that when the supply interruption began, a decision to take this emergency action would depend on the estimate of the length of the supply interruption. Therefore, we risk, on the one hand, the likelihood of deciding the interruption will be a short one and hence delaying the emergency action until too late; or, on the other hand, of starting to spend large sums of money immediately for what could prove to be an interruption of limited duration. It is not likely that business would be willing to risk the capital necessary to accomplish these emergency measures. Consequently, it will have to be a government program, and the government would hesitate to do it hoping they could soon negotiate a resumption of supply. It seems quite likely that we might be unduly influenced in our foreign policy decisions by the consideraton of the heavy expense of such a program. It does not appear to be in our security interest to depend on this source of supply. Including the 0.2 MMB/D of Elk Hills production, we could reduce our Eastern Hemisphere dependence to 7.2 million barrels a day or to about 37% of demand. This compared with the surplus of 3.2 MMB/D estimated by the Task Force. If both Eastern Hemisphere and Latin American supplies were denied in 1980, our estimate shows a supply deficit of 9.3 MMB/D or 47% of demand. Going back to the conclusion of the Task Force that if all Eastern Hemisphere and Latin American supplies were denied to the U.S. and Canada, the two countries could meet 92% of their demand from internal sources. Our estimate indicates they could supply only 55% of their requirements. Our estimates are, of course, subject to error in both directions, but we believe theirs is even subject to a greater error for, despite the numerous qualifications they made, they always used the most optimistic possible estimate. The Task Force also suggested the use of rationing. In an emergency we would have to resort to rationing, but based on our estimate the rationing would be very severe. It also should be noted that rationing of petroleum products now would be much more difficult than it was in World War II. Oil's share of our energy requirements in 1940, before the war started, was 32% in 1969 it was 43%. Since World War II our trains, which at that time used coal, have switched to oil. During World War II most major cities had streetcars operating on elec tricity generated by coal or water power. Now these cities have buses operating on gasoline or diesel fuel. In the postwar period people have moved further out from the central cities, and automobiles have become necessary to get to work. Protection against the need for rationing of petroleum products should be one of our major national security objectives. THE USE OF A TARIFF TO CONTROL IMPORTS It should be made clear that the Task Force made two major recommendations. First, that import controls could be liberalized and, second, that a tariff be substituted for quotas as the method of control. There has been some confusion on this point in comments made in the press on the suggested program. In fact, there seems to be some confusion in the Task Force report itself. An increased level of imports resulting in a lower price for domestic crude, which they gave as a major reason for using a tariff, could be accomplished by increasing the overall quota. Regardless of the import level determined to be most appropriate, we believe that control by the use of a tariff to be inferior to the use of quotas. We think it would be nearly impossible to set a tariff which would give a desired level of imports. A tariff established under our traditional, most favored nation policy, or one equally applicable to all foreign nations would first exclude Canadian oil and then other Western Hemisphere sources. The Task Force recognized this and therefore recommended the establishment of preferential tariffs for Canada and Latin America-a questionable departure from our long-standing practice. Even under their preferential system, however, it is unlikely that the desired level of Eastern Hemisphere imports could be achieved with a tariff. With the large supply of lower-price Eastern Hemisphere supplies, imports under a tariff are likely to be in excess of desired levels until the tariff reaches a level at which they would practically cease. The Task Force recognized the difficulty of setting the desired tariff and suggested that changes be made until the desired level was obtained, but they also set a limit or a quota on Eastern Hemisphere imports. Therefore, despite their advocacy of a tariff for control, we are convinced that the 10% of demand limitation on Eastern Hemisphere crude would become the new quota. The tariff therefore becomes largely a tariff for revenue form, should be only with full consideration and deliberation by the Congress and not by Administrative action. The use of a tariff tends to remove the benefit of lower cost imports from the consumer and transfers it instead to the government. To the extent this new tax or increase in revenue reduced other taxes paid, the consumer would benefit. However, the Task Force recommends these revenues be used for another purpose. They say, "They could serve as a basis for legislation to develop, for example, strategic petroleum reserves without increasing taxes," and later add, “It would facilitate further research and exploration into development of synthetic crude, development of reserves on government lands, or other steps contributing to oil security." This is a strange, circular line of reasoning that removes a program designed to protect national security to save consumers money, gives the savings to the government instead of to the consumers, and then the government uses it to make up for the loss of security caused by the new program. Other objections to the tariff system, as advocated by the Task Force, are that it would tend to benefit a few companies with the lower cost foreign oil, and it would discriminate against nations just because they were located in the Eastern Hemisphere. OTHER COMMENTS ON THE REPORT OF THE MAJORITY I would like to point out a few of the other questionable aspects of the report. Their estimate of a cost to the consumer of $4.848 billion, which they round up to $5 billion in their summary and which is now being quoted as an established fact, is very questionable. This is particularly true in view of the Office of Oil and Gas estimate of it to be only $2.2 billion by 1975. They ignore the offsetting costs to the economy by removing controls. They brush aside as insignificant even their own low estimate of $1.5 to $2.0 billion adverse effect on the balance of payments. Finally, they dismiss without consideration, the hardships that their program could cause to individuals and specific localities as not being significant in the country as a whole. THE SEPARATE REPORT OF THE MINORITY The Separate Report on the Oil Import Question by the Secretary of the Interior, the Secretary of Commerce, and the Chairman of the Federal Power Commission, although short, sharply points out basic weaknesses in the "Task Force Report." We believe that most of the recommendations in this separate report are sound. However, as I stated earlier, we believe the current overall level of imports which rises with domestic production has been working well, and we question the recommendation to arbitrarily increase the imports as a percentage of production at this time. They do not establish any basis for the increase. Their table on page 361 of the report assumes a 4% a year increase in domestic production of crude oil and natural gas liquids production. We believe this is a rather optimistic rate of increase even if imports were not to be increased as they recommend. If imports are increased as they recommend, the rate of increase in domestic production would tend to decline each year. Their suggestion to base the percentage on refinery inputs is a sound one. This would allow for an increase in imports if domestic production did not increase enough to meet demand. Might it not be a sound policy to use the present formula until U.S. production cannot meet the increased demand and then change Districts I-IV to a system similar to that used in District V? We also question their recommendation on allocations to petrochemical producers. Gulf Oil Corporation has consistently maintained there is no justification for awarding oil import allocations to petrochemical producers, and we see no reason to change that position. However, even if there is a justification for these allocations, it does not seem equitable to grant petrochemical producers allocations equal to 20% of inputs when larger refiners are getting only about one-fourth that much. We believe that if allocations are made to petrochemical producers, they should be on the same basis as to refiners. We do approve of the principle in their proposal to award allocations for exports of petrochemicals. It would be very difficult to design a program to do this equitably, but it should be tried. Mr. EDMONDSON. I also have a letter from Lt. Gov. Thomas P. Gill have to be made a part of our files. But if there is no objection, Lieutenant Governor Gill's letter will be made a part of the record at this point. Hearing no objection, it is so ordered. The leaflet which he supplies will be made a part of the committee files. (The letter referred to follows:) OFFICE OF THE LIEUTENANT GOVERNOR. Hon. ED EDMONDSON, U.S. House of Representatives, DEAR REPRESENTATIVE EDMONDSON: The State of Hawaii suffers great discrimination because of the oil import quota program. We are a state with neither indigenous sources of oil nor overland access to foreign oil. Our one refinery runs almost exclusively on foreign oil from the Middle East or Indonesia which is brought in on foreign bottoms; yet our local prices for petroleum products are exhorbitantly high, basically because the quota system prevents effective competition. Our islands are almost entirely dependent on oil for our energy requirements. Our high oil prices contribute to our high cost of living and to our economic retardation. We had hoped that the Presidential Task Force would recommend and the President support our exemption from the quota system, or at least some modification to it which would aid us. This has not happened. Enclosed is a brochure which briefly outlines our plight. As an island state. we cannot even get the same consideration given to the Commonwealth of Puerto Rico and the Virgin Islands. We hope that legislation will be enacted, or that administrative steps will be taken, to modify the quota system and give us some relief. We hope you will support us in our efforts. If you want further information, I, or the members of Hawaii's Congressional delegation, will be happy to supply it. Aloha, THOMAS P. GILL, Mr. EDMONDSON. I think permission has already been obtained for other statements to be filed. Without objection the statement of Mr. David S. Bruce, chairman of the Petrochemical Group, will be made a part of the record. (The statement referred to for inclusion in the record at this point follows:) STATEMENT OF DAVID S. BRUCE, CHAIRMAN OF THE PETROCHEM GROUP OF PETROCHEMICAL COMPANIES Mr. Chairman, my name is David S. Bruce. I am the Assistant to the Vice President of Hercules Incorporated. I am appearing today in my capacity as Chairman of the PetroChem Group, an informal organization of domestic petrochemical producers. The members of the PetroChem Group, which constitutes a broad cross-section of the petrochemical industry, are: Cabot Corporation: Chemplex Company; Copolymer Rubber & Chemical Corporation; Dart Industries Inc.; Eastman Kodak Company; E. I. du Pont de Nemours and Company; El Paso Products Company; Ethyl Corporation; Firestone Tire & Rubber Company; Foster Grant Company, Inc.; Goodyear Tire & Rubber Company; B. F. Goodrich Chemical Company; Hercules Incorporated; J. M. Huber Corporation; Koppers Company, Inc.; Marbon Chemical Division of Borg-Warner Corporation; National Distillers & Chemical Corporation; Sid Richardson Carbon Company. The PetroChem Group was formed in late 1969 for the purpose of presenting the petrochemical industry's views to the Cabinet Task Force on Oil Import NATURE AND EXTENT OF THE PETROCHEMICAL INDUSTRY'S FEEDSTOCK COST PROBLEM The petrochemical industry is competitive worldwide. Any program which raises petroleum feedstock costs for the U.S. petrochemical industry creates a cost disadvantage which will dislocate the U.S. industry, obsolete existing plants, and stimulate foreign production for the American market. The Task Force Report and particularly the Separate Report of Secretaries Stans and Hickel and Chairman Nassikas confirm the fact that American petrochemical companies face a feedstock disadvantage as compared with their foreign counterparts. The problem, which was spawned at the inception of the MOIP, has become worse as the industry expanded and as the feedstock cost disparities between U.S. and foreign feedstocks have increased. The seriousness of this dislocation from the national point of view can be gauged by the fact that petrochemical plants represent an investment of $20 billion and employ over 300,000 workers. The industry's products serve not only the U.S., but have a large export market; in 1968 our balance of trade was $1.3 billion. Unfortunately, as the Department of Commerce has reported, the U.S. chemical industry, of which we are a part, is losing its worldwide position. We are here today to discuss one of the causes and a solution to the problem. At the outset I would like to emphasize several points on the relationship between the Oil Import Program and petrochemicals. The petrochemical industry is not opposed to the Oil Import Program. We recognize that the interests of national security may require regulation of the imports of petroleum, and we express no views as to the best solution to achieve the national security objectives of the oil program. Moreover, we believe that a solution to the petrochemical problem is fully consistent with the objectives of the oil program. The Oil Import Program has had an unintended impact on the petrochemical industry which is also important to national security. By reason of the Oil Import Program, the costs of feedstocks are higher here than in Europe with serious implications for our international trade balance. In addition, the higher cost of feedstocks provides an unfortunate incentive to locate plants abroad rather than in the U.S. It is possible to have a compatible solution to both the petroleum and petrochemical problems. To accomplish this requires an understanding of the problem of each industry. Once this is understood, a solution can be found to the problem of each industry without interfering with the solution to the problem of the other industry. For the oil industry the question is to determine the national security objectives of reserves and discovery. Once these have been defined, imports are limited under the program in order to maintain prices at a level to achieve the desired reserves and level of discovery. The oil industry thus operates in a market where imports are restricted and prices maintained by regulating imports. The petrochemical industry is different. It is competitive worldwide. There are no restrictions on imports of petrochemical products except tariffs. Tariffs are already low and are rapidly being reduced as a result of the Kennedy Round. The industry is very sensitive worldwide to competitive differences such as feedstock cost disadvantage. We believe now that it is clear that as a result of the MOIP, there has been an upward pressure on the price of petrochemical feedstocks. The alternate use of these feedstock materials in the energy market-for heating and indirectly for gasoline means that chemicals must compete for feedstocks in a market where prices are higher because of the MOIP. The solution to the problem of the U.S. petrochemical industry is to offset this feedstock cost disadvantage of the U.S. industry. This can be done consistent with the objectives of the MOIP because of two basic facts: First, the petrochemical industry uses for feedstocks only about 5% of all the hydrocarbons consumed in the U.S. Second, the petrochemical program can be separated administratively from the oil industry so that the requirements to achieve feedstock cost parity for petrochemicals will have no impact on the oil import objectives. THE SOLUTION TO THE PETROCHEMICAL FEEDSTOCK PROBLEM We believe that the solution to the petrochemical feedstock problem requires a dual approach along the lines set out in the Separate Report. This means that Option A.-Adjustment of allocation rights based on petrochemical manufacture to eliminate feedstock cost disadvantage for those companies which cannot use foreign feedstocks directly, and Option B.-Controlled access to foreign feedstocks for petrochemical manufacture for those companies which can use foreign feedstocks directly. Both of these options are essential to the balanced program. The majority of American petrochemical companies, big and small, use domestic feedstocks and are unable to process foreign feedstocks in existing plants. As a practical matter they cannot convert to foreign feedstocks for two reasons: First, in general the cost of converting existing plants which use domestic LPG to foreign feedstocks, such as naptha or gas oil, is prohibitive. My company has looked into the matter of putting in new cracking facilities for naptha or gas oil. This would virtually double our investment in our plants. The same is true of other companies using LPG. Second, plants using LPG for feedstocks have processes for products and by-products, all geared to LPG feedstocks. To change to new feedstocks means a major reorientation of plant and processes. Thus, to shift to foreign feedstocks inevitably means the write-off or junking of a large part of the existing plant and the major problem of establishing productive use of an extensive group of new by-products. Only the large integrated plants will be able to import and use foreign feedstocks. The amount they can import will relieve the increasing feedstock shortage to some extent but will not eliminate it. While these imports may have the effect of lowering feedstock costs somewhat, they cannot be expected to bring the price of domestic feedstocks to world levels. Thus, the plants using domestic feedstocks will continue to be at a competitive disadvantage both as to foreign producers and as to U.S. producers using foreign feedstocks. This is the reason the bulk of the U.S. industry must have the option, under a balanced plan, of receiving import quota allocations to offset the higher cost of domestic feed stocks. With a quota fixed at a level to achieve feedstock cost equity. domestic plants will be competitive with foreign producers and with domestic plants using foreign feedstocks. This is what we mean by feedstock equity. THE NEED FOR IMMEDIATE ACTION In his testimony before this Committee on Monday, March 9, General Lincoln, Director of the OEP, listed petrochemicals as one of the problems urgently needing a decision. We welcome this statement of priorities by General Lincoln. We earnestly hope that this Committee's interest in this matter and these hearings will help to bring about an early and satisfactory solution of the petrochemical problem. Large investments in petrochemical plant construction and expansion have been held up by U.S. companies pending the current review of the Mandatory Oil Import Program. Until there is a solution providing feedstock cost parity, the plants will not be built in the U.S. In 1968 the petrochemical industry had a $13 billion surplus in its balance of trade and contributed significantly to the nation's balance of trade and balance of payments. If this industry's contribution to the balance of trade is to continue, the U.S. petrochemical industry must be made competitive in feedstock costs with its foreign counterparts. Delay in putting in effect the program suggested by the Task Force's Separate Report and supported by PetrolChem favors foreign producers who have no feedstock problem such as that facing us. We think it is not in the national interest to leave the problem unsolved longer with the result that foreign producers benefit and more U.S. companies are compelled to build abroad because of this feedstock question. Finally, I want to reiterate what I said earlier. Although the effects of the MOIP on the petrochemical industry have been serious, the implementation of an adequate petrochemical program will not adversely affect the national security objectives of the overall Oil Import Program. Feedstock use by the domestic petrochemical industry accounts for only about 5% of total crude oil consumption in the U.S. Imports of feedstocks for petrochemical manufacture will not have any significant leverage on petroleum prices, since petrochemicals can be separated from the oil industry program with reasonable and simple precautions; thus, solving the problem of petrochemical feedstocks need have no impact on prices of petroleum energy products or on the objectives of the |