amount of Canadian oil to be imported has always been underestimated which has led to replacement of available domestic production."

"However, we recognize that Canadian, Mexican and other Western Hemisphere oil is considered a more secure source of supply than other parts of the world. Therefore, an essential part of our recommendation would also include the provision that all holders of individual allocations be required to import a portion of their allocation from a Western Hemisphere source. This percentage should be established for each allocation period and would be subject to modification in light of changing circumstances."

The proposed regulations do not implement our suggestion, but will establish an overall level of Canadian crude oil that may be imported into Districts I-IV with allocation among historical importers and others that can utilize such crude in their refineries.

If an overall level of Canadian crude oil that may be imported into Districts I-IV is to be established, we object to the favoritism in the proposed regulation toward historical importers, and strongly recommend a different basis for allocation.

Under the proposed regulations, historical importers and users of Canadian crude oil would be allowed to import up to 105 percent of the imports during a specified period. As you know, one of the complaints against the Oil Import Program has been that the program favors historical importers and that the phasing out of such favoritism has been difficult to accomplish. Therefore, in establishing a new regulation relating to the imports of crude oil from Canada, we do not believe that upon the institution of new regulations the past mistakes of favoring historical importers should be repeated. We think it has been adequately demon