the District V import-demand ratio equals that established for the rest of the nation." This, for the sake of argument, we will concede. It is, however, no reason for scrapping the present District V quota system at this time in favor of a tariff system which, according to the report, "could be adopted at once without increasing West Coast oil prices." Consider West Coast oil prices. The average crude oil price in California in 1959 (cited because it is the year of inception of the mandatory quota system) was $2.55 per barrel; in 1969, it was $2.51 per barrel (computed from data of the State Division of Mines). The price reduction was 1.6%. Of immediate interest to the consumer, gasoline prices (wholesale ex taxes) were 12.94 cents per gallon in 1959, against 12.54 cents in 1969. The reduction was 3.1%. These reductions are small, admittedly, but they assume great significance when compared with the increases in prices of all other commodities that have occurred during the 10-year period. To return to the North Slope. Only the Task Force finds enough warmth in it to solve all the problems otherwise raised by its tariff scheme. It may or may not come up to the Task Force's expectations; it may even exceed those expectations. The point is that to base national policy on completely unknown quantities is foolhardy at best and fatal at worst. And there remains the final question: When (except in World War II and the Korean War, in neither of which case did it work) has the government of the United States set out to fix prices? More particularly, when has it set out to cut prices? Yet the Task Force report announces the latter as its aim; the former aim is exemplified by this quotation from the Los Angeles Times: "The principle is more important than setting specific (oil) price," the source (unidentified) said. "The object is to get the price set in Washington instead of Dallas and Houston." We submit that nothing could be more repugnant to the traditions, political philosophy, or government policy of the United States of America. The President's oil policy committee should reject the Task Force report out of hand. Once that is done, a realistic appraisal of the bearing of oil imports on the nation's welfare can be undertaken. STATEMENT OF STANFORD G. STILES, VICE PRESIDENT, TRANSPORTATION AND SUPPLIES, SHELL OIL Co. Shell Oil Company believes that the basic purpose of any system for regulating oil imports should be the maintenance of secure sources of oil for the United States. In the past, Shell Oil Company has endorsed the principle of restricting importation of foreign petroleum for security purposes by means of the import control program. Our understanding of the meaning of the term "national security" is illustrated by Appendix C of our 1969 submission to the Cabinet Task Force on Oil Import Control, a copy of which is attached. In our statement before this Subcommittee in 1968 we stated that [t]he justification for a system restricting free international trade in hydrocarbons is the need from a national security standpoint for a secure energy base for the nation's growing economy. The need for such a secure U.S. energy base remains with us. Shell Oil Company therefore continues to believe that such security can be best assured by a properly structured and administered oil import control program. The majority of the Cabinet Task Force on Oil Import Control, in the Report released by President Nixon on February 20, propose, with certain important reservations, replacement of the present oil import control system with a system of import controls by tariff. Shell Oil Company is opposed in principle to such a tariff system. Any important regulatory system should be capable of balancing the proper amount of domestic oil production with the proper amount of foreign oil imports in order to satisfy domestic petroleum demand. The present oil import program, whatever its faults, has successfully done this for the past decade. We do not believe that a regulatory system based on tariffs will work as well. The tariff system of import control proposed by the Task Force is intended to this way the system is intended to render imported crude and product supplies available to anyone willing to pay the tariff, while at the same time supposedly providing domestic crude producers and refiners an economic incentive to reduce their costs in order to increase their market share. We do not, however, consider the tariff system to be effective for this purpose. The total price of imported crude oil, before tariff, is the sum of foreign production, transportation and government costs, plus any producer's profit. None of these elements lies within the scope of U.S. controls. Instead, these elements are controlled by individual organizations concerned either with maximizing their own revenues or whatever other national objectives foreign nations may have. Therefore not only would any price equilibria achieved by a tariff system and including these uncontrolled elements be unstable, but they would be liable to rapid unpredictable dislocations. Accordingly, in such a tariff system, U.S. production, crude prices and tariffs would tend to fluctuate over the short term to the point where proper planning would be impossible. Longer term, we believe these very uncertainties would depress domestic exploration and production and increase reliance on imports. Moreover, the sources of imported crude and the places that crude would enter the United States would, we anticipate, be likely to change in ways not wanted or controllable by the tariff regulatory agency. Use of a tariff for protecting national security is not the same as using a tariff only for commercial purposes. In conventional international trade situations, tariffs have played a significant role in maintaining employment, protecting infant industries, or building up manufacturing. In this way, they shelter domestic producers from competition by limiting the flow of imports. As we have indicated in this statement, however, limiting U.S. imports of foreign oil is not just for commercial reasons, but more importantly for the maintenance of national security. Accordingly, risks associated with tariff protection that might be acceptable to some in a trade situation are not risks that the U.S. can accept when national security is in issue. We therefore believe that, for these reasons, a tariff system of regulating oil imports would not effect the purposes set forth above. In our submission to the Task Force last year, we said that anything that tries to regulate indirectly what a quota system regulates directly is not likely to do it as well. We also said that we had examined the alternatives proposed for the Mandatory Oil Import Program, and had concluded that none of them will meet the U.S. national security objective as effectively. In our statement to the Subcommittee in 1968 we said we were in favor of the quota system; we said the same thing in our submission to the Task Force in 1969; and we are still in favor of the quota system. We recognize, of course, that reforms are needed to improve the effectiveness of the Mandatory Oil Import Program in achieving its objectives. In particular, we believe it is timely to increase the level of permitted petroleum imports. Both the Task Force Report and the Separate Report agree that import levels of foreign petroleum should be subject to change. The two reports differ, however, on the means by which that change should be brought about. The authors of the Task Force Report advocate periodic adjustment of import levels; while the authors of the Separate Report propose a planned increase of the 12.2% basis over a five year period to 17.2%, based on inputs rather than domestic production. Planning and construction of new facilities for storing and moving petroleum and manufacturing products can require as long as five or six years. Any increases in imports should for this reason be made in a predictable and continuous manner, so that any needed U.S. transportation, storage and refining facilities can be planned and built in an orderly way. We therefore would prefer to see the import level increased in the manner proposed in the Separate Report. In summary, we feel as we did in our statement to you in 1968, that the basic import program is an adequate system. The study we urged at the time has been made, and many valuable data and proposals brought to light thereby. After reviewing the submissions to the Task Force and the Reports issued by the Task Force members, we believe that extension of the Mandatory Oil Import Program, with inclusion of recommended reforms, is in the best interests of the United States. APPENDIX C THE OPERATIONAL MEANING OF NATIONAL SECURITY National security in the abstract is an all-encompassing concept. It tends to suggest security in the event of overt war. Most commentators therefore come fensibility of U.S. supply lines. Distinctions have consequently been made between supply points on the basis of "overland" (hence, presumably more secure) versus "over water" transport routes; and on the basis of long water routes versus shorter (Western Hemisphere) routes, etc. Comment on the likelihood of nuclear, conventional-total, or conventionallimited wars is a job for the National Security Council and its expert advisors. In this Appendix, security will mean operational as opposed to military security. Operational security is a function of the political stability, reliability and maturity of producing sectors and of areas through which oil passes on its way to the U.S. By this definition, reserves under U.S. political control are the only fully secure reserves, whether in the lower 48 states or on the Arctic Slope of Alaska. During periods of nominal world peace, the U.S. is still vulnerable to interruption of imported oil supplies. Revolution, labor unrest, subversion or adverse political action can and have interrupted the flow of oil from foreign countries. Although hostile activities may not be aimed at the United States, our oil supplies may nonetheless be interrupted. Although the degree of insecurity varies widely, all other oil is distinctly less secure than our own supplies. Even in the case of very friendly nations, our policy interests do not always coincide. Control of an essential commodity confers bargaining strength to other countries which works against our national freedom of action, hence, security. This exposure may be deemed sufficiently small, compared to benefits, that in the case of friendly and stable oil producing countries we would be willing to rely upon their oil reserves as a supplement to our own. It is instructive to consider that of great power centers in existence today, only North America and the Communist bloc are completely self-sufficient in petroleum. The U.S. is barely self-sufficient today; and continued freedom of action vis-a-vis the Communist bloc will depend upon continued discovery and development of secure petroleum supplies. With growing Russian involvement in the Mid-East, the flank of the Atlantic Alliance is seriously threatened, for Europe depends on Mid-East oil. In a world of tensions and confrontations, it would be national folly to get into a posture of great petroleum vulnerability. This, reduced to essentials, is the operational meaning of national security as regards oil: we must maintain an environment in which our domestic petroleum production industry can grow and stay strong. STATEMENT OF J. H. CAMPBELL, PRESIDENT, on Behalf of CONSUMERS POWER CO. Mr. Chairman, members of the subcommittee, I submit this statement on behalf of Consumers Power Company, a combination electric and natural gas utility with a service area of 30,600 square miles in Michigan's lower peninsula. My purpose is to bring to your attention the inequity of the present methods of allocating residual fuel oil imports. It is the view of Consumers Power Company that residual oil, for use as fuel, should be accorded the same freedom of import into District II as now is provided in District I. This question is one of great importance to Consumers Power Company in its electric operations. The Company provides electricity to more than one million customers and has electric generating capacity exceeding 3.4 million kilowatts. In 1969, the Company supplied its customers with more than 18.4 billion kilowatthours of electricity. Forecasts of future growth indicate that the demand for electricity in Michigan's lower peninsula will double in the next ten years. For many years Consumers Power Company has depended upon coal as the prime source of heat to produce steam for generating electricity. Coal requirements have increased from about one million tons in 1946 to more than seven million tons in 1969. More than 90 percent of the Company's entire generating capacity is represented by coal-fired steam plants. The balance is in a number of relatively small hydro plants, a relatively small nuclear power plant, and a number of oil or gas fired plants. The Company is completing a large new nuclear power plant west of Kalamazoo, with prospective capacity in excess of 700,000 kilowatts. The Company also has begun preliminary construction for a twin reactor nuclear plant near Midland with prospective capacity of 1.3 million kilowatts. Under construction near Ludington is a very large pumped storage hydroelectric plant, owned will have a total generating capacity for peak power demands of 1.8 million kilowatts. Nevertheless, a large portion of all electricity to be generated in the foreseeable future by Consumers Power Company and The Detroit Edison Company, as principal partners in the Michigan Power Pool, will be produced by plants burning coal. Consumers Power Company, as a responsible citizen of Michigan, is concerned with maintaining and improving the environment. It is aware that environmental protection must be a prime consideration as well as such factors as load centers, long-term fuel supply commitments, alternative cost economies, and transmission problems. Year by year, as Consumers Power Company built generating plants, it installed the best equipment available for air quality control. Yet today, mechanical dust collectors are relatively inadequate compared to electrostatic precipitators which remove more than 99 percent of the ash resulting from coal combustion. The Company's newer installations, like the Dan E. Karn and James H. Campbell plants, were originally built with electrostatic precipitators. The Company is now in the midst of an $18 million, three-year program of installing similar precipitators and other environmental quality equipment at its other major coal-burning plants. Electrostatic precipitators already have been installed at the B. C. Cobb plant near Muskegon and, as a result, the Company received the "Clean Air Award" from the Citizens for Clean Air of Muskegon, Michigan. Installation of such precipitators at the J. C. Weadock Plant near Bay City and clean air equipment at the Justin R. Whiting Plant near Erie beginning in 1970 has been planned. At some plants, conversion to natural gas is possible. This has been done at the Company's Bryce E. Morrow plant near Kalamazoo. There the boilers have been converted to gas a full year ahead of the schedule approved by the Michigan Air Pollution Control Commission. The Company, meanwhile, has scheduled retirement of several older, coalfired plants. These will be phased out progressively beginning in 1970. Thus, by 1973, the Company will have completed its program to reduce to a minimum the release of smoke and ash from its coal generating plants. In connection with generating capacity required in 1975–76–77, optimum generation mix studies indicate that system needs would best be met through the installation of "intermediate load" units-that is, units which would operate fewer hours of a week than a "base-load" unit. In these studies, both coal and residual fuel oil were considered as fuel for such units. Nuclear power was not considered because the economies of nuclear plants are dependent upon constant heavy loading. A survey of potential coal supplies indicated that all of the coal known to us to be available would have a sulphur content of in excess of 2 percent and, in some cases, in excess of 5 percent. Michigan air quality regulations do not now limit the sulphur content of fuels. However, as a matter of long-range planning, it seemed unwise to commit a facility to high sulphur coal over a long period of time in view of the present controversy over the effects of sulphur dioxide. Investigation has revealed that low sulphur residual fuel oil can be burned in compliance with Michigan's particulate release standards and with a minimum release of sulphur dioxide. Inquiry as to the availability of residual fuel oil was made of 21 suppliers of domestic petroleum products. Five did not reply. Twelve reported either that all of their residual oil was committed or that production of it had been discontinued. The total production of residual oil by the remaining four, some of which was committed, totaled 3.5 million barrels per year, only silghtly more than half of Consumers Power Company's projected 1977 requirements. This initial investigation made it clear that there is not sufficient residual fuel oil production, regardless of sulphur content, to satisfy Consumers Power Company's requirements. In addition, further investigation reveals that the amount of domestic residual fuel oil with a low sulphur content is a much smaller amount than the total amount of domestic residual fuel oil available. Upon investigating the availability of foreign residual fuel oil, it was discovered that several sources were able to supply sufficient quantities of low sulphur residual fuel oil but that under prevailing quotas for District II, only two companies are allowed to import a limited amount of residual fuel oil and all of it is committed to their customers. Company, both from an economic standpoint and from an environmental standpoint, is to construct oil-fired intermediate load units using low sulphur residual oil. Accordingly, Consumers Power Company is planning the construction of two 650,000 kilowatt oil-fired units at its Karn plant for operation, respectively, in 1975 and 1977. In connection with the installation of electrostatic precipitators at the Weadock plant, it has been determined that the conversion of boilers to residual oil would substantially improve the quality of the atmosphere in the Bay City area at acceptable costs to the Company and in turn, to its customers. Moreover, the precipitators would not be necessary if the conversion can be made. We believe that the Oil Import Regulations, which prejudice District II. must be changed. Through the St. Lawrence Seaway and the Great Lakes, it is possible to load a vessel of the proper draft and size at a foreign refinery and ship directly to a destination on the Great Lakes at only silghtly greater cost than to a destination on the East Coast. Unfortunately, existing regulations preclude users on the Great Lakes from participating in this commerce. Under present regulations, it is not possible for Consumers Power Company or any petroleum product supplier not presently receiving an allocation to import residual fuel oil into District II. Yet, some of the units to be converted must be converted by 1971. In addition, in order to construct a new oil-fired unit for operation in 1975, it is necessary to order some equipment now and to let many of the contracts in the near future. Thus, the lead-time required in meeting construction schedules for generating plants requires immediate decisions. However, until the necessary quota can be obtained, on an assured long-term basis. it would not be prudent to undertake the conversion to oil-burning equipment or the construction of new oil-fired units. The essential point is that a decision could be reached rapidly if Consumers Power were authorized to satisfy its low sulphur fuel requirements through importation. If permitted to import residual oil for use as fuel, the present estimates of need. based on an allocation year commencing April 1 of the stated calendar year and ending March 31 of the following year, are as follows: Barrels per year 2,000,000 1971 1972 1973 1974 1975 1976 2,000.000 2,000,000 2,000,000 3,300,000 3,300,000 1977 and beyond‒‒‒‒‒ 6,400,000 On behalf of Consumers Power Company, I urgently express the hope that steps will be taken in the immediate future which will facilitate the importation of residual oil for use as fuel in District II. Both the majority and minority reports of the President's Task Force on Oil Import Control appear to be in agreement on this point. Thank you. STATEMENT OF ARTHUR T. SOULE, PRESIDENT, INDEPENDENT FUEL TERMINAL OPERATORS ASSOCIATION Mr. Chairman; thank you very much for the opportunity of presenting a statement to this Committee. My name is Arthur T. Soule, and I am Vice President of the Patchogue Oil Terminal Corporation of New York. I am an independent deepwater terminal operator and am appearing today in my capacity as President of the Independent Fuel Terminal Operators Association. Our Association is composed of 17 independent deepwater terminal operators along the East Coast from Maine to Florida. A membership list is included as Attachment A of my statement. All members own or control deepwater terminal facilities capable of receiving ocean-going tanker shipments, and none is affiliated with a major oil company. In my statement today, I should like to cover four areas related to No. 2 fuel oil: First, the nature of our business; Second, the competitive squeeze we are experiencing: |