oil that would be imported and since there are incentives for foreign governments to dump oil, as we say in the report, under a periodically adjusted tariff, that the uncertainty that would arise from that, Mr. Chairman, could very well have a dampening or inhibiting effect on capital investment for domestic oil production.

Mr. EDMONDSON. You mentioned serious international problems, economic and political, and you have mentioned the likelihood of dumping during periods when the tariff weight was favorable. What other serious international problems do you foresee as a result of the tariff approach?

Secretary NEHMER. Over the last 11 years the countries of the world, particularly concerned with supplying oil to the United States, have understood the oil import quota system, have learned to live with the system. The introduction of a tariff mechanism would be a new mechanism for the control of oil imports and would not be very well understood.

I was intrigued by the statement recently made by the Venezuelan Minister, who was in Washington, as reported in the press, of great relief over the fact that the tariff system was not introduced.

Also, Mr. Chairman, insofar as the European Common Market is concerned, we have been very critical of the Common Market for its variable systems of levies on agricultural imports into the Common Market. We liken the proposal for a tariff system with the variable levies which we have been very critical of the European Common Market for maintaining. In fact, we would be following their example in this process.

Furthermore, we point out that if the U.S. Government can syphon off some of the differential between foreign oil and domestic oil prices, it will not be very long before foreign governments supplying oil will come to the conclusion, as we point out, that they, rather than the U.S. Government, should be in the position of syphoning off that differential cost.

The result is bound to be increased friction between them and the United States.

Finally, we suggest that since the proposal that has been made is for a tariff differential among supplying countries, that it is inconceivable to us that Latin American countries would not resent being subject to a higher duty than the duty on oil from Canada, or that Middle Eastern and North African countries would not resent being subject to a higher duty than either Latin America or Canada.

Mr. EDMONDSON. There was some discussion yesterday by Secretary Shillito of the concern of the Department of Defense over a possible political withholding of oil from the Middle East. Do you see that as a possible consequence of a tariff on oil imports that was differentially applied?

Secretary NEHMER. I think, as we pointed out in our report, Mr. Chairman, the obvious consequence of the tariff proposal would be increased dependence on Eastern Hemisphere sources of oil and certain parts of the Eastern Hemisphere do have problems of instability possibly affecting the availability of oil for the United States. And we think that in terms of the national security of the United States, this

Very clearly, we would be increasingly dependent on Eastern Hemisphere oil if the tariff proposal were adopted.

Mr. EDMONDSON. You have commented the tariff system would introduce inequities. Do you think of any inequities that would be present that you have not already commented upon, as in international consequences?

Secretary NUMER. The inequities here we are referring to are really domestic inequities. We think that the tariff system would result in coastal refiners, for example, having an advantage over inland refiners. Companies with foreign crude oil production would have an advantage over those companies which do not have foreign crude oil production.

In general, to sum it up, the financially strong would have an advantage over the financially weak.

Mr. EDMONDSON. Would you comment further upon your point it would eliminate "pass-through" of lower prices to consumers?

Secretary NEHMER. Some of the cost advantages of present import of foreign oil is passed on to consumers. To the extent that lower cost foreign oil averages down the crude oil cost to U.S. refiners, and this advantage is passed on in part in the form of lower prices, the skimming off of this differential, Mr. Chairman, through a tariff would in effect lose this pass-through as it now occurs.

Mr. EDMONDSON. So the pass-through would be reduced by the amount of the tariff?

Secretary NEHMER. Right.

Mr. EDMONDSON. You comment about serious impairment of the position of small independent refiners, in terms of inland refiners versus coastal refiners. Do you have any further comment on that?

Secretary NEHMER. One additional point, Mr. Chairman. The introduction of the oil import program in 1959 stopped the decline in the operations of independent refiners. The introduction of the tariff system, we think, would resume that decline.

Mr. EDMONDSON. Would you comment on the three additional points that you have made on page 3, the first with regard to national security and the second with regard to investment losses to American producers.

Secretary NEHMER. The key with regard to the jeopardizing of the national security is that in the judgment of the two Secretaries and the Chairman of the Federal Power Commission, who submitted the separate report, the task force has overestimated the availability of supply under a tariff proposal from domestic production and from Canada and even from Latin American sources.

This would mean therefore that our dependence on Eastern Hemisphere, that is, Middle East and North Africa sources, would be significantly higher, we feel, than the task force has estimated. And we think this is a key to the national security issue, that we would, in adopting the task force report, be jeopardizing security from that point of view.

Mr. EDMONDSON. What is the latitude of that overestimate in your judgment.

Secretary NEHMER. I am not sure that we have them offhand, but

Mr. EDMONDSON. Would you supply them for the record?

Secretary NEHMER. Yes. Let me supply them for the record. They may be in the reports here.

Mr. EDMONDSON. Without objection, they will be made a part of the record at this point when supplied.

(The information follows:)

OVERESTIMATES GIVEN BY THE TASK FORCE ON FUTURE DOMESTIC AND SECURE FOREIGN CRUDE OIL PRODUCTION

In their Separate Report, the Secretary of the Interior and the Secretary of Commerce and the Chairman of the Federal Power Commission pointed out that the Task Force Report was consistently optimistic in respect to the volume of production which would be forthcoming under the proposed preferential tariff scheme with a rollback in the domestic price of crude oil. Their position is stated on page 354 of The Oil Import Question as follows:

1. In our judgment a significant increase in oil imports would cause domestic wells to be abandoned more rapidly, and development of known fields curtailed more severely than the "Report" indicates. Consequently, the "Report's" estimate of U.S. oil production in 1975 may be overstated by as much as 15%, approaching 2.0 million b/d. The "Task Force Report's" proposals, if adopted as national policy, would be virtually certain to result in continuing and cumulatively more serious deterioration of our national security after 1980.

2. The "Report" forecasts Canadian 1975 production, under a U.S. "intermediate" tariff, of 3.0 million b/d, of which 2.0 mililon b/d would be exported to the United States. Despite lower Canadian wellhead prices, unless sizeable reserves in frontier areas are found, developed and provided with transportation facilities within the next five years, oil available for import from Canada will fall short of the estimate by about one-third. Imports from Mexico have been virtually constant (by agreement) at 30.000 barrels per day under the so-called “overland exemption." There is no possibility of serious disagreement between the Task Force Report and the Separate Report regarding receipts from this source, we believe. The reasons are that the quantity thus far involved is small and Mexican potential is also small. In fact, Mexico is becoming a net importer of petroleum and may wish to terminate its shipments of crude oil to the U.S. in years to come.

The Separate Report does not contain a specific statement challenging the Task Force Staff estimate of future receipts from Latin America. However, these also appear to be far out of line. On page 46 of The Oil Import Question, the Task Force Staff estimates a minimum of 3.5 million b/d exports from Latin America to North America (presumably most of it to the U.S.), while exports are increased to other Latin American and European destinations proportionately. This estimate is inconsistent with the production record of Venezuela and lesser Latin American producing countries over the past five years. During this interval, Venezuelan production has remained stagnant at approximately 3.6 million b/d. The Task Force projection of exports from Latin America (being mainly Venezuela) to North America by 1980 would require an increase of 50% to 100% in output in less than ten years. This dramatic expansion of production from the Latin American area is not reasonable.

Mr. EDMONDSON. What are your estimates of reduction in State revenue that could be expected to follow in the event we went to a tariff and reduced the price to $3.

Secretary NEHMER. We have not, as far as I know, quantified in any precise way what the magnitude of the reduction in State revenues would be.

Let me just check this if I may, Mr. Chairman.

We have not done it, Mr. Chairman, I suspect because of the complexity of the problem in making this estimate. You are dealing with corporation taxes, income taxes, severance taxes. I would guess a stab

But one thing we are very clearly aware of, there would be a diminishing of State revenues as a result of reduction, of course, in domestic oil production that would result.

Mr. EDMONDSON. We have been receiving a number of estimates from the various States on this subject, and they have been sizable figures. I think it would be useful to the committee if your Department could make some estimates on this subject, independent of the States, based on the data that you have as to the reduction in State revenues in the event the price went to $3 a barrel and in the event it went to $2.50 a barrel. Would you supply those estimates?

Secretary NEHMER. We would be glad to. We will do our best.
Mr. EDMONDSON. Thank you, sir.

(The information follows:)

IMPACT OF TARIFF ON STATE REVENUES

States' loses in revenue from introduction of a tariff program would occur from losses in tax revenue, royalty income, and lower realizations from lease sales. Total annual losses have been projected to range from a minimum of $100 million to over $1 billion. The wide variance is due to effect of time, tariff level selected, and whether or not losses in lease sale realizations are included. Annual losses in income to states resulting from reduced petroleum production will increase both with passage of each year under a tariff system and with decreases in oil tariff level.

Mr. EDMONDSON. The final point is one that I think fits rather heavily in your separate views and those of the Chairman of the FPC, the reduction of available supply of natural gas for the increase in its price. Would you comment on that particular point?

Secretary NEHMER. Well, as you say, Mr. Chairman, this is one of the key questions, one of the key points that we feel has not been gone into as thoroughly as it might in the task force report. One of the advantages which consumers in the United States have had over the years during the period of the oil import program has been a cost of natural gas lower than would otherwise have been the case without the oil import program.

I think one of the best statements on this has been made by Dr. Richard Gonzalez, and I think he has actually estimated that the savings to the consumer of natural gas cost as a result of the oil import program has been in the order of magnitude of $5 billion.

Now, he has, I think, spelled this out at one point-and I am reading here from a newspaper report of October 13, 1969-and if I may just quote from this.

Mr. EDMONDSON. All right.

Secretary NEHMER. At the point of production, the average price is about $3 a barrel for crude oil and less than $1.20 for the equivalent energy as natural gas. The average cost of domestic petroleum energy equivalent to a barrel of crude oil is one half of the sum of these two figures, or $2.10, which is about as cheap as foreign crude oil can be delivered to U.S. ports. The significance of the energy mix supplied by the domestic petroleum industry is (1) that for many users natural gas is cheaper or more attractive than oil and (2) that anything discouraging the development of domestic crude oil will also discourage development of natural gas.

Secretary NEHMER. This is by Dr. Richard Gonzalez, an oil consultant located in Houston.

We could make the full story available. I was just reading from a report on a speech by Dr. Gonzalez.

Mr. EDMONDSON. May I ask you a couple of questions about your alternative plan for revision of the mandatory oil import program which appears at page 358 of the report?

Secretary NEHMER. Yes.

Mr. EDMONDSON. One of your points is that you would continue the unrestricted entry of residual fuel oil into district No. 1, and consider extending this privilege also to the other districts. Then you make the point of encouraging domestic production of low sulfur residual fuel oil.

What plan did you have in mind for encouragement of domestic production of low sulfur residual?

Secretary NEHMER. The points, the 14 points, by and large, Mr. Chairman, are statements of position; not all of them have been worked out in the details necessary for implementation so far as oil import regulations are concerned. And this is one which I believe the Department of the Interior may be working on and they may be in a better position to provide you with details on that, Mr. Chairman. Mr. EDMONDSON. You think Secretary Dole might have some information on it?

Secretary NEHMER. I cannot say, but it may very well be. Let me just check with my people here.

There is nothing I can really add to that, Mr. Chairman.

Mr. EDMONDSON. Your next two points, 4a and 4b, involve negotiations with Canada and Mexico, negotiation of common energy policy with Canada. That is one you will concede presents some pretty thorny problems, would it not?

Secretary NEHMER. Yes, I should think so. I believe that the Oil Policy Committee will be considering this question of the kind of posture that the United States should take in such a negotiation with Canada on a common energy policy.

Mr. EDMONDSON. Are you thinking in terms of a treaty that would require ratification by the Senate?

Secretary NEHMER. Actually, this goes beyond my field of responsibility, Mr. Chairman. I think you are getting more into a question for the State Department, and I think really the Oil Policy Committee itself, and I would like to beg off answering that. I am just really not familiar with how that would be implemented, if and when negotiated.

Mr. EDMONDSON. There are several other points in this plan that I think probably better go to Mr. Dole rather than to you. Do you have any specific plan for incentives to encourage imports of crude and unfinished oils and residual fuel oil from Western Hemisphere-producing companies? What incentive are you talking about under this alternative plan?

Secretary NEHMER. What has been talked about here in the past but has not been implemented in any way, and has to be worked out in detail if indeed a decision is made no decision has been made to do