. : I Appendix DERIVATION OF COSTS GIVEN IN TABLE 2 ASSUMPTIONS OF THE ANALYSIS quantities of oil and natural gas liquids consumed in 1975 and 1980 equal to those quantities given in Table 1, above. der free trade, the domestic price of crude oil would equal the foreign at 5200 per barrel now and in 1975 and 1980. 1 lewe,ghted average cost to US, consumers of the oil import program ain at its current level of $1.30 per barrel. Iis effective domestic equilibrium price is $3.30 per barrel ($1.30 + $200_ and will remain at this level if the import quota program continues. Prorationing could not exist in its present form under a free-trade tion of prorationing would reduce production costs an average of r barrel. estic production would fall off rapidly at a price less than $1.00 per with prorationing in effect and $0.60 a barrel without prorationing (81.00– purpose of this analysis is to revise the cost estimates inherent in the y estimates given in Table 1, the quantity estimates are taken as given. Charles Rivers methodology is applied to these quantity estimates in order de a more thorough estimate of the cost of the import quota program as and 1980. imption that the world price of oil will not rise above $2.00 per barrel 1 upon a nearly perfectly elastic supply of Middle East and North nd as shown by Paul Bradley, even with large increases in the demand The fact that the world price is currently below $2.00 per barrel, delivered "La 18, provides a margin of added conservatism in the second assumption . assumption of a per barrel weighted average cost, to the consumer, of a for the oil import quota program as of 1969 was arrived at through the of fairly rigorous techniques. This was done to avoid the possibility of over mating the program cost by merely taking the value of an import ticket at F. st Coast and multiplying it by annual U.S. consumption to arrive at -al annual cost to the consumer. Instead, the weighted average difference ween the price of domestic oil consumed, in each of the Petroleum Administrabor Defense Districts I-V, and the price of imported oil delivered to the - District location was used as the cost of the oil import program In fact, most of the program was under estimated somewhat. This is so because sportation charges were not applied to domestic oil unless a significant n of the oil shipped into a District came from a relatively few domestic For example, 55% of the oil going into District II from outside of *header. Paul G, The Economics of Crude Petroleum Production, Amsterdam, North In part three, of the same volume, the Department also presented estimates en the cost of the oil import quota program to consumers of oil products, in 1974 and 1980, if the program is continued in its present form. The estimated costs to consumers were put at $2.2 billion in 1975 and $3.5 billion in 1980 Calculations of these costs have assumed that under unrestricted imports, re raw material cost savings to U.S. integrated oil companies would be reflecti in lower consumer prices, Integrated companies would retain present leve net profit. Much of the economic rent which appears to accrue to the producing sector of the industry under the quota program is absorbed in the transportatio refining and marketing sectors. Hence, the saving to consumers upon removal of import controls would ta less than it would be under the assumption that the full value of the econo.. rent is reflected in the prices of products under the existing quota progr: ra Volumes of crude oil used in this calculation assumes the remov. 1 of Pr;-controls in 1969. Within five years, intermediate adjustments (in known fe, i should have been largely accomplished, but adjustments in crude oil product. (finding) and in refinery location would have been only partially completext Thus, this calculation represents an intermediate rather than "equilibrium” av «t estimate. CRA, in its submission to the Task Force, developed an analytical methodol suitable for determining the magnitude of the cost to the consumer, transfe to pro lucers and refiners, and costs to the nation. The application of thes et odology, to the data in table 1, yields estimate of the cost to the cons aer nation, and transfer payments depending upon the expected domestic product. capabilities if the import quota program were eliminated in 1969. These estimates are shown in table 2. If production could proceed according to maximum exps tions without the import quota program, then the cost to the consumer of T eliminating the program in 1969 would reach $7.13 billion in 1975 and $ ! bilion by 1980. These consumer cost estimates are based upon the speeche sumption that the prices of petroleum products, under the quota program, reflect the full value of the economie rent. The cost to the nation cresource cost) is less than the cost to consULLETS, the extent that the cost to consumers includes transfer payments recobor rent i to domestic producers and refiners. The cost to the nation in resouros s epial to the extra cost of producing domestically what could be produced tu cheaply in foreign countries and imported to the United States,* Aiso, the of additional consumption which could take place at the lower world prices II. be added as part of the cost to the nation. Finally, the inefficient use of rescin due to prorationing, which could not continue to exist without the import q .. program, must be included in the cost to the nation. Again, with maximum expectations of production table 2 shows that the cost to the nation would equal $0.77 billion in 1975 and $2.12 billion by 1980 A un ler the same estimate of domestic production capabilities, transfer payn from consumers to producers would increase from $5.65 billion in 1975 to s billion in 1986 while transfer payments from consumers to reliner will rise fr go:98 billion to $1.03 billion over the same period. Similar estimates are give: in the second column under each year for a situation where domestic prod serie would be capable of achieving only minimum expected levels without the ita," control program. TABLE 2 VALUES OF COST BREAKDOWN DEPENDING UPON ASSUMED DOMESTIC PRODUCTION CAPABILIT WITH NO IMPORT QUOTA PROGRAM Appendix DERIVATION OF COSTS GIVEN IN TABLE 2 ASSUMPTIONS OF THE ANALYSIS quantities of oil and natural gas liquids consumed in 1975 and 1980 • eqail to those quantities given in Table 1, above. 2 Under free-trade, the domestic price of crude oil would equal the foreign 17 22:00 per barrel now and in 1975 and 1980. 1e weighted average cost to U.S. consumers of the oil import program an at its current level of $1.30 per barrel. effective domestic equilibrium price is $3.30 per barrel ($1.30 + $2.00– and will remain at this level if the import quota program continues. Prorationing could not exist in its present form under a free trade ...ation of prorationing would reduce production costs an average of r barrel. mestic production would fall off rapidly at a price less than $100 per w-*b prorationing in effect and $0.60 a barrel without prorationing (81 00--80 603. je purpose of this analysis is to revise the cost estimates inherent in the ty estimates given in Table 1, the quantity estimates are taken as given. Charles Rivers methodology is applied to these quantity estimates in order v-le a more thorough estimate of the cost of the import quota program as and 1980 assumption that the world price of oil will not rise above $200 per barrel w upon a nearly perfectly elastic supply of Middle East and North coil as shown by Paul Bradley, even with large increases in the demand The fact that the world price is currently below $2.00 per barrel, delivered “2018, provides a margin of added conservatism in the second assumption sumption of a per barrel weighted average cost, to the consumer, of a for the oil import quota program as of 1969 was arrived at through the 4 fairly rigorous techniques. This was done to avoid the possibility of over ating the program cost by merely taking the value of an import ticket at Fat Coast and multiplying it by annual U.S. consumption to arrive at --il annual cost to the consumer. Instead, the weighted average difference -ween the price of domestic oil consumed, in each of the Petroleum Administrabir Defense Districts I-V, and the price of imported oil delivered to the District location was used as the cost of the oil import program In fact, cost of the program was under estimated somewhat. This is so because "atsportation charges were not applied to domestic oil unless a significant on of the oil shipped into a District came from a relatively few domestic For example, 55% of the oil going into District II from outside of Fender Paul G, The Economics of Crude Petroleum Production, Amsterdam, North In part three, of the same volume, the Department also presented estimates of the cost of the oil import quota program to consumers of oil products, in 1975 and 1980, if the program is continued in its present form. The estimated costs to consumers were put at $2.2 billion in 1975 and $3.5 billion in 1980. Calculations of these costs have assumed that under unrestricted imports, net raw material cost savings to U.S. integrated oil companies would be reflected in lower consumer prices. Integrated companies would retain present levels of net profit. Much of the economic rent which appears to accrue to the producing sector of the industry under the quota program is absorbed in the transportation, refining and marketing sectors. Hence, the saving to consumers upon removal of import controls would be less than it would be under the assumption that the full value of the economic rent is reflected in the prices of products under the existing quota program. Volumes of crude oil used in this calculation assumes the removal of import controls in 1969. Within five years, intermediate adjustments (in known fields) should have been largely accomplished, but adjustments in crude oil production (finding) and in refinery location would have been only partially completed. Thus, this calculation represents an intermediate rather than "equilibrium" cost estimate. CRA, in its submission to the Task Force, developed an analytical methodology suitable for determining the magnitude of the cost to the consumer, transfers to producers and refiners, and costs to the nation. The application of this methodology, to the data in table 1, yields estimate of the cost to the consumer. nation, and transfer payments depending upon the expected domestic production capabilities if the import quota program were eliminated in 1969. These estimates are shown in table 2. If production could proceed according to maximum expectations without the import quota program, then the cost to the consumer of not eliminating the program in 1969 would reach $7.13 billion in 1975 and $8.13 billion by 1980. These consumer cost estimates are based upon the specific assumption that the prices of petroleum products, under the quota program, reflect the full value of the economic rent. The cost to the nation (resource cost) is less than the cost to consumers, to the extent that the cost to consumers includes transfer payments (economic rent) to domestic producers and refiners. The cost to the nation in resources is equal to the extra cost of producing domestically what could be produced more cheaply in foreign countries and imported to the United States.* Also, the loss of additional consumption which could take place at the lower world prices must be added as part of the cost to the nation. Finally, the inefficient use of resource due to prorationing, which could not continue to exist without the import quota program, must be included in the cost to the nation. Again, with maximum expectations of production table 2 shows that the cost to the nation would equal $0.77 billion in 1975 and $2.12 billion by 1980. Also, under the same estimate of domestic production capabilities, transfer payments from consumers to producers would increase from $5.65 billion in 1975 to $5.70 billion in 1980 while transfer payments from consumers to refiner will rise from $0.98 billion to $1.03 billion over the same period. Similar estimates are given in the second column under each year for a situation where domestic production would be capable of achieving only minimum expected levels without the import control program. TABLE 2.-VALUES OF COST BREAKDOWN DEPENDING UPON ASSUMED DOMESTIC PRODUCTION CAPABILITIES WITH NO IMPORT QUOTA PROGRAM 1. The quantities of oil and natural gas liquids consumed in 1975 and 1980 will be equal to those quantities given in Table 1, above. 2. Under free-trade, the domestic price of crude oil would equal the foreign price at $2.00 per barrel now and in 1975 and 1980. 3. The weighted average cost to U.S. consumers of the oil import program will remain at its current level of $1.30 per barrel. 4. The effective domestic equilibrium price is $3.30 per barrel ($1.30+$2.00= $3.30) and will remain at this level if the import quota program continues. 5. Prorationing could not exist in its present form under a free-trade situation. 6. Elimination of prorationing would reduce production costs an average of $0.40 per barrel. 7. Domestic production would fall off rapidly at a price less than $1.00 per barrel with prorationing in effect and $0.60 a barrel without prorationing ($1.00$0.40 $0.60). As the purpose of this analysis is to revise the cost estimates inherent in the quantity estimates given in Table 1, the quantity estimates are taken as given. The Charles Rivers methodology is applied to these quantity estimates in order to provide a more thorough estimate of the cost of the import quota program as of 1975 and 1980. The assumption that the world price of oil will not rise above $2.00 per barrel is based upon a nearly perfectly elastic supply of Middle East and North African oil as shown by Paul Bradley, even with large increases in the demand for it. The fact that the world price is currently below $2.00 per barrel, delivered to the U.S., provides a margin of added conservatism in the second assumption above. The assumption of a per barrel weighted average cost, to the consumer, of $1.30 for the oil import quota program as of 1969 was arrived at through the use of fairly rigorous techniques. This was done to avoid the possibility of over estimating the program cost by merely taking the value of an import ticket at the East Coast and multiplying it by annual U.S. consumption to arrive at the total annual cost to the consumer. Instead, the weighted average difference between the price of domestic oil consumed, in each of the Petroleum Administration For Defense Districts I-V, and the price of imported oil delivered to the same District location was used as the cost of the oil import program. In fact, the cost of the program was under estimated somewhat. This is so because transportation charges were not applied to domestic oil unless a significant portion of the oil shipped into a District came from a relatively few domestic sources. For example, 55% of the oil going into District II from outside of Bradley, Paul G., The Economics of Crude Petroleum Production, Amsterdam, N |